assignment of receivables pledge

Pledging Accounts Receivable

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on January 30, 2024

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Definition and explanation.

Pledging accounts receivable is essentially the same as using any asset as collateral for a loan. Cash is obtained from a lender by promising to repay.

If the loan is not repaid, the collateral will be converted to cash, and the cash will be used to retire the debt.

The receivables can be either an identified set of notes and accounts or a general group in which new ones can be added and old ones retired.

The collection of a pledged receivable has no impact on the loan balance.

The pledging agreement usually calls for the substitution of another receivable for the one collected.

As an example, suppose that Sample Company borrows $80,000 on 31 December 2023, and agrees to pay back $81,600 on 1 April 2024.

Further, it pledges $100,000 of trade receivables for the loan. The company would make three journal entries as follows:

The last two entries can be combined, but they are shown separately here to facilitate a comparison of pledging with the other approaches.

The only financial statement disclosures provided for pledged receivables are notes or parenthetical comments.

A similar notation is provided for the notes payable .

Assignor Collects

As an alternative to pledging, the company may decide to assign its receivables to a lending institution.

Under this arrangement, the original holder essentially transfers title to the third party but agrees to collect the receivables and pay the cash to the factor .

Suppose that Sample Company obtains $80,000 cash on 31 December 2023 by assigning $100,000 of its trade receivables.

The company agrees to place the collections in a special restricted checking account from which it will repay the original $80 000 plus a $2,400 finance charge on April 1, 2024.

These journal entries would be made as follows:

To record partial collection of the assigned accounts :

To accrue the finance charge:

To reclassify the uncollected accounts and unrestricted cash:

The disclosures that would be provided on various balance sheet dates are shown in the following example, under the simplifying assumption that no other activity took place.

Notice that the payable to the factor is contra to the assigned accounts. Any restricted cash balance is, in turn, contra to the payable account.

Most arrangements of this type call for more frequent payments than the example shows.

The net result of the assignment is that Sample Company obtained $80,000 by giving up $82,400 of receivables.

Pledging Accounts Receivable FAQs

What is pledging accounts receivable.

Pledging Accounts Receivable means that a business gives up some of its rights to an asset in order to borrow money. For example, you could pledge your car title as collateral for a loan. If the loan isn't repaid, the lender can take possession of your car.

What are the journal entries for pledging accounts receivable?

There are no Special Journal entries required when you pledge your Accounts Receivable as collateral for a loan. The lender still has to approve giving up your Accounts Receivable before making the loan.

How are accounts receivable journal entries prepared?

Accounts Receivable are money owed to a company by their customers for products they've already received. Accounts are recorded in the balance sheet as assets.

What are the journal entries for assigning Accounts Receivable as collateral for a loan?

The entry to record assignment of Accounts Receivable as collateral would be a credit to cash, and a debit to assign Accounts Receivable. The cash account is debited because the company gave up the assigned receivables. The assign Accounts Receivable account is credited because they still owe this money to their customers.

What are the main financial statements in an assignment of accounts receivable?

The three main Financial Statements in an assignment of Accounts Receivable are the income statement, balance sheet, and Cash Flow statement. The income statement and Cash Flow statements would report the repayments on the receivables.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Assignment of Accounts Receivable: Meaning, Considerations

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Investopedia / Jiaqi Zhou

What Is Assignment of Accounts Receivable?

Assignment of accounts receivable is a lending agreement whereby the borrower assigns accounts receivable to the lending institution. In exchange for this assignment of accounts receivable, the borrower receives a loan for a percentage, which could be as high as 100%, of the accounts receivable.

The borrower pays interest, a service charge on the loan, and the assigned receivables serve as collateral. If the borrower fails to repay the loan, the agreement allows the lender to collect the assigned receivables.

Key Takeaways

• Assignment of accounts receivable is a method of debt financing whereby the lender takes over the borrowing company's receivables.
• This form of alternative financing is often seen as less desirable, as it can be quite costly to the borrower, with APRs as high as 100% annualized.
• Usually, new and rapidly growing firms or those that cannot find traditional financing elsewhere will seek this method.
• Accounts receivable are considered to be liquid assets.
• If a borrower doesn't repay their loan, the assignment of accounts agreement protects the lender.

