RECEIVABLE FINANCING

Pledge, assignment and factoring

Receivable financing

• the financial flexibility or capability of an entity to raise

money out of its receivables.
• Forms
– Pledge of accounts receivable
– Assignment of accounts receivable
– Factoring of accounts receivable
– Discounting of notes receivable
Pledge of accounts receivable

• Accounts receivable may be pledged as collateral

security for the payment of a loan.
• Collections are normally made by the borrowing entity.
• With respect to the pledged accounts, no entry would be
necessary. But disclosure must be made in the notes to
financial statements.
Pledge of accounts receivable (Journal entries)

To record a loan...
Cash XX
Discount on note payable XX
Note payable - bank XX

To record amortization of discount...

Interest expense XX
Discount on note payable XX
Pledge of accounts receivable (Statement presentation)

Current liabilities:
Note payable-bank XX
Discount on note payable (XX)
Carrying amount XX

Notes to financial statements

“The note payable to bank matures on (date) and is
secured by accounts receivable with face value of
(amount).”
Assignment of accounts receivable

• the transfer of rights in some accounts receivable to a

lender in consideration for a loan.
• secured borrowing evidenced by a financing agreement.
• specific accounts receivable serve as collateral security
for a loan.
• may me done on a
– nonnotification basis (customers continue to make payments
to the assignor)
– notification basis (customers are notified to make payments
directly to the assignee)
Assignment (Nonnotification basis - Journal entries)

To record assignment of AR...

Accounts receivable - assigned XX
Accounts receivable XX

Cash XX
Service charge XX
Note payable - bank XX
Assignment (Nonnotification basis - Journal entries)

To record collection of AR...

Cash XX
Accounts receivable - assigned XX

To record remittance of collections to assignee...

Note payable - bank XX
Interest expense XX
Cash XX
Assignment (Notification basis - Journal entries)

To record assignment of AR...

Accounts receivable - assigned XX
Accounts receivable XX

Cash XX
Service charge XX
Note payable - bank XX
Assignment (Notification basis - Journal entries)

To record payments made by customers to assignee...

Cash* XX
Interest expense** XX
Note payable - bank XX
Sales discount XX
Accounts receivable - assigned XX

* for any excess amount collected by assignee.

** for any interest treated to be paid from assignee's
collections.
Statement presentation

• Accounts receivable - assigned is presented as part of

“trade and other receivables”.
• Equity in assigned accounts must be disclosed in the
notes to financial statements

Accounts receivable - assigned XX

Note payable - bank (XX)
Equity in assigned accounts XX
Factoring of accounts receivable

• sale of accounts receivable (on a without recourse,

notification basis)
• A gain or loss is recognized.
• There is actual transfer of ownership.
• The factor assumes responsibility for collecting the
accounts AND uncollectible factored accounts.
• Forms
– Casual factoring
– Factoring as a continuing agreement
Casual factoring (Journal entries)

To record sale of AR...

Cash XX
Allowance for doubtful accounts XX
Loss on factoring XX
Accounts receivable XX
Factoring as a continuing agreement

• Before a merchandise is shipped to a customer, the

selling entity requests the factor's credit approval.
• The factor typically charges a commission or factoring fee.
• The factor may withhold a predetermined amount
(factor's holdback, a receivable from factor, classified as
current asset) as a protection against customer returns
and allowances, and other special adjustments.
• Settlement of factor's holdback is made after full
collection of factored receivables.
Factoring as a continuing agreement (Journal entries)

To record sale of AR...

Cash XX
Sales discount XX
Commission XX
Receivable from factor XX
Accounts receivable XX
Factoring as a continuing agreement (Journal entries)

To record sales allowance...

Sales return and allowance XX
Sales discount XX
Receivable from factor XX*

* balancing figure.

To record receipt of remaining factor's holdback...

Cash XX
Receivable from factor XX
Credit card

• a plastic card which enables the holder to obtain credit up

to a predetermined limit (from the issuer of the card) for
the purchase of goods and services.
• 1% to 5% service fee.
• Retailer forwards receipts to the card issuer for collection
of payment.
Credit card (Journal entries)

To record credit card sale...

Accounts receivable - VISA XX
Sales XX

To record collection from VISA...

Cash XX
Credit card service charge XX
Accounts receivable - VISA XX
Credit card (Journal entries when payments from
card issuer is deposited directly to a current account)

To record credit card sale...

Cash XX
Credit card service charge XX
Sales XX