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RECEIVABLE FINANCING (PLEDGING, ASSIGNMENT AND FACTORING)

Introduction This topic focuses more on the preparation of journal entries for the first three types of
receivable financing.
Rationale Imagine a company reporting the following in the current section of its Statement of Financial
Position:
Cash 10,000
Accounts Receivable 840,000
Notes Receivable 450,000
Inventory 190,000
Prepayments 14,000
Short-Term Investments 25,000
Considering the scenario above, the entity’s liquidity may suffer since there is a low cash
balance relative to the total current assets. It can also be noticed that the receivables portion
constitutes a big portion of the current assets. The problem with this is that the company may
not able to convert its receivable to cash for availability of such. In such case, the entity may
enter into receivable financing agreements to convert its receivables into cash.
Concept
Map Receivable
Financing

Authors have
different
treatments and Pledging Assignment Factoring Discounting
classifications.
Nevertheless,
Valix illustrates the
meeting ground for
all authors. Notification- Casual Without
With Recourse
Basis Factoring Recourse

Non-
Continuing Conditional
Notification
Agreement/ Sale
Basis
Regular
Factoring
Secured
Borrowing

Pledging Receivables are just pledged as collateral security for the payment of a loan applied for.
No journalizing issues can be encountered with pledging of receivables as the journal
entries required are the record of the loan transactions and none for the pledging.
Disclosure of the pledging of receivable on the loan/note on the notes to financial statements
is the only requirement for pledging.
Assignment This is the formal pledging of specific accounts receivable as collateral for a loan/note. The
receivables are still owned by the entity.
If the debtor is made known of the assignment and is required to pay his obligation to the
assignee, the assignment is said to be on notification basis, otherwise, non-notification
basis would render the assignor to collect the debt and remit the proceeds to the assignee.
The receivables assigned are segregated, and only a portion of the assigned receivables
may be loaned. A service charge is also incurred by the assignor normally as a percentage
of the receivables assigned.
The following would be the required journal entries:
Non-Notification Basis Notification Basis
To reclassify the assigned accounts:
AR – Assigned xx AR – Assigned xx
Accounts Receivable xx Accounts Receivable xx
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To record the loan:

Cash [net] Cash [net]
Service Charge [% of AR] Service Charge [% of AR]
Note Payable [% of AR] Note Payable [% of AR]
Issuance of credit memo (sales return):
Sales Return xx Sales Return xx
AR - Assigned xx AR - Assigned xx
To record collection:
Cash xx Note Payable xx
Sales Discount xx Sales Discount xx
AR – Assigned xx AR – Assigned xx
To record remittance:
Note Payable [net] Interest Expense xx
Interest Expense xx Cash xx
Cash xx
To record write-off of accounts assigned:
Allowance for Bad Debts xx Allowance for Bad Debts xx
AR - Assigned xx AR - Assigned xx
To record transfer of remaining balance:
Accounts Receivable xx Accounts Receivable xx
AR - Assigned xx AR - Assigned xx
Factoring Factoring is the sale of accounts receivable to a factor. This involves the transfer of
ownership of the receivables.
When receivables are factored without recourse, the factor assumes all the risks and
responsibilities on the collection of the receivables. If the receivables prove to be worthless,
the factor cannot run back to the entity, therefore, the factor only gives a portion of the
receivables factored as the proceeds from factoring. This is called casual factoring. The
difference of the carrying amount of the receivables and proceeds from factoring constitutes
a loss from factoring.
If the problem says When receivables are factored with recourse (continuing agreement/regular factoring), the
that the interest
shall be computed entity still have the obligation to pay for any deficiency. The factor charges a commission to
on weighted be treated as loss from factoring. The loss from factoring will also include the interest
average time to
maturity use 365
expense deducted in advance and the fair value of the recourse obligation.
days as The factor also withholds an amount for protections from returns and allowances known as
denominator. factor’s holdback.
The following would be the required journal entries:
*Cash is the AR
Without Recourse With Recourse
factored, net of To record factoring:
discounts, Cash xx Cash *xx
commission,
holdback and Allowance for Bad Debts xx Allowance for Bad Debts xx
interest. Loss on Factoring [net] Sales Discount xx
Accounts Receivable xx Receivable – Factor xx
**This includes the
commission, Loss on Factoring **xx
interest and xx
recourse
Accounts Receivable
obligation. Est. Recourse Oblig. [fair value]
To record sales returns:
Sales Returns xx
No entry Sales Discounts xx
Receivable – Factor [net]
To record final settlement:
Cash xx
No entry xx
Receivable – Factor