Understanding Assignment of Accounts Receivable

With an assignment of accounts receivable, the borrower retains ownership of the assigned receivables and therefore retains the risk that some accounts receivable will not be repaid. In this case, the lending institution may demand payment directly from the borrower. This arrangement is called an "assignment of accounts receivable with recourse." Assignment of accounts receivable should not be confused with pledging or with accounts receivable financing .

An assignment of accounts receivable has been typically more expensive than other forms of borrowing. Often, companies that use it are unable to obtain less costly options. Sometimes it is used by companies that are growing rapidly or otherwise have too little cash on hand to fund their operations.

New startups in Fintech, like C2FO, are addressing this segment of the supply chain finance by creating marketplaces for account receivables. Liduidx is another Fintech company providing solutions through digitization of this process and connecting funding providers.

Financiers may be willing to structure accounts receivable financing agreements in different ways with various potential provisions.​

Special Considerations

Accounts receivable (AR, or simply "receivables") refer to a firm's outstanding balances of invoices billed to customers that haven't been paid yet. Accounts receivables are reported on a company’s balance sheet as an asset, usually a current asset with invoice payments due within one year.

Accounts receivable are considered to be a relatively liquid asset . As such, these funds due are of potential value for lenders and financiers. Some companies may see their accounts receivable as a burden since they are expected to be paid but require collections and cannot be converted to cash immediately. As such, accounts receivable assignment may be attractive to certain firms.

The process of assignment of accounts receivable, along with other forms of financing, is often known as factoring, and the companies that focus on it may be called factoring companies. Factoring companies will usually focus substantially on the business of accounts receivable financing, but factoring, in general, a product of any financier.

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• What Are Pledging Receivables? And ...

What Are Pledging Receivables? And How Can They Help You Raise Working Capital

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Exposing the ai hype in o2c: real innovation or empty promises.

Key Takeaways

• Pledging receivables involves using your accounts receivables as collateral to get a loan or extra funds.
• To pledge receivables, the lender checks your customer payments, decides how much to lend, and collects from your customers if you can’t repay.
• Pledging receivables allows businesses to use unpaid invoices as collateral, ensuring immediate cash flow to boost working capital and meet short-term financial needs.

Introduction

Sometimes, businesses run short of money, and they need extra cash to keep everything running smoothly. They often get this extra money through short-term loans.

But here’s the thing: Small and medium-sized businesses (SMBs) often have a hard time getting loans from banks because banks think they might not pay the money back.

So, what do these SMBs do? They use something called accounts receivable and inventory financing to raise working capital for daily operations.

Utilizing accounts receivable(AR), or customers’ credit accounts, to obtain finances for your business is a method of meeting working capital needs. By pledging the receivables, businesses gain capital for themselves.

Businesses are frequently offered accounts receivable funding by commercial finance organizations in place of their account receivables as collateral—it’s a flexible financing option and it is designed to provide financial bridging to address cash flow needs. 

The more you understand how pledging accounts receivable work, the better you will be able to leverage them to meet your financing needs.

What Are Pledging Receivables? 

Pledge receivables are the accounts receivables that you submit as collateral to the lender against a pre-decided loan(or capital funds). When you pledge or assign the AR, you are effectively using them as security to receive cash.

Although the receivables are held as collateral by the lender, you, as the business owner, are still responsible for collecting debts from your credit clients. When accounts receivable is handled in this way, the lender usually limits the loan amount to one of the following:

• 70% to 80% of the entire amount of outstanding accounts receivables; or
• A fraction of accounts receivables based on the age of the receivables.

The second option above is safer from the lender’s perspective and is more common as it allows for accurate identification of receivables that are less likely to be collected.

Typically, the lender will only accept receivables that are not past the due date. Accounts that are past due do not make suitable collaterals.

Also, if a customer is given credit terms that the lender believes are excessively long, the lender may refuse to accept those receivables as collateral. After evaluating a company’s receivables for overdue accounts, the lender decides how much of the receivables they will accept.

Example of Pledging Receivables

Let’s say Company A borrows $80,000 on December 31, 2021, and agrees to repay $81,600 on April 1, 2022. It pledges $100,000 in trade receivables as collateral for the loan. The company would make the following three journal entries:

Note: The last two entries can be combined, but they are shown separately here for clarity. The only financial statement disclosures for pledged receivables typically appear as notes or parenthetical comments.

How Do You Pledge Receivables?

To pledge receivables, first, the lender looks at the money your customers owe you and checks for any late payments or how long they have to pay. They decide how much they’re willing to lend based on this.

