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BLUE NOTES
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Receivable financing is the financial flexibility or capability of an entity to raise money out of its receivables.

Most Common Forms of Receivable Financing Used in Practice:

a. Pledging of accounts receivable
b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of notes receivable

Pledging of accounts receivable is usually made when obtaining loans from banks or any other lending institution. The
pledged receivables shall serve as a collateral security for the payment of the loan.
Accounting Treatment
 Doesn’t require necessary entry in the books. Disclosure of such transaction in the financial statements is
enough.
 Accounting for the loan is done in usual manner as any other loans.
Assignment of accounts receivable
 evidenced by a financing agreement and a promissory note both of which the assignor signs
 specific accounts receivable serve as a collateral security
 The assignee usually only lends a certain amount in consideration for the assigned accounts in order to protect
itself from factors that may lead for the assigned accounts to be not fully realized such as sales discounts, sales
returns and allowances and uncollectible amounts
 Service or financing fee is also charge by the assignee for the assignment agreement.

Notification basis Non-notification basis

 the customers are informed that their accounts  customers are not informed of the assignment of
had been assigned and therefore make their accounts receivable and therefore still make their
payments to the assignee directly payment to the assignor

Accounting Treatment for Assignment of accounts receivable

 The entry to record the assignment under both basis involves reclassification of accounts receivable to
accounts receivable-assigned.
Presentation
 The accounts receivable assigned is included in the carrying amount of accounts receivable but disclosure is
necessary.

Factoring is a sale of accounts receivable, thus, ownership of accounts is transferred.

Note: The new owner of the accounts receivable which is usually a bank or finance, also called the factor, assumes full responsibility over
the collection of accounts including risks of non-collection.

Forms of Factoring
a. Casual factoring b. Factoring as a continuing agreement
 Recorded as normal sale  Recorded as normal sale
 Recognition of loss on factoring  Recognition of loss on factoring (Factoring fee or

Practical Accounting 1 Theory of Accounts

Chapter 6 – Receivable Financing USL Blue Notes 19

commission)
 Provision of factor’s holdback*
Note: *a predetermined amount for protection against customer
returns and allowances and other special adjustments. Factor’s
holdback is actually a receivable from factor and classified as a
current asset.

Presentation for Factored Accounts Receivable

 Excluded from total accounts receivable. (derecognized)

Discounting of Notes Receivable

 To discount the note, the payee must endorse it. Thus, legally, the payee becomes an endorser and the bank
becomes an endorsee.

Terms Related to Discounting of Note

1. Net proceeds refer to the discounted value of the note received by the endorser from the endorsee.
Net proceeds = maturity value minus discount
2. Maturity value refers to the amount due on the note at the date of maturity.
Maturity value = principal amount plus interest
3. Maturity date is the date on which the note should be paid.
4. Principal is the amount appearing on the face of the note. Also known as face value.
5. Interest as used for this discussion refers to the interest for the full term of the note.
Interest = principal X rate X time
6. Interest rate is the rate appearing on the face of the note.
7. Time is the period within which interest shall accrue. For discounting purposes, it is the period from the date of
note to maturity date. It is the full term of the note.
8. Discount is the amount of interest deducted by the bank in advance.
Discount = maturity value X discount rate X discount period
9. Discount rate is the rate used by the bank in computing the discount. This is a different rate from that of
interest rate. If there is no discount rate given, then it is safe to assume that the interest rate is also the
discount rate.
10. Discount period is the period of time from the date of discounting up to maturity date. Simply put, it is the
unexpired period of the note.
Accounting for Discounting of Notes Receivable
With Recourse Without Recourse
a. Conditional sale b. Secured borrowing Discounting with recourse doesn’t
The discounted notes receivable shall A liability for notes receivable shall be require recognition of contingent
be excluded from the total notes recognized. liability since the sale of the note
receivable but a contingent liability receivable is absolute. The difference
for a same amount is appropriately of the carrying amount of the note
disclosed. and proceeds shall be recognized in
profit or loss.

Illustrative Problems

A P2, 000, 000 180-day, 10% note dated January 1 was received from a customer and discounted without recourse on
January 31 at 12% discount rate.
Theory of Accounts Practical Accounting 1
20 USL Blue Notes Chapter 6 – Receivable Financing

Maturity Value = 2, 000, 000 + (2, 000, 000*10%*180/360)

= 2, 100, 000.00

Discount = 2, 100, 000*12%*150/360

= 100, 000.00

Net Proceeds = 2, 100, 000 – 100, 000

= 2, 000, 000

Book Value = 2, 000, 000 + (2, 000, 000*10%*30/360)

= 2, 016, 667

Gain/(Loss) = 2, 000, 000 – 2, 016, 667

= (16, 667)

(SCENARIO 1)Using these computations, the journal entry assuming the discounting with recourse as a conditional
sale would be:

Cash 2, 000, 000

Loss on Discounting 16, 667
Notes Receivable Discounted 2, 000, 000
Interest Income 16, 667

(SCENARIO 2)Using these computations, the journal entry assuming the discounting with recourse as a secured
borrowing would be:

Cash 2, 000, 000

Loss on Discounting 16, 667
Liability Notes Receivable Discounted 2, 000, 000
Interest Income 16, 667

(SCENARIO 3)Using these computations, the journal entry assuming the discounting without recourse would be:

Cash 2, 000, 000

Loss on Discounting 16, 667
Notes Receivable 2, 000, 000
Interest Income 16, 667

Practical Accounting 1 Theory of Accounts