Which statement about accounts receivable and notes receivable regarding interest is true?

Which statement about accounts receivable and notes receivable regarding interest is true?

• A. Accounts receivable arise from credit sales; notes receivable arise from cash collections.
• B. Notes receivable arise from credit sales; accounts receivable arise from cash receipts.
• C. Accounts receivable arise from credit sales and typically carry no stated interest; notes receivable usually require interest income.
• D. Both are always interest-bearing.

Answer: (C)

Accounts receivable come from selling goods or services on credit; they are informal promises to pay and typically do not have a stated interest rate included in the original balance. Notes receivable are formal written promises to pay a specific amount and usually include a stated interest rate, so interest income is earned over time as the note is outstanding. Because of this difference in form and expected return, the statement that AR arise from credit sales and typically carry no stated interest, while notes receivable usually generate interest income, best captures how interest is treated for these two types of receivables. The other statements misstate the origins (notes arise from credit sales, not cash collections) or assume both are always interest-bearing (not true for accounts receivable).

Accounts receivable come from selling goods or services on credit; they are informal promises to pay and typically do not have a stated interest rate included in the original balance. Notes receivable are formal written promises to pay a specific amount and usually include a stated interest rate, so interest income is earned over time as the note is outstanding. Because of this difference in form and expected return, the statement that AR arise from credit sales and typically carry no stated interest, while notes receivable usually generate interest income, best captures how interest is treated for these two types of receivables. The other statements misstate the origins (notes arise from credit sales, not cash collections) or assume both are always interest-bearing (not true for accounts receivable).