Note receivable Vs. Accounts receivable

A note receivable and an accounts receivable are both forms of assets that represent money owed to a company. However, there are some key differences between the two:

1.Nature:

A note receivable refers to a legal promissory note or written agreement where a borrower agrees to repay the borrowed amount with specified terms, such as interest and repayment schedule. 

In contrast, an accounts receivable refers to an open invoice or unpaid amount owed by customers for goods or services provided by a company.

2. Documentation:

A note receivable requires a formal written agreement or promissory note, which outlines the specifics of the borrowing arrangement.

On the other hand, accounts receivable typically do not require a formal written agreement and can be generated through the normal course of business transactions, such as issuing invoices.

3.Timeframe:

Note receivables usually have specified repayment terms, ranging from short-term (typically less than one year) to long-term (over one year). 

Accounts receivables, on the other hand, generally have a shorter timeframe for collection, typically ranging from a few weeks to a few months. 

4.Interest: Note receivables often accrue interest, whereby the borrower is obliged to make interest payments in addition to the principal amount.

Accounts receivables do not typically include interest charges unless late payment penalties or finance charges have been specified in the invoice terms. 

In summary, note receivable is a formal agreement with set repayment terms and usually accrues interest, while accounts receivable refers to outstanding payments owed by customers for goods or services provided by a company.

Here are some more examples and explanations to further illustrate the differences between notes receivable and accounts receivable: 

Example 1: Note Receivable

Let's say a company lends $10,000 to a customer for the purchase of equipment. They create a promissory note that specifies the repayment terms, such as 2 years with an interest of 5% per year.

The customer signs the note, agreeing to repay the principal plus interest over the specified time frame. In this case, the $10,000 would be recorded as a note receivable on the company's balance sheet. 

Example 2: Accounts Receivable

A company sells products to a customer and issues an invoice for $5,000 payable within 30 days. The customer receives the products but has not yet paid the invoice.

The $5,000 would be recorded as an accounts receivable on the company's balance sheet, representing the amount owed by the customer. 

Explanation:

- The note receivable in example 1 involves a formal written agreement between the company and the customer, outlining the borrowing terms and repayment schedule.This provides legal protection and helps ensure repayment.

- On the other hand, the accounts receivable in example 2 is a more common and straightforward arrangement where the customer simply has an outstanding payment that needs to be collected.There is no formal written agreement, but the invoice acts as a record of the transaction. 

Overall, note receivables are typically used in larger borrowing transactions with more formal terms, such as loans or financing arrangements, where interest may be charged. 

Accounts receivables, on the other hand, represent the most common form of outstanding payments owed to a business for goods or services provided on credit.