Volume I, Chapter Xxxviii. As There Stated, Where Payment Is Allowed

to lapse, it is generally advisable to insist on the giving of new notes in place of the old. There may be circumstances in which this is not advisable, but the proper method will usually be apparent in each case.

Interest on Notes Receivable

The valuation of notes receivable—using the term to include all written promises to pay, i.e., promissory notes, accepted drafts, and the like, requires a consideration of interest. By far the larger number of notes given in trade are non-interest bearing and are not therefore worth their face value until they become due. The interest problem in the valuation of notes is thus whether the notes should be shown at their face value or present, i.e., discounted, value. Notes which are interest bearing from their date of issue are, of course, worth their face, on the assumption that the interest takes care of the discount. Where non-interest bearing notes form a very considerable item it is well to value them on a discounted basis; if their amount is small, theoretical principles of valuation give place to practical considerations and they may be valued at their face. Where notes bearing interest are valued on a discounted basis, care must be exercised not to include the interest accrued both in their face valuation and also under the head of accrued income.

Balance Sheet Titles for Notes Receivable

The problem of terminology is also met in handling notes receivable. Under the balance sheet caption “Notes Receivable” should usually be included only notes received from trade debtors, and certainly it should never represent any but current asset items. Notes received from officers and employees, of indefinite term and the payment of which will not be pressed, should be recorded under some such title as “Notes Receivable Special.” Long-term notes and those representing loans or advances of any sort should be properly earmarked, as should also loans carried on open account, salary overdrafts, and the like. The latter should be shown under Deferred Charges. These nicer points of valuation cannot be presented on a condensed balance sheet, but care should at all times be taken to make such a showing as will not be misleading and will serve the purpose for which the statement is to be used.