In the world of accounting, money people owe your business is an asset. It shows up on the balance sheet as accounts receivable. Accounts receivable are typically due within a year. If it won't come due for more than 12 months, it's a long-term account receivable. These debts are usually secured by promissory notes or other guarantees.
The Balance Sheet
The balance sheet is an equation: One side shows the assets, the other shows the owners' equity and the company's debt. Long-term accounts and notes receivable go onto the balance sheet on the asset side. If, say, you make a cash loan for $20,000, due in 14 months, you'd debit the cash assets entry and add $20,000 as a long-term receivable.
Earnings and Equity
If the company earns interest on a note receivable, it reports the interest income separately on the balance sheet. A $1,000 interest payment would also increase the company's earnings. That shows up on the other side of the balance sheet, as part of the owners' equity. Any increase in income affects both sides of the balance sheet equation, keeping them equal.
Bad Debt Reporting
The balance sheet is supposed to give an accurate picture of company finances. If you think the long-term debt will not be paid off, the balance sheet has to reflect that. For example, if you suspect $5,000 of a $20,000 long-term receivable will go unpaid, you reduce the account by $5,000. This is slightly different from tax accounting: the Internal Revenue Service prefers you wait until the debt is definitely going unpaid to report it.
- University of Massachusetts Lowell: Financial Statement Reporting of Accounts Receivable
- Accounting Tools: Notes Receivable Accounting
- Securities and Exchange Commission: Beginners' Guide to Financial Statements
- Accounting Coach: Why Isn't the Direct Write off Method of Uncollectible Accounts Receivable the Preferred Method?