Then, they adjust the amount to cover any possible issues, like returns or allowances. After that, they decide the percentage of the money they’re willing to give you as a loan.

If your business can’t repay the loan or defaults on the AR financing loan, the lender will take the money your customers owe you and collect it themselves.

You don’t need to make special notes in your financial records for pledged receivables. However, the lender still has to approve your AR before making the loan.

How Pledging Receivables Can Help Raise Working Capital

Pledging receivables can help raise working capital by allowing a business to use its outstanding invoices as collateral for a loan.

As discussed above lenders provide funds based on the value of these receivables, providing immediate cash flow that can be used for operational expenses, investments, or other financial needs.

This process improves liquidity and ensures the business can meet its short-term financial requirements, even when customers have not yet paid their invoices.

Final Thoughts

It’s well-known that many small businesses encounter cash flow challenges , but did you know that the leading cause of new business failures is a lack of cash?

In fact, 38 percent of small businesses fail because they either run out of cash or struggle to secure additional financial support.

Pledging receivables can offer a financial lifeline to businesses, providing a financial bridge to address the cash flow needs of these businesses.

So, understanding what they are and how to leverage them to meet your financing needs is crucial. Though they may not suffice for larger funding needs.

1). What is the difference between pledging receivables and assigning receivables?

When a business pledges its accounts receivable, it does so as a form of loan collateral. When a business assigns its accounts receivable to a financial institution, it enters into a lending agreement with the bank to receive payment on specific customer accounts.

2). Is pledging and factoring receivables exactly the same process?

In pledging receivables the business promises its account receivables as collateral and gets into a pledging agreement with the lender. The company retains title to and is responsible for collecting accounts receivable, not the lender whereas, in factoring receivables, businesses opt to sell or assign its account receivable (or a specific invoice) to a factoring company in exchange for cash at a discount to its face value. The factor is then responsible for collecting the receivables.

3). Why does a company pledge its receivables?

Pledging receivables is a common practice in the business world, particularly for those seeking additional financing or working capital. By pledging their receivables, businesses can leverage their outstanding invoices to secure a loan and meet their financing needs. 

4). What are the advantages of pledging accounts receivable?

One of the most significant advantages of pledging receivables is the immediate injection of cash into the business. Rather than waiting for customers to make payments, the company can obtain funds upfront by using its outstanding invoices as collateral.

5). What are the journal entries for pledging accounts receivable?

Well, no special journal entries are required for pledging receivables. However, it is crucial to recognize that the lender’s approval must be obtained before the loan is granted, as they have the final say in relinquishing your accounts receivable.

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Pledge vs assignment of receivables.

Pledge Vs Assignment Of Receivables is a subject of growing interest among creditors and debtors alike. Both mechanisms allow for the transfer of rights to future payments, and both have their own unique benefits and drawbacks. Understanding the differences between these two options is essential not just for those who are directly involved in the transaction but also for any third parties that may be impacted.

What’s The Difference Between A Pledge And Assignment Of Receivables? We Break It Down For You.

Are you trying to determine the difference between a pledge and an assignment of receivables ? If so, you are not alone. Knowing the difference between a pledge and assignment of receivables can be difficult, but it doesn’t have to be. In this blog post, we’ll break down the differences between a pledge and assignment of receivables, so you can understand the difference between the two.

What Is A Pledge?

A pledge is a legal agreement in which a person or business pledges a particular asset as collateral for a loan. The pledged asset can be used as security for the loan and if the borrower defaults on their loan, the lender can take possession of the asset and use it to recover some or all of the debt.

Pledging an asset requires the borrower to give up ownership rights until the debt is paid in full, or the pledge is released by the lender. A pledge is often used when the borrower needs quick access to capital, but does not want to completely surrender ownership of the asset.

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Pledge Vs Assignment Of Receivables:

The primary difference between a pledge and assignment of receivables is that a pledge involves giving up possession of an asset while an assignment of receivables involves assigning rights to receive payments from a debtor. When you pledge an asset, you are transferring title and possession to the lender while with an assignment of receivables, you are assigning your rights to collect payments from a debtor to the lender. 

In both cases, you are taking on additional risk since you are no longer in control of the asset or receivables. However, with a pledge, you are taking on more risk because you are giving up ownership rights until the debt is paid in full. With an assignment of receivables, you are still in control of collecting payments from your debtors.

