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Receivable Financing

Receivable financing allows businesses to obtain immediate cash by using or selling their receivables as collateral. This includes methods such as pledging accounts receivable for loans, assigning specific receivables to lenders, and factoring, which involves selling receivables to a third party. Each method has distinct accounting treatments and implications for cash flow management.

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Jam Tamar Almario
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1 views

Receivable Financing

Receivable financing allows businesses to obtain immediate cash by using or selling their receivables as collateral. This includes methods such as pledging accounts receivable for loans, assigning specific receivables to lenders, and factoring, which involves selling receivables to a third party. Each method has distinct accounting treatments and implications for cash flow management.

Uploaded by

Jam Tamar Almario
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Receivable Financing

Receivable financing is a way for a business to get immediate cash by using its receivables
(accounts or notes receivable) as collateral or selling them outright. This is useful when a
company is experiencing cash flow problems due to slow customer payments but still needs
to pay its own obligations.

1. Pledge of Accounts Receivable

●​ The business uses its receivables as collateral to secure a loan from a bank or
lender.
●​ The business still collects the receivables from customers and may be required to
use those collections to repay the loan.
●​ Accounting treatment:
○​ When the loan is received:​
Dr. Cash (amount received)​
Dr. Discount on Note Payable (if applicable)​
Cr. Note Payable (total loan amount)
○​ When the loan is repaid:​
Dr. Note Payable​
Cr. Cash
○​ No journal entry is needed for the pledged receivables, but a disclosure is
made in the financial statements.

Assignment of Accounts Receivable

Definition:​
Assignment of accounts receivable is when a business (assignor) transfers specific accounts
receivable to a lender (assignee) in exchange for a loan. Unlike pledging, where all
receivables serve as collateral, assignment is more formal and applies to specific
receivables. The lender provides a loan based on a percentage of the assigned receivables’
value, considering potential uncollectible amounts, sales discounts, and returns.

Types of Assignment:

1.​ Nonnotification Basis:


○​ Customers are not informed that their accounts have been assigned.
○​ They continue paying the business (assignor), which then remits the
collections to the lender (assignee).
2.​ Notification Basis:
○​ Customers are informed that their accounts have been assigned.
○​ They must directly pay the lender (assignee).
Factoring of Accounts Receivable

Definition:

Factoring is when a business sells its accounts receivable to a bank or finance company
(called a factor) to get immediate cash. Unlike an assignment, where the business retains
ownership of the receivables, factoring transfers ownership to the factor. This means the
factor assumes responsibility for uncollectible accounts (if it’s without recourse).

Since the accounts are sold, the customers are notified and must pay directly to the
factor.

Types of Factoring:

1.​ Casual Factoring – One-time sale of receivables due to urgent cash needs.
2.​ Factoring as a Continuing Agreement – Ongoing arrangement where a factor

Factoring is when a business sells its accounts receivable (money owed by customers) to
a third party called a factor (usually a bank or finance company) to get immediate cash.
This is useful when a company needs money quickly instead of waiting for customers to pay.

Key Features of Factoring:

✅ The business transfers ownership of receivables to the factor.​


✅ The factor takes on the risk of bad debts (uncollectible accounts).​
✅ The customers are notified and must pay the factor directly.​
✅ A gain or loss is recorded depending on the amount received.

Examples of Factoring:

1. Casual Factoring (One-Time Emergency)

A business is in urgent need of cash and sells its receivables at a discount.

Example:​
A company sells P100,000 of receivables (with P5,000 allowance for doubtful accounts) for
only P80,000.

●​ The company records a loss of P15,000 because it received less than the
receivable’s value.

📌
Journal Entry:​

📌
DR Cash P80,000​

📌
DR Allowance for Doubtful Accounts P5,000​

📌
DR Loss on Factoring P15,000​
CR Accounts Receivable P100,000
2. Factoring as a Continuing Agreement (Ongoing)

A company regularly sells its receivables to a factor before shipping goods to customers.

●​ The factor approves customers before sales occur.


●​ The factor charges a fee (5%–20%).
●​ The factor may withhold part of the amount (factor’s holdback) to cover possible
returns.

Example:

●​ A company sells P200,000 of receivables to a factor.


●​ The factor charges a 10% fee (P20,000) and withholds P10,000 for possible returns.
●​ The company receives P170,000 in cash (P200,000 - P20,000 - P10,000).

📌
Journal Entry:​

📌
DR Cash P170,000​

📌
DR Receivable from Factor (holdback) P10,000​

📌
DR Factoring Expense P20,000​
CR Accounts Receivable P200,000

3.​ approves credit before sales and takes over collections.

Credit Card Explained Simply

A credit card allows customers to buy goods and services on credit (without paying
immediately). The card issuer (usually a bank) lends the money to the customer and pays
the retailer, minus a service fee. The customer repays the bank later, often within a month.

How Credit Card Sales Work

1. At the Time of Sale

●​ The customer buys goods using a credit card.


●​ The retailer records a sale but doesn’t receive cash yet.
●​ Instead, the retailer records a receivable from the card issuer (since the bank will
pay later).

📌 Example:​
A customer buys P10,000 worth of goods using a credit card. The bank charges a 3%
service fee (P300).

📌
Journal Entry:​

📌
DR Accounts Receivable from Card Issuer P9,700​

📌
DR Credit Card Service Fee Expense P300​
CR Sales P10,000
2. When the Bank Pays the Retailer

●​ The card issuer pays the retailer the amount due (after deducting the service fee).

📌
Journal Entry:​

📌
DR Cash P9,700​
CR Accounts Receivable from Card Issuer P9,700

Key Points:

✅ The retailer gets paid quickly (by the bank, not the customer).​
✅ The customer pays later, usually within a month.​
✅ The bank earns a service fee (1%–5% of sales).
To record credit card sales

​ Dr. Accounts receivable- (bank name) ​ XXX

​ ​ Cr. Sales ​ ​ ​ XXX

To record payment from bank

​ Dr. Cash​ ​ XXX

​ Credit card service charge​ XXX

​ ​ Cr. Accounts Receivable- (bank name)​ XXX

​ ​ ​

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