Notes Receivable: Definition, Maturity Date & Interest

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  • 00:00 Nots Receivable Defined
  • 00:55 Maturity Date
  • 2:00 Interest
  • 4:46 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Receivables are assets that a company owns. There are various items that are considered receivables. In this lesson, we are going to discuss notes receivable and the calculation of both the maturity date and the amount of interest charged on the note.

Notes Receivable Defined

Have you ever borrowed money from a bank? What about purchasing a car? For that matter, have you ever signed any paperwork where you agreed to pay a specific sum of money to someone by a specified date? If so, then you have taken part in creating a note receivable. A note receivable is a formal promise in writing to pay a specific amount of money on a specified date or dates made between a borrower (the one who borrows money) and a lender (the one who lends money). The written agreement that is signed between the borrower and lender is called a promissory note.

There are several key items that need to appear on a promissory note; they are the date the note begins, the length of time the note extends for, the name of the borrower, the amount of money borrowed, the interest rate, the maturity date, and the name of the lender.

Maturity Date

For this lesson we are going to focus on two of those components, the maturity date and the interest rate. The maturity date of a note is the date that the loan is due and payment must be received. But how is this date calculated? Well, it all depends on the wording on the promissory note as to how a maturity date is calculated. If the note states that the term of the loan is in months, then the maturity date is calculated in months.

For example, let's say that I go to the bank on June 20th and borrow $1000 on a three-month loan. In this case, the calculation of the maturity date is simple; you would just count three months from the date begins, which would be September 20th. Now, what if the loan is a 90-day loan? Since 90 days is three months, then the due date would be the same right? Wrong. When the number of days are used in the context of a promissory note, then each and every day is counted. In this instance, to figure the maturity date, I start counting beginning with the day after the note begins, which would be June 21st. My calculation would look like this:


Maturity Date Calculation


As you can see from the example, the maturity date of the 90-day note is September 18th. By counting days instead of months, there's a two-day difference in the maturity date.

Interest

The next part of a note receivable that we need to look at is interest. Interest is the amount of money charged to the borrower by the lender for making a loan. Interest can be classified as simple or compound. Simple interest is interest charged just on the original amount of the loan. The formula for calculating simple interest is:

INTEREST = PRT

P stands for principal, which is the dollar amount borrowed, R stands for rate, which is the percentage charged on the dollar amount borrowed, T stands for time, which is the length of time between the date the note was signed and the maturity date. The time portion of the calculation can be expressed in days, months or years. Compound interest is interest that is charged on both the principal amount of a loan and any accrued interest that has accumulated.

For the purpose of this lesson, we are only going to look at simple interest calculations. I went to the bank and borrowed $1000 on a one-year note at an interest rate of 9%.

I = PRT

I = 1000 x .09 x 1

I = 90

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