Which entry reflects recognizing a note receivable from a customer?

Which entry reflects recognizing a note receivable from a customer?

• A. Debit Cash for $25,000 and a Credit Notes Receivable for $25,000
• B. Debit Notes Receivable for $25,000 and a Credit Cash for $25,000
• C. Debit Interest Revenue for $25,000 and a Credit Notes Receivable for $25,000
• D. Debit Notes Payable for $25,000 and a Credit Cash for $25,000

Answer: (B)

When you recognize a note receivable from a customer, you are establishing an asset that represents the amount the customer promises to pay. The asset you have becomes Notes Receivable, so you debit that account to increase it. The offsetting credit shows where the value came from; in this case, the note was created in exchange for cash you had, so you reduce cash. Put together, the entry is to debit Notes Receivable for the amount and credit Cash for the same amount. This reflects converting cash into a note that you will collect later. The other options don’t fit this moment of recognizing a note from a customer: increasing cash while decreasing notes receivable would reverse the direction of the transfer; recognizing interest revenue would pertain to earned interest over time, not the initial recognition of the note; and recording a liability (notes payable) would represent an obligation you owe, not an asset you hold.

When you recognize a note receivable from a customer, you are establishing an asset that represents the amount the customer promises to pay. The asset you have becomes Notes Receivable, so you debit that account to increase it. The offsetting credit shows where the value came from; in this case, the note was created in exchange for cash you had, so you reduce cash. Put together, the entry is to debit Notes Receivable for the amount and credit Cash for the same amount. This reflects converting cash into a note that you will collect later.

The other options don’t fit this moment of recognizing a note from a customer: increasing cash while decreasing notes receivable would reverse the direction of the transfer; recognizing interest revenue would pertain to earned interest over time, not the initial recognition of the note; and recording a liability (notes payable) would represent an obligation you owe, not an asset you hold.