Accounting Lecture: Receivables, Promissory Notes, and Financial Ratios

Vocabulary practice flashcards covering terminology related to accounts receivable, notes receivable, interest calculations, credit management, and receivable turnover metrics.

Accounts Receivable

A receivable asset created when a company sells goods or services to another party in the ongoing course of business.

Note Receivable

A written promissory note representing a borrower's formal promise to pay a specific amount of money, typically bearing an interest rate over time or issued to settle an overdue account receivable.

Promissory Note

A written legal document stating a promise to pay a specific sum of money on demand or at a definite future date to a specified payee.

Payee

The party to whom a promissory note is made payable and who is entitled to receive the funds (the lender).

Maker

The party who signs a promissory note, thereby promising to pay the stated sum and assuming the debt obligation (the borrower).

Face Value

The principal amount of money borrowed or stated on the face of a promissory note.

Demand Note

A type of promissory note that is payable immediately whenever the lender requests repayment.

Honoring a Note

The act of a maker (borrower) fulfilling their legal obligation by paying the note in full at its maturity date.

Dishonoring a Note

The failure of a maker to pay a promissory note in full when it becomes due at maturity, leaving it in default and no longer negotiable.

Interest Receivable

An asset account representing the amount of interest income that has accrued over time but has not yet been collected in cash.

Allowance for Doubtful Accounts

A contra asset account that normally holds a credit balance and is deducted from gross receivables to report them at their net realizable value.

Contra Asset Account

An account associated with an asset that carries a normal credit balance, offsetting and reducing the balance sheet value of the primary asset.

Liar's Loans

A colloquial term for stated-income loan programs that permitted borrowers to qualify for loans with little or no documentation verifying their income or assets.

Accounts Receivable Turnover

A financial efficiency metric calculated by dividing net sales by average accounts receivable ($\frac{\text{Beginning} + \text{Ending}}{2}$) to measure how many times receivables are collected during a given period.

Average Collection Period

A metric that measures the average number of days it takes to collect receivables, calculated by dividing $365$ days by the accounts receivable turnover.