What Is An Assignment Of Receivables?

An assignment of receivables is a legal agreement that transfers the rights to receive payments from a debtor to another party, known as the assignee. The assignee becomes the new owner of the receivable, and is entitled to the payment from the debtor. This type of agreement can be used in many different financial scenarios, such as when a company needs to raise capital by selling off some of its receivables, or when a creditor wishes to secure debt repayment. In comparison to a pledge, an assignment of receivables is generally more involved and requires more paperwork, but it can also offer more legal protection than a pledge.

The Key Differences Between Pledges And Assignments Of Receivables

Pledges and assignments of receivables are two different financing tools used by businesses. While both are forms of secured financing, the major difference between them is in the structure of the agreement. 

A pledge is a type of security interest that gives a creditor the right to take possession of an asset if the borrower defaults on their loan. It also allows the creditor to have a claim over a piece of property as collateral against repayment. This means that the creditor has rights to the pledged asset should the borrower not be able to meet their debt obligations. 

On the other hand, an assignment of receivables involves transferring title or ownership of a certain amount of a company’s invoices to a third-party financier, such as a bank or factor, who will collect the payment on behalf of the company. The financier pays an advance to the company at a discount and then collects the full amount from the debtor. The financier bears the credit risk and any delays in collection of payments are the responsibility of the factor.

In summary, while both involve a security interest and provide capital to companies, pledges and assignments of receivables differ in terms of structure and level of risk assumed. Pledges grant creditors rights to an asset as collateral, whereas with assignments of receivables, third-party financiers bear the credit risk and any delays in collection of payments.

When Should You Use A Pledge Vs An Assignment Of Receivables?

Whether you choose to use a pledge or assignment of receivables depends on the specific needs of your situation. A pledge is often used in cases where the lender is seeking more assurance that the loan will be repaid, such as when there is a risk of the borrower not paying the loan back. When a pledge is used, the borrower has to give up possession and control of the assets pledged.

An assignment of receivables, on the other hand, is used when the lender wants to secure payment from a third-party rather than from the borrower directly. In this case, the borrower assigns the right to receive payments from the third-party to the lender in order to secure the loan. This means that if the third-party fails to make their payments, the lender can pursue legal action against them to recover their funds.

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When deciding between pledge vs assignment of receivables, it is important to consider your unique circumstances and goals. If you have a high risk of default, a pledge may be a better choice as it provides greater assurance of repayment. However, if you are looking to secure payment from a third-party, an assignment of receivables may be preferable. Ultimately, it is important to speak to a financial advisor or lawyer who can help you determine which option is best for your needs.

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What is Pledge Vs Assignment of Receivables?

Creating an Accounts Receivable Assigned Journal Entry is a good way to control cash flow and minimize your credit exposure by having a greater degree of control over your receivables. It allows you to reduce the time spent in account collection activities and increase cash flow more quickly.

What are the benefits of using Pledge Vs Assignment of Receivables?

Assignment of receivables is the process by which a company sells its debt receivable to a third party. This can involve setting up a special purpose entity and assigning the receivables to it as security for the sale. Assignment of receivables has benefits over pledge of assets because it allows access to cash immediately, in addition to providing certainty of payment.

What are the key considerations when choosing between Pledge Vs Assignment of Receivables?

The main consideration when choosing between Pledge Vs Assignment of Receivables is whether your company is willing and able to repay debt. If this is a concern, then you may want to consider an assignment of the receivables instead.

The Difference Between Assignment of Receivables & Factoring of Receivables

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You can raise cash fast by assigning your business accounts receivables or factoring your receivables. Assigning and factoring accounts receivables are popular because they provide off-balance sheet financing. The transaction normally does not appear in your financial statements and your customers may never know their accounts were assigned or factored. However, the differences between assigning and factoring receivables can impact your future cash flows and profits.

How Receivables Assignment Works

Assigning your accounts receivables means that you use them as collateral for a secured loan. The financial institution, such as a bank or loan company, analyzes the accounts receivable aging report. For each invoice that qualifies, you will likely receive 70 to 90 percent of the outstanding balance in cash, according to All Business . Depending on the lender, you may have to assign all your receivables or specific receivables to secure the loan. Once you have repaid the loan, you can use the accounts as collateral for a new loan.

