RECEIVABLES FINANCING
→ Pledging
→ Assignment
→ Factoring
→ Discounting
Pledging of Accounts Receivable
Key Concepts and Definitions
📌 What is Pledging?
Pledging of accounts receivable is a financing
arrangement in which a business uses its accounts
receivable as collateral to obtain a loan from a financial
institution.
→Borrower retains ownership of receivables.
→Lender does NOT collect from the customers.
→Loan repayment is NOT directly linked to collections.
✅ It is still the responsibility of the borrower to collect and
repay the loan, not the lender.
Pledging of Accounts Receivable
📌 Features of Pledging:
Pledging of Accounts Receivable
🧾 Accounting Treatment for Pledging
Example:
Assume that the company borrowed ₱500,000 from a bank
and pledged ₱600,000 of accounts receivable as collateral.
Journal Entry:
Dr. Cash 500,000
Cr. Notes Payable 500,000
🔍 No entry is made for the pledging itself. However,
disclosure is required.
Pledging of Accounts Receivable
❑ Disclosure in Financial Statements
The company must include in the notes to the financial
statements:
→ That certain receivables are pledged.
→ The amount of receivables pledged.
→ The amount of the loan secured by such receivables.
📝 Sample Disclosure:
“At year-end, the company pledged accounts receivable
amounting to ₱600,000 to secure a ₱500,000 bank
loan.”
Assignment of Accounts Receivable
Key Concepts and Definitions
📌 What is Assignment of Receivables?
Assignment of accounts receivable is a financing
agreement in which a business transfers specific accounts
receivable to a lender as collateral for a loan. The borrower
often retains collection responsibilities and must remit the
proceeds to the lender.
→ Legal right to specific receivables is assigned to the lender.
→ It may be general (all receivables) or specific (named
accounts only).
→ Assignment can be with or without notification to the
customer.
Assignment of Accounts Receivable
📌 Features of Assignment:
Assignment of Accounts Receivable
Accounting Treatment for Assignment of Receivables
SAMPLE PROBLEM
ABC Corp assigns ₱800,000 of its receivables to obtain a
₱600,000 loan from DEF Bank, with a service charge of
₱20,000. Loan interest is 10% p.a., withheld in advance.
Requirement:
Prepare JE related to the assignment of receivables
Assignment of Accounts Receivable
Factoring of Receivables
Key Concepts and Definitions
📌 What is Factoring?
Factoring is a financial transaction in which a business sells
its accounts receivable to a third party (the factor) at a
discount, either with or without recourse.
→ With recourse: The company retains the risk of
uncollectible accounts.
→ Without recourse: The risk of uncollectibility is transferred
to the factor
✅ Factoring usually involves a fee/commission, and may also
involve retention (holdback) by the factor as protection.
Factoring of Receivables
SAMPLE PROBLEM
Due to financial difficulty, ABC factored ₱6,000,000 of its
receivables to DEF Finance with 15% commission. DEF Finance
retained 10% as protection for customer returns & allowances.
ABC has previously set up an allowance for bad debts for these
receivables in the amount of ₱200,000.
During the year, a customer returned ₱100,000 worth of goods and
another customer took a 2% discount worth ₱20,000. On Dec 31,
the balance was collected from customers and the account was
fully settled.
Requirement:
1. Compute the gain or loss on factoring and net cash proceeds
received by ABC
2. Prepare JE related to the receivables factoring.
Factoring of Receivables
SAMPLE PROBLEM
Due to financial difficulty, ABC factored ₱6,000,000 of its receivables to DEF Finance with 15% commission.
DEF Finance retained 10% as protection for customer returns & allowances. ABC has previously set up an
allowance for bad debts for these receivables in the amount of ₱200,000.
During the year, a customer returned ₱100,000 worth of goods and another customer took a 2% discount worth
₱20,000. On Dec 31, the balance was collected from customers and the account was fully settled.
Solution
1. Compute the gain or loss on factoring and net cash proceeds
received by ABC
Factoring of Receivables
Factoring of Receivables
DISCOUNTING OF NOTES RECEIVABLES
Definition: Discounting of notes receivable is a financing
arrangement where the holder of a promissory note (the
payee) sells or transfers the note to a bank or a financial
institution before its maturity date in exchange for
immediate cash.
There are two types of discounting arrangements:
Without Recourse – The bank assumes the risk of nonpayment by
the note maker. The note is treated as sold, and the holder has no
further liability if the note is dishonored.
With Recourse – The seller retains the risk of nonpayment. The note
is used as collateral, and the holder is liable if the note maker fails
to pay. The note is not fully derecognized from the books, and a
contingent liability must be disclosed.
Discounting of Notes Receivables
DEFINITION OF TERMS:
ENDORSER- The PAYEE that endorses the note
ENDORSEE- The BANK that discounts the note
MAKER- Party liable to pay in the note
PAYEE- Party entitled to payment in the note
DISCOUNTING- Refers to the deduction of an amount
by a bank or endorsee called DISCOUNT
Discounting of Notes Receivables
Computation of Bank Discount and Proceeds
❑ Interest Income (if not yet accrued):
Interest = Face Value × Note Rate × Time
❑ Maturity Value:
Maturity Value = Face Value + Interest
❑ Bank Discount:
Discount = Maturity Value × Bank Discount Rate ×
Time Remaining
❑ Proceeds:
Proceeds = Maturity Value – Discount
Discounting of Notes Receivables
Example: Note Discounting
ABC Company holds a ₱500,000, 90-day, 12% note dated
April 1. On May 1 (30 days later), it discounts the note with a
bank at 15% per annum. On Jun 1, the maker pays the note
in full.
Requirements: Compute for the following:
1. Maturity value
2. Discount on NR
3. Interest on NR
4. Net proceeds
5. Prepare JE assuming:
a) Maker makes full payment
b) Maker dishonors the note
Discounting of Notes Receivables
Solutions:
Compute Maturity Value
Interest = ₱500,000 × 12% × (90 ÷ 360) = ₱15,000
Maturity Value = ₱500,000 + ₱15,000 = ₱515,000
Compute Bank Discount
Time Remaining = 90days – 30days = 60 days
Discount = ₱515,000 × 15% × (60 ÷ 360) = ₱12,875
Compute The Net Proceeds
Net Proceeds = ₱515,000 – ₱12,875 = ₱502,125
Discounting of Notes Receivables
