Form 41. Notes Receivable Journal
(left and right hand pages)
If the bill book is for memorandum use only, the “Amounts Credited” columns may be omitted. If it is a real note journal, its debit and credit equilibrium is shown through summary entry at posting time. The total debit is to Notes Receivable for the amount of that column’s total. If it were not for the fact that sometimes notes are received in whose face amount is included not only the credit to the customer but an interest item as well, there would be no need of credit columns. The note journal would then be operated just as is any simple special journal, with a debit to Notes Receivable and the same amount credited to the customer; but when interest is included, the note is best recorded in an additional column, separating the credit to Customers from that to Interest. If notes are numerous, a distributive column in the cash book should be used for receipts from notes, in order to secure a total posting to the credit of Notes Receivable account.
Referring to the left-hand page of the illustrated ruling ([Form 41]), the face amount of the note receivable is entered in the Notes Receivable column, and the due date in one of the narrow columns headed “When Due,” each of these columns representing a separate month. In this way it is easy to find the total of all the notes due in a given month and the amount of cash to be expected from their payment. For this purpose, however, it is best to use a note journal arranged by months of maturity on the principle of a “tickler.” In such a journal one page is reserved for each month, and the notes are entered, not on the page for the month when received, but on that for the month when due. Thus a note received in January and due in March should be entered on the March page. To secure a summary of all notes received during each month for posting to Notes Receivable account at the end of each month, the various month pages are totaled and “recapped” on a special page. On this “recap” page, at the end of January, say, will be entered the total of the January page, giving the notes received in and maturing during January; the total of the February page, giving the notes received in January but maturing in February; etc., for each month during the year. The grand total is the amount to be posted to the general ledger, representing all notes received during January.
This type of journal gives easy control over maturities, and forecasts for a given month the amount of cash receipts from notes.
Notes Entered at Face Value Always.—Some notes are interest-bearing from their date of issue; others only after their due date when not paid. Even on non-interest-bearing notes, the law allows the charging of interest for their overdue period. From the standpoint of strict accuracy, a note payable at a future time is not worth its face value at the time of entry, unless it is interest-bearing from date at approximately as high a rate as the current discount rate. Its present value is such an amount as when placed on interest will equal the face at its due date. That value increases day by day until it reaches par or face on the due date. Because of the practical difficulties encountered in the numerous adjustments necessary under any other method of entry, universal practice countenances the bringing of the note onto the books at a slightly inflated value, i.e., face value, at the time of entry. Face value is the amount of the credit to the customer’s account; it shows the amount to be collected on account of the note; and if interest-bearing, the amount on which the interest is based. Accordingly, the note transaction is entered at its face value. Where the note is interest-bearing and the face plus the interest is paid at maturity, credit is in two items, one to Notes Receivable for the face, and the other to Interest Income for the amount received as interest.
Occasionally, the interest for the period the note is to run is added to the amount of the debt, and the sum is made the face of a non-interest-bearing note. The purpose of such procedure is to secure a compounding of interest for the first period if the note is not paid at maturity. The entry of the note on the books is a debit to Notes Receivable for its face, and credits to the customer for the amount of the debt and to Interest Income for the amount of the interest. Only a credit to Notes Receivable is made when the note is paid. The credit to Interest Income, before the interest is actually earned and received, is necessitated by its pre-estimate and inclusion in the face of the note. Were a balance sheet drawn up on that date, the entire amount of this interest would be shown as deferred income.
The Interest Accounts.—As explained in [Chapter XV], when interest items are numerous two interest accounts are usually carried on the ledger, one for Interest Income and one for Interest Cost. Sometimes, however, only the one account, Interest and Discount, is carried, and if it is desirable to separate the two classes of interest, it may be done by entering the debit and credit totals of the Interest and Discount account—instead of simply the balance—when the trial balance is taken. Needless to say, bank discount—interest paid in advance—is the only kind of discount recorded under this account title; it must not be confused with discounts on sales and purchases, which receive different accounting treatment.
CHAPTER XLIII
PROBLEMS ENCOUNTERED IN RECORDING
NOTES RECEIVABLE AND PAYABLE
Entries in the Account.—The elementary discussion of entries to the note accounts in [Chapter XIV] will be reviewed and amplified here.
Where the Notes Receivable account in the ledger shows each note separately rather than the totals of the items, good practice countenances the recording of the credits in this account in non-chronologic order. Thus, when a customer settles his promissory note and the document is returned to him, the credit to Notes Receivable should be entered directly opposite the original debit item. This brings each complete note transaction on a single line and shows at a glance which notes are outstanding, as evidenced by the blank lines on the credit side of the account.