Assignment Strengths and Weaknesses

Using your receivables as collateral lets you retain ownership of the accounts as long as you make your payments on time, says Accounting Coach. Since the lender deals directly with you, your customers never know that you have borrowed against their outstanding accounts. However, lenders charge high fees and interest on an assignment of accounts receivable loan. A loan made with recourse means that you still are responsible for repaying the loan if your customer defaults on their payments. You will lose ownership of your accounts if you do not repay the loan per the agreement terms.

How Factoring Receivables Works

When you factor your accounts receivable, you sell them to a financial institution or a company that specializes in purchasing accounts receivables. The factor analyzes your accounts receivable aging report to see which accounts meet their purchase criteria. Some factors will not purchase receivables that are delinquent 45 days or longer. Factors pay anywhere from 65 percent to 90 percent of an invoice’s value. Once you factor an account, the factor takes ownership of the invoices.

Factoring Strengths and Weaknesses

Factoring your accounts receivables gives you instant cash and puts the burden of collecting payment from slow or non-paying customers on the factor. If you sell the accounts without recourse, the factor cannot look to you for payment should your former customers default on the payments. On the other hand, factoring your receivables could result in your losing customers if they assume you sold their accounts because of financial problems. In addition, factoring receivables is expensive. Factors charge high fees and may retain recourse rights while paying you a fraction of your receivables' full value.

• All Business: The Difference Between Factoring and Accounts Receivable Financing

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• 4 The Role of Factoring in Modern Business Finance

Assignment of Accounts Receivable

The financial accounting term assignment of accounts receivable refers to the process whereby a company borrows cash from a lender, and uses the receivable as collateral on the loan. When accounts receivable is assigned, the terms of the agreement should be noted in the company's financial statements.

Explanation

In the normal course of business, customers are constantly making purchases on credit and remitting payments. Transferring receivables to another party allows companies to reduce the sales to cash revenue cycle time. Also known as pledging, assignment of accounts receivable is one of two ways companies dispose of receivables, the other being factoring.

The assignment process involves an agreement with a lending institution, and the creation of a promissory note that pledges a portion of the company's accounts receivable as collateral on the loan. If the company does not fulfill its obligation under the agreement, the lender has a right to collect the receivables. There are two ways this can be accomplished:

General Assignment : a portion of, or all, receivables owned by the company are pledged as collateral. The only transaction recorded by the company is a credit to cash and a debit to notes payable. If material, the terms of the agreement should also appear in the notes to the company's financial statements.

Specific Assignment : the lender and borrower enter into an agreement that identifies specific accounts to be used as collateral. The two parties will also outline who will attempt to collect the receivable, and whether or not the debtor will be notified.

In the case of specific assignment, if the company and lender agree the lending institution will collect the receivables, the debtor will be instructed to remit payment directly to the lender.

The journal entries for general assignments are fairly straightforward. In the example below, Company A records the receipt of a $100,000 loan collateralized using accounts receivable, and the creation of notes payable for $100,000.

In specific assignments, the entries are more complex since the receivable includes accounts that are explicitly identified. In this case, Company A has pledged $200,000 of accounts in exchange for a loan of $100,000.

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• Building Your Business
• Business Financing

Using Accounts Receivable To Finance Your Business

An alternative to bank financing for your small business

2 Methods of Accounts Receivable Financing

Pledging accounts receivable, factoring accounts receivable, frequently asked questions (faqs).

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Using your accounts receivable, or your customers’ credit accounts, to obtain financing for your small business is another method of raising money for working capital needs. Both accounts receivable financing and inventory financing are usually used for quick, short-term loans when it is not possible to obtain a short-term loan from a bank or other financial institution. Both are used to raise working capital or the money you use for your daily operations. Here's how it works.

Key Takeaways

• Accounts receivable financing is a way for you to finance your small business.

There are two methods of accounts receivable financing: pledging and factoring.

• Interest rates are usually higher on this type of financing than on a traditional bank loan.
• Accounts receivable financing may not be ideal for long-term business financing needs.

Accounts receivable financing can be used as an alternative to bank financing. Commercial finance companies often offer accounts receivable financing to small businesses. Sometimes, commercial banks or other financial institutions will also offer accounts receivable financing. Interest rates are usually higher on this type of financing than on a traditional bank loan.

Pledging, or assigning, accounts receivable means that you essentially use your accounts receivable as collateral to obtain cash. The lender has the receivables as security, but you, as the business owner, are still responsible for the collection of the debts from your customers.

