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So the account receivable is a verbal of agreement between us and a customer. We send them an invoice and theyre gonna pay us in 30, 60 or maybe 90 days. But sometimes customers run a little short on cash and they approach us about getting an extension. And we might agree to change their account receivable into a NOTE receivable. And theres two reasons we might do that. One is that if we call it a note receivable we can attach an interest rate to it. So we can earn interest. And secondly thatll give us something in writing that acknowledges that they owe us the money. So if we have to sue them and we have to go to court, we have a written piece of paper that documents the debt that they owe us. So lets talk about changing an account receivable into a NOTE receivable. Does that happen very often in the real world? NO, but its a great opportunity to talk about accrual accounting and calculating interest expense. So our customer Deadbeat owes us $10,000 in an Account R
