Is Notes Receivable a Debit or Credit?
Notes receivable is a debit. It is an asset representing a written promise to be paid, so it increases with a debit when the note is made and decreases with a credit as principal is repaid. Its normal balance is a debit, and it is reported on the balance sheet.
- Account category
- Asset
- Normal balance
- Debit (Dr)
- Increases with
- Increase (Dr)
- Decreases with
- Decrease (Cr)
- Financial statement
- Balance sheet
Classifying one account is easy. Ledger IQ classifies the whole trial balance.
Try it freeNotes receivable on a trial balance
| Acct # | Account | Debit | Credit |
|---|---|---|---|
| 1000 | Cash | 48,200.00 | |
| 1200 | Accounts receivable | 86,400.00 | |
| 1250 | Allowance for doubtful accounts | 4,200.00 | |
| 1300 | Inventory | 72,500.00 | |
| 1400 | Prepaid expenses | 9,800.00 | |
| 1450 | Notes receivable (the account this page is about) | 15,000.00 | |
| 1460 | Due from shareholder | 12,000.00 | |
| 1500 | Equipment | 120,000.00 | |
| 1510 | Accumulated depreciation | 38,000.00 | |
| 1700 | Goodwill | 40,000.00 | |
| 1710 | Accumulated amortization | 8,000.00 | |
| 2000 | Accounts payable | 31,500.00 | |
| 2050 | Credit card payable | 6,300.00 | |
| 2100 | Accrued expenses | 11,200.00 | |
| 2150 | Payroll liabilities | 7,400.00 | |
| 2200 | Sales tax payable | 4,100.00 | |
| 2300 | Unearned revenue | 18,000.00 | |
| 2400 | Notes payable | 85,000.00 | |
| 2450 | Due to shareholder | 20,000.00 | |
| 3000 | Common stock | 50,000.00 | |
| 3100 | Additional paid-in capital | 35,000.00 | |
| 3900 | Retained earnings | 92,000.00 | |
| 3950 | Shareholder distributions | 45,000.00 | |
| 4000 | Sales revenue | 550,000.00 | |
| 4100 | Sales returns and allowances | 12,000.00 | |
| 4200 | Interest income | 1,200.00 | |
| 5000 | Cost of goods sold | 240,000.00 | |
| 6000 | Salaries and wages | 96,000.00 | |
| 6050 | Officer compensation | 60,000.00 | |
| 6100 | Rent expense | 36,000.00 | |
| 6150 | Insurance expense | 14,400.00 | |
| 6300 | Depreciation expense | 19,000.00 | |
| 6450 | Interest expense | 6,800.00 | |
| 6900 | Other operating expenses | 28,800.00 | |
| Total | 961,900.00 | 961,900.00 |
Example journal entries
| Account | Debit | Credit |
|---|---|---|
| Notes receivable | 15,000.00 | |
| Cash | 15,000.00 |
| Account | Debit | Credit |
|---|---|---|
| Cash | 3,900.00 | |
| Notes receivable | 3,000.00 | |
| Interest income | 900.00 |
Why it works that way
A note receivable is a right to collect, backed by a written agreement with a stated rate and term. Rights to collect are assets, and assets increase with debits. The difference between this and accounts receivable is the paperwork and the interest, not the direction of the entry.
Only principal moves through the account. When a payment arrives, it is split: the principal portion credits notes receivable, and the interest portion credits interest income. Crediting the whole payment to the asset is the error that defines this account, and it understates income by exactly the interest.
Current and long term, split at year end
Schedule L separates current assets from the rest, so a note repayable over several years has to be split: the principal due within twelve months is current, the rest is not. The split changes every year as the note amortises, so last year's allocation is not this year's.
Loans to shareholders and partners get their own line
If the borrower is an owner, the note is not just another receivable. Schedule L gives loans to shareholders their own line on the corporate returns, and the 1065 asks separately about amounts due from partners.
Those lines matter beyond presentation:
- A shareholder loan with no note, no stated interest and no repayments looks like a distribution, and on an S corporation it can be recharacterized as one
- Below market interest on a related party loan brings imputed interest rules into play
- A loan that grows every year and is never repaid is the single most common balance the IRS reclassifies as compensation or a dividend
Documentation is what keeps it a loan: a signed note, a market rate, a repayment schedule, and actual repayments.
Mistakes that throw it off
Crediting the whole payment to the note. Principal and interest are different things. Interest income disappears and the note amortises too fast.
Leaving a defaulted note at full value. A note from a borrower who has stopped paying is not worth its face. The write off is a real year and a real conversation.
Recording accrued interest nowhere. Interest earned and not yet received is an asset, and on an accrual basis it belongs on the books at year end whether or not a payment has arrived.
Where it fits in the accounting equation
Tax return treatment
| Form | Line |
|---|---|
| Form 1120 | Schedule L line 7 if from shareholders, otherwise lines 4 or 6 by term |
| Form 1120S | Schedule L line 7 if from shareholders, otherwise lines 4 or 6 by term |
| Form 1065 | Schedule L line 6 or 8, and line 5 if the note is from a partner |
Common questions
Is notes receivable a debit or credit?
A debit. It is an asset, so it increases with a debit when the note is made and decreases with a credit as principal comes in. A credit balance means more principal has been applied than was ever lent, usually because interest was credited to the note instead of to income.
How do I split a loan payment between principal and interest?
Use the amortization schedule for the note. Interest is the rate applied to the outstanding principal for the period; the rest of the payment reduces principal. Debit cash for the whole payment, credit notes receivable for the principal, and credit interest income for the balance.
Where does a loan to a shareholder go on the balance sheet?
On its own line. Form 1120 and 1120S Schedule L have a loans to shareholders line, and Form 1065 asks separately about amounts due from partners. Burying it in other assets hides exactly the balance a reviewer looks for.
What is the difference between notes receivable and accounts receivable?
Accounts receivable arises from selling to a customer on normal terms, with no formal instrument and no interest. Notes receivable is backed by a written note with a stated rate and maturity. Both are assets with debit balances, and they sit on different Schedule L lines.
Related answers
Last reviewed October 17, 2026.