Integrated Practical Accounting
Receivable Financing – capability or financial flexibility of the company to generate cash out of
its receivable, not because of collection.
Used for paying liabilities
Used for investing
Used as collateral
Common Forms of Receivable Financing
1. Pledging – refers to borrowing of money from the bank or any financial institution in
which receivables in general are used as collateral.
a. “Receivable in general”
2. Assignment – more formal borrowing arrangement in which the specific receivables are
identified and used as a security.
a. “Specific receivables”
b. Modification of pledging
3. Factoring – involves the sale of receivables to a finance primary company, which are
called a factor. The factor or buyer assumes the risk of collectivity and generally handles
the billing and collection function.
a. Sale/transferring of ownership of the receivable
4. Discounting of Notes Receivable – sale of the note to a 3rd party, usually a bank.
a. Specifically to notes receivables
b. Discounting – process of converting future value to present value (interest)
c. Factoring and discounting are both sale – factoring has no interest; discounting
has interest
Pledging (hypothecating of receivables)
- Refers to borrowing of money from the bank or any financial institution in which
receivables in general are used as a collateral or security for a loan. Since receivables in
general are use as collateral, pledging is sometimes called general assignment.
- The company is still the owner of the receivable.
- Entries should also be written on the notes to financial statements.
Journal entries:
Receivable Loans
A/R xxx 1. Borrowing of Loan
Sales xxx a. Interest not deducted in advance
Cash xxx
Loans Payable xxx
Sales xxx b. Interest deducted in advance
A/R xxx Cash xxx
Disc. on Loans Payable xxx
Loans Payable xxx
Sales Discount xxx 2. Payment of Interest/Amortization of
Cash xxx Discount
A/R xxx a. Interest Expense xxx
Cash xxx
b. Interest Expense xxx
Disc. on Loans Payable xxx
Assignment
- More formal borrowing arrangement in which the specific receivables are identified and
used as security. The assignor or borrower transfers its rights in some of its accounts
receivable to a lender or assignee in consideration for a loan.
o Company – borrower / assignor
Signs a financing agreement (assignment)
Signs a promissory note
o Bank – lender / assignee
- More formal type of pledging of accounts receivable
- Secured borrowing evidenced by a financing agreement and a promissory note both of
which the assignor signs.
- Equity in the assigned account
o difference between the balance of the assigned accounts and the balance of the
loan.
Characteristics of Assignment:
1. The loan is at a specified percentage of the face value of the collateral. Interest and
service fees are charged to the assignor.
a. Example: A/R is 1M but loan permitted is only 800k; since it is not guaranteed
that the company will received 100% of the A/R.
2. The debtors are occasionally notified to make payments to the assignee but most of the
assignments are not on a notification basis.
a. Types of assignment: notification & non-notification
i. Example: Juan (the debtor) are notified that his payment can be directed
to the assignee. (Notification)
Non-Notification Notification
Assignment: Assignment:
A/R – assigned xxx A/R – assigned xxx
A/R xxx A/R xxx
Cash xxx Cash xxx
Service Fees xxx Service Fees xxx
Disc. on L/P* xxx Disc. on L/P* xxx
Loans/Notes Payable xxx Loans/Notes Payable xxx
Debit memo: Debit memo:
Sales Return xxx Sales Return xxx
A/R – assigned xxx A/R – assigned xxx
Write-off: Write-off:
ADA xxx ADA xxx
A/R – assigned xxx A/R – assigned xxx
Collection: Collection:
Cash xxx On the date of the debtor’s payment to the
Sales Discount* xxx bank, you shall have no entry. You should be
A/R – assigned xxx notified by the bank before recording the
entries.
Loans Payable xxx
Sales Disc.* xxx
Int. Expense xxx
A/R xxx
Payment of principal and interest to bank: Payment of principal and interest to bank:
Int. Expense xxx No entry
L/P xxx
Disc. on L/P xxx
Cash xxx
Your loan is paid but your receivable is not Your loan is paid but your receivable is not
finished: finished:
A/R xxx A/R xxx
A/R – assigned xxx A/R – assigned xxx
3. Assigned accounts are segregated from other accounts. The Loans Payable should be
deducted from the balance of A/R – assigned to determine the equity in assigned
accounts receivable.
