![]() ![]() The principal of a note is the initial loan amount, not including interest, requested by the customer. Notes receivable have several defining characteristics that include principal, length of contract terms, and interest. What would you do? How does this dishonored note affect your company both financially and nonfinancially? If your customer wanted to renegotiate the terms of the agreement, would you agree? If so, what would be the terms? Characteristics of Notes Receivable Let’s say one of these companies is unable to pay in the established timeframe and dishonors the note. Each note has a minimum principal amount of $500,000. For each sale, you issue a notes receivable to the company, with an interest rate of 10% and a maturity date 18 months after the issue date. Many competitors in your industry are vying for your customers’ business. You are the owner of a retail health food store and have several large companies with whom you do business. ![]() Several characteristics of notes receivable further define the contract elements and scope of use. A note can be requested or extended in exchange for products and services or in exchange for cash (usually in the case of a financial lender). There is also generally an interest requirement because the financial loan amount may be larger than accounts receivable, and the length of contract is possibly longer. The length of contract is typically over a year, or beyond one operating cycle. In contrast, notes receivable (an asset) is a more formal legal contract between the buyer and the company, which requires a specific payment amount at a predetermined future date. This receivable expansion allows a company to attract a more diverse clientele and increase asset potential to further grow the business.Īs you’ve learned, accounts receivable is typically a more informal arrangement between a company and customer that is resolved within a year and does not include interest payments. Companies, however, can expand their business models to include more than one type of receivable. So far, our discussion of receivables has focused solely on accounts receivable. ![]()
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