What principle underlies the treatment of notes receivable in accounting?

The treatment of notes receivable in accounting is closely tied to the revenue recognition principle. This principle dictates that revenue should be recognized when it is earned and realizable, regardless of when the cash is received. In the context of notes receivable, this means that when a company provides a loan or extends credit through a note, it recognizes the revenue at the point when the agreement is made, not necessarily when the cash payment is received.

This approach ensures that the financial statements reflect the economic reality of transactions, providing a clearer picture of a company's financial performance. The notes receivable represent future cash inflows from sales or services already delivered, aligning with the notion of earning revenue as soon as the service has been provided or the goods have been delivered. Understanding this principle is crucial for accurately recording and reporting accounts involving future payments, which is a common scenario in business operations.