How to Calculate Interest Receivable & Interest Revenue for Notes Receivable

A note receivable is an amount of money that a customer owes to your business at a future date. You’ll earn interest on the note receivable to compensate you for extending credit. The amount of interest you earn on notes receivable in an accounting period but have not yet been paid is referred to as interest receivable.

Interest charges that your business earns regardless of when you receive payment are called interest revenue. You can calculate these amounts at the end of your accounting period and report the amounts on your financial statements. The calculation is most commonly a component of accrual accounting when accrued interest revenue is recognized before it’s actually received.

Accounting is riddled with numerous terms that sound similar but, in fact, have different implications. Both notes receivable and accounts receivable represent money owed to your business. Unlike with notes payable and accounts payable where you're the borrower, you’re effectively the lender with the receivables accounts.

But accounts receivable are loans on which you're not charging interest, according to Penn State University. The sum total you can possibly receive is the amount you've agreed can be paid over time. There may or may not be a definitive due date.

Notes receivable are promissory notes, typically anchored by a written promise by the payee and a specific due date or maturity date. They carry interest, which means more income to your business: the base amount of the loan plus the interest income component.

You'll need your notes receivable to start your calculations as well as the interest rate you're charging for these notes. Determine the total amount of your notes receivable and their interest rates.

Assume you have $120,000 in notes receivable with a 10 percent interest rate. Multiply the interest rate by the amount of notes receivable to calculate the interest you'll earn per year. Divide the result by 12 to calculate monthly interest. Multiply 10 percent, or 0.1, by $120,000 to get $12,000 in annual interest in this example. Then, divide $12,000 by 12 to get $1,000 in monthly interest.

Next, determine the number of months in the accounting period for which you held your notes receivable regardless of whether you actually received interest payments. Determine the number of those months for which you have yet to receive payment.

Assume you held your notes receivable for three months during the period in this example. You expect to collect interest payments from the borrower for two of those months next period.

Multiply the number of months for which you haven't been paid by the monthly interest to calculate the amount of interest receivable at the end of the accounting period. You would multiply 2 by $1,000 in monthly interest to get $2,000 in interest receivable in this example. This means that you have yet to collect $2,000 in interest.

Multiply the number of months for which you held the receivables by the monthly interest to calculate interest revenue for the period. You would multiply 3 by $1,000 to get $3,000 in interest revenue in this case.

Record the amount of interest receivable in the “Current Assets” section of your balance sheet if the note receivable is an amount due within one year's time. The Corporate Finance Institute indicates that this interest receivable would be entered as a noncurrent asset on the balance sheet if the note does not come due until a date that's more than a year away.

Record the amount of interest revenue in your journal entries in the “Nonoperating Income” section of your income statement. You would record $2,000 of interest receivable on your balance sheet in this example and $3,000 in interest revenue on your income statement.

You would then debit the amount, adjusting entries when the interest is paid. It’s always possible that one or more of these promissory notes are bad debts that you’ll ultimately write off, and this too must be accommodated in the bookkeeping process. They’re uncollectible. A dishonored note most likely won’t be paid.

Multiply the interest rate by the amount of notes receivable and then divide by 12 to capture the monthly rate to calculate interest receivable and interest revenue for notes receivable. You can then multiply the monthly rate by the number of months the receivables were held to calculate interest revenue for that specific period of time.