When a company loans cash to another business and records it as a note receivable, which is the correct initial journal entry?

When a company loans cash to another business and records it as a note receivable, which is the correct initial journal entry?

• A. Credit to Notes Receivable for $25,000 and a debit to Cash for $25,000
• B. Debit to Notes Receivable for $25,000 and a credit to Cash for $25,000
• C. Debit to Notes Payable for $25,000 and a credit to Cash for $25,000
• D. Credit to Notes Payable for $25,000 and a debit to Cash for $25,000

Answer: (B)

When you loan cash, you create an asset that represents amounts owed to you, called a notes receivable, while your cash balance decreases. In double-entry accounting, assets increase with a debit and decrease with a credit. Since you’re adding an asset (the note) and giving out cash (a reduction in cash), the proper recording is to debit Notes Receivable for 25,000 and credit Cash for 25,000. This shows you now expect to collect 25,000 in the future and you have 25,000 less cash on hand. The alternatives would misstate the transaction: debiting Cash would imply you’re increasing cash when you’ve actually spent it, and using Notes Payable would incorrectly record a future obligation you don’t owe—we’re the lender, not the borrower.

When you loan cash, you create an asset that represents amounts owed to you, called a notes receivable, while your cash balance decreases. In double-entry accounting, assets increase with a debit and decrease with a credit. Since you’re adding an asset (the note) and giving out cash (a reduction in cash), the proper recording is to debit Notes Receivable for 25,000 and credit Cash for 25,000. This shows you now expect to collect 25,000 in the future and you have 25,000 less cash on hand.

The alternatives would misstate the transaction: debiting Cash would imply you’re increasing cash when you’ve actually spent it, and using Notes Payable would incorrectly record a future obligation you don’t owe—we’re the lender, not the borrower.