What is the journal entry to record the conversion of AR to a note receivable?
Let’s say that a company has an outstanding balance with a customer for several invoices that are overdue. The customer might come to the company and see if they can convert the accounts receivable balance to a promissory note. This would allow the company to pay the balance off in the future, but they would likely also have to pay interest to the company.
The journal entry to record the conversion of A/R to a note receivable would be to debit note receivable and credit accounts receivable. The entry reclassifies the amount on the balance sheet on the date of the conversion. There is no impact to the income statement. On a go-forward basis, the main difference is now the company will record interest receivable on the note.
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