When the maker of a note fails to pay on the due date, the note receivable is considered to be dishonored. A dishonored note is no longer negotiable. In the books of creditors, the following entry is made :
Debit Accounts Receivable
Credit Notes Receivable
Credit Interest Income or Interest Receivable
When a note previously discounted with a bank is dishonored, the holder of the note (the bank) notifies the endorser (i.e the company) of non-payment. Protest fees are charged to the endorser for legal fees.
Accounts receivable are sales on credit made to customers that have not yet been collected in cash. Accounts receivable are discounted based on:
- Trade discount – discount based on sales volume
- Terms of payment
- Cash discount – discount is given if full amount is paid within a normal credit period.
Example 1:
Customers will be given 2% discount if they pay in cash at the time of sale.
Example 2:
$25 is the selling price per unit.
Customers will be given 1% discount if they fully pay within 5 days.
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