The bank accepts the note and gives the holder cash equal to its maturity value less a discount to the maturity value computed using a discount rate.Īs such, the bank receives its money back plus the discount when the note is paid by the maker at maturity. One of the differences between notes receivable and accounts receivable is the greater negotiability of notes.Ī holder of a note can readily convert it to cash by discounting it at a bank, either with or without recourse.
Accounting for Discount on Notes Receivable Given that most discounted notes are reviewed for their creditworthiness by both the bank and the endorser, contingent liability rarely turns into a real liability. If the maker pays the bank, the contingent liability will end if the maker defaults, the contingent liability will become a real liability. Rather, they are usually referred to in the footnotes of the financial statements. In many cases, these liabilities are not included in the balance sheet with other liabilities. A contingent liability is a possible liability that may or may not occur depending on some future event.
#WHATS MORE LIQUID NOTES RECEIVABLES OR INVESTMENTS FULL#
If the maker fails to make the required payments, the bank will present the note to the endorser and demand full payment.īy discounting a note with recourse, the endorser has a contingent liability. This means that the company discounting the note, known as the endorser, guarantees the eventual full payment of its maturity value. The note is usually discounted with recourse. The term " discount" is used because the bank deducts the interest it charges from the note's maturity value and thus discounts the note. Discount on Notes Receivable: Explanationĭiscounting means selling or pledging a customer's notes receivable to the bank at some point prior to the note's maturity date. This is done by giving a discount on notes receivable to a bank or other lender prior to their maturity date. It is possible to use notes receivable to obtain immediate cash.
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