Final answer:
A note receivable is a formal document where the maker promises to pay the payee a certain amount on a specific date. It is an asset for the payee and affects the business's financial statements by impacting liquidity and net worth. Option C is the correct answer.
Step-by-step explanation:
Understanding Notes Receivable
A note receivable is a written promise by the maker (debtor) to the payee (creditor) to pay a specified amount of money at a definite time. Unlike a simple receipt of payment, a note receivable usually comes in the form of a formal document that outlines the terms of repayment, which includes the principal amount, any interest to be paid, and the maturity date. It is a legally binding agreement and represents an asset for the payee, as it is expected to be settled in cash by a certain date.
Businesses often use notes receivable when providing goods or services on credit terms. It enhances the probability of collection by formally documenting the debtor's obligation and usually includes interest, which serves as compensation for the delay in payment. When a note receivable is paid on time, it improves the liquidity position of the business. If, however, the debtor fails to pay the note, this asset may have to be written off, which would result in a loss for the business.
Notes receivable can vary in length from short-term (less than one year) to long-term (more than one year) and are reported on the balance sheet in the current assets section if they are short-term and in the long-term assets section if they exceed one year. They are an important part of the financial statements, as they affect both the liquidity and the net worth of a business.
In conclusion, option (c) is the correct answer: a written promise by the maker to the payee to pay a specified amount of money at a definite time.