Final answer:
When a promissory note is dishonored, it is customary to convert the principal and any accrued interest into an account receivable, allowing the holder to pursue collection as a regular debt.
Step-by-step explanation:
When a promissory note is dishonored (not paid at maturity), it is a common accounting practice to convert the amount of the note plus any accrued interest into an account receivable (A/R).
This means that the expected cash payment from the note, which has now failed to materialize, is reclassified as a regular debt owed by the issuer of the note to the holder. Converting the note into an A/R allows the holder to continue to pursue collection efforts under the typical terms of trade credit.
The amount to be converted into A/R includes both the principal amount of the note and interest due till the maturity date, or in some cases, till the date of recognition of the note being dishonored.