Question

Give an explanation - and use an example - of why we may need to convert an Account Receivable to a Note Receivable and why we need to keep track of the days of the notes.



Answer 1

Benefits of converting account receivable to note receivable:-

1. In note receivable interest is also earned. This is not in the case of account receivable.

2. It serves as proof to sue the creditor.

3. It is transferable.

Example:-

ABC company has sold goods to XYZ for $1000 due within 10 days. After 10days, XYZ was not able to honor the payment. Hence, it is mutually agreed that XYZ will issue a note payable of $1000 with a payment of $250 every month along with the rate of interest as 4% per annum.

We need to keep track of the days of the notes because the creditor has to pay the amount along with interest payment. For correct determination of interest, days calculation is vital.

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