Dishonored note is a promissory note that is not fully paid at maturity. A dishonored note receivable is no longer negotiable. However, the payee still has a claim against the maker of the note. Therefore the note holder usually transfers the Notes Receivable account to an Account receivable.
It is a note on which a debtor has defaulted.
A dishonored note refers to a note that the maker has failed to pay at maturity. The payee or holder records the due amount in accounts receivable and removes the note from notes receivable because it has been matured.
The maker is bound to pay the principal and interest at a note’s maturity date. The payee needs to record the earned interest and remove the note from the notes receivable account. So, the note’s payee needs to debit accounts receivable for the note’s maturity value and credit notes receivable for the face value of the note and interest revenue for the interest. When a promissory note is dishonored, generally, the creditor or crediting company writes off the debt as operating expenses.
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