Accounts Receivable vs. Notes Receivable: Key Differences Explained

Understanding the differences between accounts receivable and notes receivable is crucial for anyone in accounting or finance roles. Although they sound similar, these two asset accounts have important distinctions.

In this comprehensive guide, we’ll explain what sets accounts receivable and notes receivable apart. Let’s start with definitions of each

What Are Accounts Receivable?

Accounts receivable represent amounts owed to a company by customers who purchased goods or services on credit It’s essentially money the business has a right to receive in the future

For example, if a retailer sells $5,000 of inventory to a client with Net 30 terms, they will debit accounts receivable for $5,000 This is an asset showing money owed that the company expects to collect within a year

Accounts receivable is a current asset that arises naturally from selling on credit. No formal agreement is needed outside the invoice stating payment terms.

Businesses aim to minimize the time accounts are outstanding. Long delays in collecting can require recognizing receivables as uncollectible bad debt expenses.

What Are Notes Receivable?

Notes receivable also represent money owed to a company, but under more formal terms. A note receivable is a promissory note documenting a loan made by the company that it expects to collect in the future.

The borrower signs this legal agreement promising repayment of the principal amount plus any interest. If the debtor defaults, the note serves as evidence to compel payment.

Notes receivable clearly lay out all repayment terms. They are assets that can be classified as current or long-term based on the duration of the note. Companies actively lend money to generate notes receivable.

Now that we’ve defined both, let’s explore key differences:

7 Key Differences Between Accounts Receivable and Notes Receivable

Accounts Receivable Notes Receivable
Arise naturally from selling goods/services on credit Stem from formally lending money to a debtor
Informal claim to receive payment in the future Legal agreement signed by borrower to repay
Typically current assets Can be current or long-term assets
Interest not charged Interest typically charged
Payment terms based on invoice Payment terms clearly outlined in note
Harder to enforce collection Easier to enforce collection through legal means
Not sold or transferred Can be sold or transferred to others

Let’s expand on some major points of comparison:

Source of the Receivable

The source of accounts receivable is selling products or providing services to customers on credit. It happens organically as part of commerce.

Notes receivable stem from formally lending sums of money to other entities. There is an intentional extension of credit via a promissory note.

Legal Standing

Accounts receivable have no formal legal standing outside of the invoice. If customers delay payment, the company must take extra steps to collect.

Notes represent a signed agreement clearly spelling out the borrower’s obligation to repay principal and interest. This supports collection through legal channels if needed.


Accounts receivable remain obligations owed specifically to the company. Although they can be factored or sold at a discount, accounts receivable themselves cannot be directly transferred.

Promissory notes are legal negotiable instruments. A holder in due course can freely sell or assign notes receivable to others.


Accounts receivable are nearly always current assets, as companies expect to collect them within 12 months. The operating cycle determines this short-term estimation.

Notes can be classified as current or long-term depending on the duration established in the note. Terms exceeding one year make a note receivable a long-term asset.

Interest Charges

Accounts receivable do not bear interest charges. Payment amounts are fixed to sales prices and terms on the original invoice.

Notes receivable usually stipulate interest charges based on principal, rate, and timeframe. This extra earned interest income goes beyond just collecting the original principal.

Real World Examples of Accounts Receivable vs. Notes Receivable

Let’s illustrate accounts and notes receivable with some real world examples:

Accounts Receivable Example

ACME Furniture sells $10,000 of furniture to Modern Home, Inc with Net 30 day terms.

ACME records:

Dr Accounts Receivable $10,000

Cr Sales Revenue $10,000

ACME now has a $10,000 account receivable representing money Modern Home owes. This will be collected within one month. No formal agreement beyond the invoice is involved.

Notes Receivable Example

ACME loans $20,000 to Modern Home and has Modern Home sign a promissory note agreeing to repay the principal plus 5% interest over a 3 year term.

ACME records:

Dr Notes Receivable $20,000

Cr Cash $20,000

This notes receivable is a long-term asset that ACME will collect over several years with interest per the terms in the note.

Managing Accounts and Notes Receivable

Proper management of receivables involves:

Accounts Receivable

  • Reviewing aging schedules to identify delays
  • Sending reminders when invoices become past due
  • Charging late fees to incentivize prompt payment
  • Taking collection actions on severely delinquent accounts
  • Writing off uncollectible accounts as bad debts

Notes Receivable

  • Tracking notes to ensure borrowers meet payment schedules
  • Monitoring notes maturity dates
  • Charging penalties for late repayments
  • Using legal methods to collect from defaulted borrowers
  • Discounting notes or selling them to others when beneficial

Implementing strong receivables management maximizes collections and minimizes write-offs or defaults.

Key Takeaways on Accounts Receivable vs. Notes Receivable

  • Accounts receivable arise from sales on credit, while notes receivable come from lending money.
  • Notes have stronger legal standing and clear repayment terms.
  • Accounts receivable are nearly always current assets, while notes can be long-term.
  • Notes often accrue interest, unlike accounts.
  • Accounts receivable relate specifically to the company, while notes can be transferred.

Understanding these major differences helps with accounting treatment, analysis, and decision making involving these important asset accounts.

account receivable vs notes receivable

What Are the Key Components of Notes Receivable?

Notes receivable typically contain certain detailed information to help document the payment obligations of the customer. These include:

  • Payee: The payee is the business or organization that is owed the principal and interest that will accrue. The payee “holds” the note receivable.
  • Maker: The maker of the note is the customer who has the obligation to pay back the note. This will typically be either a person or a business, and may also be referred to as the borrower or debtor.
  • Principal: The original amount of the note, or principal, is the cash value that is effectively loaned by the payee to the maker, which is expected to be paid back by the end of the time period defined.
  • Maturity date: Speaking of the time period, the amount of time that the maker has to pay back the note is often referred to as the term. The note will mature at the end of its time frame or duration. This is often referred to as the maturity date or end date.
  • Interest: This is additional money paid by the maker to the payee, on top of the original principal amount. All loans accrue interest, and a note payable is no exception.
  • Interest rate: Interest is accrued or calculated based on the interest rate,which is a percentage that is applied to the principal balance and which is set by the terms of the original note.

Where Can Notes Receivable Be Found in the Balance Sheet?

Notes receivable are reported in the balance sheet in the assets column. They will be reported as either current or non-current assets depending on the timeframe in which there are expected to be paid.

The principal part of a note receivable that is expected to be collected within one year of the balance sheet date is reported in the current asset section of the lenders balance sheet. The remaining principal of the note receivable is reported in the noncurrent asset section entitled Investments.


What is the difference between accounts receivable and notes?

Accounts receivable are informal, short-term and non-interest-bearing amounts owed by a customer. Notes receivable have the backing of a promissory note, bear interest and have longer terms, sometimes exceeding a full business cycle.

What are notes receivable?

Notes receivable are asset accounts for an underlying promissory note that details the terms of payment for a purchase between a company and a customer. Most often, notes receivable appear when a client needs more time to pay for a sale than the conventional billing terms.

Are notes receivables negotiable?

In contrast, the business typically receives accounts receivable balances in less than one year. Negotiability: Notes receivables, compared to accounts receivable, are negotiable, which means a company can transfer the note to sell its ownership of it to another party. The new owner of the note can claim it the same way as the original payee.

Is a note receivable a current asset?

It will become legal evidence in the court if one party does not comply. Note receivable is recorded separately from accounts receivable on the balance sheet. It is classified as current assets or noncurrent assets depend on the term on a promissory note. If the customer promise to pay within a year, it will be classified as current assets.

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