A note receivable is an amount of money a customer or other party owes your company. Your company earns interest on the note receivable to compensate you for extending credit. The amount of interest you earn on the notes receivable in an accounting period, but have yet to be paid, is called interest receivable. The amount of interest you earn regardless of when you receive payment is called interest revenue. You can calculate these amounts at the end of your accounting period and report the amounts on your financial statements.
1. Determine the amount of your notes receivable and their interest rate from your accounting records. For example, assume you have $120,000 in notes receivable with a 10 percent interest rate.
2. Multiply the interest rate by the amount of notes receivable to calculate the interest you earn per year. Divide the result by 12 to calculate the monthly interest. In this example, multiply 10 percent, or 0.1, by $120,000 to get $12,000 in annual interest. Then divide $12,000 by 12 to get $1,000 in monthly interest.
3. Determine the number of months in an accounting period for which you held your notes receivable, regardless of whether or not you received interest payments. Determine the number of those months for which you have yet to receive payment. In this example, assume you held your notes receivable for three months during the period. Assume you expect to collect interest payments for two of those months next period.
4. Multiply the number of months for which you have not been paid by the monthly interest to calculate the amount of interest receivable at the end of the accounting period. In this example, multiply 2 months by $1,000 in monthly interest to get $2,000 in interest receivable. This means you have yet to collect $2,000 in interest.
5. Multiply the number of months for which you held the receivables by the monthly interest to calculate interest revenue for the period. In this example, multiply 3 by $1,000 to get $3,000 in interest revenue.
6. Record the amount of interest receivable in the “Current Assets” section of your balance sheet, and record the amount of interest revenue in the “Nonoperating Income” section of your income statement. In the example, record $2,000 of interest receivable on your balance sheet and $3,000 in interest revenue on your income statement. (See References 4)
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