FINANCIAL ACCOUNTING AND REPORTING
SYNTHESIS: Note/Loans Receivable
It is human nature to avoid the uncomfortable. We might not flee and
scream from things that are painful, but we often delay them and wait for them
to find their way back. In the case of accounting, this kind of scenario is
represented by receivables. These are money owed to a business on the sale of
products or services on credit. Receivables is a broad term which can generally
be classified in many types but today is the right time to focus on notes and loan
receivable and how it can be applied not just merely in the world of business but
also in a person’s life.
A written promise from a client or customer to pay a definite amount on a
specific date is called a note receivable. Notes receivable are amounts owed to
the entity by clients who have signed formal promissory notes as an
acknowledgment of the agreement. However, the term notes receivable
represents only claims arising from sale of products or service of the business and
does not entirely include notes received from officers, employees and affiliates.
On the other hand, a loan receivable is a financial asset or a loan granted by a
financial institution. Although these two classifications come in slightly different
definitions, these still represent how taking a risk in this field of work is a part of
growth attainment. A note receivable shall be initially measured at present value,
unless it’s a short-term note receivable which shall be measured at face value.
Notes could either be interest or non-interest bearing. Those notes with interests
explicitly stated shall be measured initially at face value while notes with interests
implicitly stated shall be measured at present value. Subsequently, long-term
notes receivables shall be measured at amortized cost using the effective interest
method. On the other side of the coin, loans receivable is initially measured at fair
value including the transaction costs and is subsequently measured at amortized
cost. Just like any other typical agreement, a bank charges the borrower an
origination fee for the creation of the loan and as part of compensation for all the
activities done prior to the loan. Just like in reality, an entity shall recognize a loss
allowance for expected credit losses on the financial asset. This impairment of
loan comes with three stage approach as if dealing with challenges in reality, one
step at a time, slowly but surely.
Both types of receivables can not only result to decrease in cash flow, it
can also mean lost opportunity and impaired relationships with others. A common
misconception about collections or receivables is that it’s strictly about the
numbers and finances. While on the surface it may slightly look like it, the reality is
that there’s more to it that people fail to appreciate. Simply reaching out to
someone and being able to actually put your trust while proactively working to
connect and understand both sides can be enormously stress relieving. People
want to feel trusted and yet still have second thoughts on how to take risk in
almost everything. When money is at stake, it makes us feel vulnerable and we
feel exposed. If an entity represented by a person in a daily basis can be gracious
and empathetic, treating others well at their most vulnerable and at the same
time not taking advantage on the trust that someone entrusted us, then no one
will have to worry about giving out something as precious as one’s safekeeping.
Both Note and Loans Receivables don’t take humans out of the equation, these
put them into the frontlines where they can make the biggest difference.