Notes Receivable vs. Accounts Receivable

by Sue-Lynn Carty; Updated September 26, 2017

Receivables represent funds that a company is counting on collecting but that are as yet still outstanding. On the company's balance sheet, receivables are assets, since they represent items of future value. Accounts receivable and notes receivable result when the company extends credit to someone, such as a customer or vendor.

Notes Receivable

A note receivable is the balance due on a promissory note, which is essentially a legally binding IOU. If a company has a $100 note receivable on its books, that means someone has signed a note pledging to pay the company $100. Interest may be due on the money in question, but notes receivable refers only to the principal due. (Interest may be accounted for as "interest receivable.")

Types of Notes

Notes receivable can be either long-term or short-term notes. In general, short-term notes are those that must be paid off within 12 months. Short-term notes are listed on the balance sheet as current assets and are commonly referred to as "current notes." When the note is to be paid off more than a year in the future, it is a long-term note receivable, also known as a non-current note. It's classified on the balance sheet as a long-term asset.

Accounts Receivable

When a company sells a good or performs a service and bills the customer for payment later, the balance due is an account receivable. For example, a company hires a lawn service that comes on the first of the month to mow the lawn. The lawn service bills the company on the 15th of the month for services already rendered. The lawn service records this as an account receivable.

Accounts Receivable Terms

Accounts receivable are typically considered current or short-term assets because payment is usually due within 12 months. When a company fails to receive payment on its accounts receivable, it will write off the amount of the bad debt, called a direct write-off, or write off the debt using the allowance method. For the direct write-off method, the company writes off the actual amount of a receivable that was not paid. For the allowance write-off method, the company estimates the amount of accounts receivable that it expects to not be paid.

About the Author

Sue-Lynn Carty has over five years experience as both a freelance writer and editor, and her work has appeared on the websites Work.com and LoveToKnow. Carty holds a Bachelor of Arts degree in business administration, with an emphasis on financial management, from Davenport University.