The Classification of Notes.—The Notes Receivable account should carry only the short-time notes of customers, and thus be a truly current asset. Long-time notes and those secured by mortgage should be booked under separate account titles. For a similar reason, the notes receivable given by officers, employees, or stockholders of the corporation should have separate booking, as these notes are given for the purpose of making formal record and acknowledgment of indebtedness, usually without regard to time of payment. Such notes do not constitute easily convertible assets, and therefore should not be recorded under the same account with short-time customers’ notes.

Notes Receivable Out as Collateral.—Notes receivable are sometimes given as collateral security for a loan. When they are so used, no bookkeeping problem is involved—though a memorandum to show their use as such should appear in the note account, and in case a balance sheet is drawn up, a cross-reference or a footnote should indicate the liability secured by the notes. However, the sale of the notes to satisfy the loan constitutes a regular business transaction, which should be recorded in the proper manner.

Note Renewals and Partial Payments.—The renewal of notes and partial payments are other features met in the accounting for notes. The renewal of a note is rather a question of business policy than of accounting procedure. When a note is renewed, it is usually better to deliver up the old note and secure a new one in its stead. The accounts should reflect the transaction by showing cancellation of the old and receipt of the new note. If the old note is extended, a memorandum of that fact should be entered in the ledger account.

From the financial standpoint, if neither note is interest-bearing, the amount of the renewal note should be larger than that of the old note, to cover the cost of deferring payment to a future date. For example, if the old note amounts to $1,000 and is renewed two months later, the amount of the new note should be fixed at $1,000 plus 1% interest, or $1,010.

In accounting for partial payments, no new accounting principle is involved. When such payments are numerous, additional space in the note journal and in the ledger should be provided for the purpose of facilitating the actual work of making the book record.

CHAPTER XLIV
DISCOUNTS

Definition and Kinds.—A discount is a deduction from a listed or named figure. The manufacturer or wholesaler in making up his catalogue for the trade usually enters his products at certain prices—called “list prices”—which are not selling prices but only nominal amounts on which the actual sale prices are based. For reasons to be explained later, he offers buyers a deduction from list prices which is called “trade discount.” The usual quotation of sale prices is at so many per cent below the list prices.

Among practically all merchants it is a very common practice to bill goods to customers with settlement allowed on an optional basis. The goods may be billed “net,” i.e., the full amount shown in the invoice must be paid. Since there is a relationship between the time allowed for payment and the amount to be paid, most concerns have an established credit term, at the end of which they expect full settlement of the account, but, as an inducement for earlier payment, they offer a reduction in the amount to be paid. This is stated usually at so much per cent below the billed price, and is generally called “cash discount.” The practice had its origin in conditions prevailing at the close of the Civil War when business failures were numerous and the risk on open accounts even for short credit terms was very great.

Bankers when making loans usually deduct from the face of the loan the interest charge for the use of the money. This deduction is called “bank discount.”

Merchants usually allow a deduction for the prepayment of a customer’s note, and this is called “commercial discount,” to distinguish it from bank discount, although the two kinds of discount are essentially identical; the only difference being that in the one case a bank buys a merchant’s note, while in the other case it is a transaction between two commercial houses, the one buying back its own note before it is legally due.