Dishonor a Note
Definition: When the maker of a promissory note fails to pay at maturity. The payee must transfer the full maturity value from Notes Receivable to Accounts Rec…
Scope:NarrowDifficulty:Moderate
When the maker of a promissory note fails to pay at maturity. The payee must transfer the full maturity value from Notes Receivable to Accounts Receivable and may charge a dishonored note fee.
Common Journal Entries
| Account | Debit | Credit |
|---|---|---|
| 1. Record dishonored note | ||
| Maker defaults on $5,000 note with $150 interest. | ||
| Accounts ReceivableAsset+ | $5,150 | |
| Notes ReceivableAsset− | $5,000 | |
| Interest RevenueRevenue+ | $150 | |
| Note removed; full maturity value charged to A/R. | ||
| 2. Write off if uncollectible | ||
| Collection efforts fail. | ||
| Allowance for Doubtful AccountsContra Asset− | $5,150 | |
| Accounts ReceivableAsset− | $5,150 | |
| Written off against allowance. | ||
T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.
Accounts ReceivableAsset account — amounts owed by customers. Debits increase the balance. Credits decrease the balance.AssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$5,150.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$5,150.00
$0.00
Notes ReceivableNotes ReceivableAssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$5,000.00
$5,000.00
Interest RevenueInterest RevenueRevenueIncome earned from business operations. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$150.00
Normal bal. ▶
$150.00
Allowance for Doubtful AccountsAllowance for Doubtful AccountsLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$5,150.00
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
Normal bal. ▶
$5,150.00
Related Subjects
Related
- Notes ReceivableA dishonored note was originally a notes receivable
- Maturity DateDishonor occurs when the maker fails to pay at maturity
- Maturity ValueThe full maturity value is charged to A/R
- Maker of the NoteThe maker is the party who failed to pay
Next Step
- Accounts ReceivableDishonored notes are reclassified to A/R for collection
See Also
- Allowance for Doubtful AccountsDishonored notes may ultimately be written off
External Links
- Promissory note — Wikipedia