Receivable: Notes and Loans
In a business entity – service, merchandising, or manufacturing, a receivable is
present and is accounted for payments that have not yet been paid off. It is an amount
owed to the entity and regarded as an asset in which it increases when debited.
Receivable could either be accounts receivable, notes receivable, loans receivable, trade
receivable, nontrade receivable, and other receivables. Accounting for receivable
depends on the nature of the transaction between the entity and the other party to whom
it involves.
Notes receivable and loans receivable are both claims supported by a formal
promise to pay a certain sum of money at a specific future date usually in a form of a
promissory note (Millan, 2020). However, the two are completely different in terms of and
process of the transaction. It is important to distinguished notes receivable from loans
receivable to ensure relevance and faithful representation of the financial statements.
A note receivable is a promissory note that the maker makes in favor of the terms
and conditions discussed and agreed by the payee. It could either be a current and
noncurrent interest-bearing note which is recorded at its face amount or a current and
noncurrent noninterest-bearing note for which it is computed at its present value. When
the agreed noninterest note is in lump sum form the computation is at the present value
of P1. In contrast, if the note is in installment form the computation is at the present value
of the ordinary annuity. Though there is a certain noninterest note which is payable at the
beginning of the date agreed in which it is computed at the present value of an annuity
due. The computation of the interest also depends on the note receivable – lump sum or
installment.
On the other hand, a loan receivable is a transaction that involves lending money
to the entity. Such receivable includes transaction costs that affect the principal amount
– direct origination cost and origination fees. Direct origination fees are initially added to
the carrying amount of the loan and are subsequently amortized using the effective
interest method while origination fees are initially deducted from the carrying amount of
the loan and subsequently amortized using the effective interest method (Millan, 2020).
The loan receivable is said to be at a discount when the computed initial carrying amount
is less than its face amount whilst it is at a premium when the computed initial carrying
amount is more than its face value. In the subsequent measurement, the stated interest
rate will not be used but instead, an imputed interest rate called effective interest rate will
be computed using the trial and error approach to adjust the amortization.
To conclude, accounting for receivables is an important aspect of an entity since it
has various circumstances in the transaction that must be considered to reach the
absolute relevance and faithful representation of the financial statements.