Factoring
- involves the sale of receivables to a financing company, which is called the factor. The
factor assumes the risk of collectivity and generally handles the billing and collection
function.
- The sale of receivable is on without recourse, notification basis.
o Without recourse – wala ng habol
If hindi nagbayad si debtor, hindi na puwede balikan ni factor si
company.
Casual Factoring Factoring as a continuing agreement
(unusual, not often, critical cash flow situation; the (continuous agreement; regardless if a receivable exist
receivable must really exist before entering an or not, the company and the factor can enter a factoring
agreement with the factor) agreement; the factor can also have the decision to
(type of factoring on a discount, always incurred a loss) accept customer accounts)
Factoring: Factoring:
Cash xxx Cash xxx
ADA xxx ADA xxx
Loss on factoring xxx Int. Expense xxx
Receivable from factor xxx Factoring Fee xxx
Accounts Receivable xxx Receivable from factor xxx
Accounts Receivable xxx
Returns: Returns:
Sales return of allowance xxx Sales return of allowance xxx
Receivable from factor xxx Receivable from factor xxx
Hold back or security excess or if there’s no Hold back or security excess or if there’s no
problem that arise: problem that arise:
Cash xxx Cash xxx
Receivable from factor xxx Receivable from factor xxx
Exemption: With recourse
- May habol pa
- In a situation where the customer can’t pay, the company will shoulder the payment.
- The company will have a secondary liability (Contingent Liability). Provision for
estimates.
Factoring as a continuing agreement:
Cash xxx
ADA xxx
Int. Expense xxx
Factoring Fee xxx
Receivable from factor xxx
Loss on recourse obligation xxx
Accounts Receivable xxx
Recourse Liability xxx
On casual factoring:
*only add
Dr Loss on factoring (amount only) xxx
Cr Recourse Liability xxx
If the customer didn’t pay:
Recourse Liability xxx
Cash xxx
If the customer did pay and there’s no
problem:
Recourse Liability xxx
Gain on recourse liability xxx
Discount of Notes
- Sale of the note to a third party, usually a bank. The sale is usually on a with recourse
basis which means that the default of the debtor, the seller of the note becomes liable for
its maturity value.
Customer Company Bank
- Maker / debtor - Payee / endorser - 3rd party / endorsee
- Signs the promissory
note
Date of the note Date of Discounting Date of Maturity
Interest on this period will be received by the bank
Formulas:
1. Net Proceeds = Maturity Value – Discount
a. Proceeds – money received
2. Maturity Value = Principal + Interest
3. Interest = Principal x Rate x Time
a. Time = Date of the note to Date of maturity
4. Discount = Maturity Value x Discount rate x Discount Time
a. Discount rate = new agreed rate from bank on the time of discounting
b. Discount time = Discount date to Maturity date
5. Carrying Amount = Principal + Accrued Interest
a. Carrying Amount – value of note the company have given up
6. Accrued Interest = Principal x Rate x Time (up to discount date)
7. Gain (Loss) on Discounting = Net Proceeds – Carrying Amount
Without Recourse: With Recourse:
Cash (net proceeds) xxx 1. Conditional Sale
Loss on N/R discounting xxx - There’s an actual sale but conditional; N/R is
Notes Receivable (prin) xxx not yet written-off
Interest Income (Accr. Int.) xxx
Cash (net proceeds) xxx
Loss on N/R discounting xxx
*Notes Receivable discounted xxx
Interest Income (Accr. Int.) xxx
Presentation on FS:
Notes Receivable xxx
Notes Receivable – discounted (xxx)
0
*0 can be seen as conditional sale
Note is honored/ customer paid:
N/R discounted xxx
N/R xxx
Note is dishonored/ customer didn’t pay:
Accounts Receivable xxx
Cash xxx
N/R discounted xxx
N/R xxx
2. Secured Borrowing
- There’s no actual sale, only a borrowing
wherein there’s already payment (customer
account)
Cash (net proceeds) xxx
Interest Expense xxx
Liability on N/R discounted xxx
Interest Income (Accr. Int.) xxx
Presentation on FS:
Notes Receivable xxx
Note is honored/ customer paid:
Liability on N/R discounted xxx
N/R xxx
Note is dishonored/ customer didn’t pay:
Accounts Receivable xxx
Cash xxx
Liability on N/R discounted xxx
N/R xxx
