What is the difference between Notes Receivable and Accounts Receivable?

small business accounting

A very integral aspect of a smooth functioning business is the maintenance of liquidity. Accounts Receivable has been a very common subject for many dealing in various aspects of financial accounts, but there are different other kinds of receivables having significant importance. Notes receivable is one such type that is used for multiple purposes holding an essential position adding to the working capital for small business accounting services.

But, here comes the main question, what differentiates Notes receivable and accounts receivable? Do they resemble the same types of features? How are notes receivable responsible for improving the cash statement of a business?

Let’s look at the subject more precisely and understand how it works:

Notes Receivable in precise:

An issuer formally issues a promissory note to the payee, which is Notes Receivable. This note contains the following things:

  • Principal sum
  • Issuance date
  • Date of maturity
  • Interest due
  • Name of the issuer and the payee

There are certain important things to be considered while issuing notes receivable. 

If the maturity date of notes receivable is less than a year, it comes under the category of current assets. However, if the period is more than a year, the amount exchanged within a year-long period comes under the category of current assets.  

Another important fact to note is that the ownership of notes receivable is transferable, which means that it can be issued to any third party in exchange for a promised amount. 

What is the difference between Notes Receivable and Accounts Receivable?

Notes Receivable as well as Accounts Receivable both fall under the category of current assets, but the purpose served are individual as they fall under differentiated circumstances and deal in their own ways.

Let’s look at the difference much precisely:

  • Accounts receivable is an informal note between the debtor and the creditor regarding the sum to be exchanged. Still, Notes Receivable is a formal note clearing stating all the detailed information of the event in terms of date, time and person. 
  • The amount in the case of Notes Receivable is more than Accounts receivable.
  • Notes Receivable comes with an interest component, but accounts receivable doesn’t hold any such clause.

Is there any significant benefit of Notes Receivable?

Yes, Notes Receivable stand especially beneficial representing the strength of the business. It counts as a long term asset benefiting the company beyond the ongoing financial year. Further, it also stands eligible to be used as a source of collateral payment, satisfying many other financial obligations in a business environment. 

Common benefits they offer:

Act as promoters to shorten cash collection period

They improve cash flow

Both work towards enhancing the asset paving the way for attracting clientele

They can be utilized to improve a company’s financial structure.
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