A lender looks at the aging schedule of your business firm’s accounts receivables in determining which ones to accept as collateral. Usually, the lender only accepts those receivables that are not overdue. Overdue accounts don’t make good collateral. Also, if a customer has credit terms extended to them that the lender thinks are too long, the lender may not accept those particular receivables either.

After examining a company’s receivables for overdue accounts and terms the lender doesn’t like, the lender then determines what amount of the company’s receivables they will accept.

After that, the lender will typically adjust that amount for returns and allowances. At that point, it will decide what percentage of the value of the acceptable receivables it will loan and make the loan to your small business. The percentage it will loan is usually around 75% or 85%.

If a business defaults on the accounts receivable financing loan, the lender will take over the company’s accounts receivables and collect on the debts themselves.

Factoring your accounts receivables means that you actually sell them, as opposed to pledging them as collateral, to a factoring company . The factoring company gives you an advance payment for accounts you would have to wait on for payment. The advance payment is usually 70% to 90% of the total value of the receivables. After charging a small fee to the company, usually 2% or 3%, the remaining balance is paid after the full balance is paid to the factor.

Factoring is a relatively expensive source of financing, but the cost is lowered because the factoring company takes on all the risk of default by the customer.

Factoring is important in the retail industry in the U.S. Many small businesses in a huge variety of industries use this form of financing when they need short-term working capital loans.

Sometimes using accounts receivable financing is all that stands between your small business and bankruptcy , particularly during a recession or other types of tough times for your business. Don’t hesitate to use it for your working capital needs if you need to. It may not be acceptable financing, however, for longer-term business financing needs.

What is accounts receivable financing?

Accounts receivable financing is when a business pledges its accounts receivable—the money it is still owed from customers and clients—as collateral to obtain a loan from a lender. There are two kinds: pledging, which means you put up the accounts receivable as collateral, and factoring, where you actually sell them to a company that pays you upfront the money you'd normally wait for from customers.

What is invoice financing?

Invoice financing is just another name for accounts receivable financing, which is when you pledge your invoices as collateral or sell them to a company so that you can get a short-term loan for your business. Your invoices are money that is still owed to you, so instead of you waiting on that money to come in, you exchange it for money now from a lender.

Office of the Comptroller of the Currency. " Accounts Receivable and Inventory Financing ."

Comptroller of the Currency, Administrator of National Banks. " Accounts Receivable and Inventory Financing ."

Universal Funding. " Invoice Factoring Rates ."

J&D Financial. " Factoring Rates for Our Services ."

• General Finance and Accounting

How Pledging Receivables Helps you Meet Financial Obligations and Working Capital Needs

• October 26th, 2023
• • 10 min read

In this article, you'll learn what pledging is in AR, the advantages of pledging receivables, how it differs from factoring accounts receivable, and more.

Plus, we'll share why AR automation is critical to obtaining receivables financing.

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Key takeaways

Accounts receivable is a great way to finance your business, and pledging receivables is one of multiple AR financing options.

Pledging receivables is different from invoice factoring and assignment since collection and default responsibilities vary.

Accounts receivable data like invoice statuses, AR aging, and cash flow data analysis are critical to successfully raising funds from pledged receivables.

AR automation offers several advantages to companies financing working capital using their receivables.

Small to mid-sized businesses routinely use their accounts receivables (AR) to finance working capital and meet their financial obligations. Pledging receivables is one such option, but how do you know if this is the right choice for your company?

In this article, we cover what pledging receivables means, how it works, and how AR automation can help you figure out whether this is the right choice.

What's in this article:

What pledging receivables is →

The differences between pledging, assigning, and factoring accounts receivable →

The advantages of pledging receivables →

Why AR automation is key to obtaining receivables financing →

What is pledging receivables?

Pledging receivables is placing a portion of your accounts receivable as collateral for a loan with a bank or lender. You can pledge receivables that are not past due as collateral.

Lenders will review your cash flow data and assess default risks before accepting your AR as collateral. This makes maintaining accurate collections and AR data critical when pledging receivables.

What happens when you pledge accounts receivable?

Companies looking to pledge their receivables usually reach out to lenders specializing in this form of financing. These lenders will ask for documents like:

Credit policy terms

AR aging data

Collections data

Customer credit profiles

After scrutinizing these data, the lender will offer a loan based on the value of the receivables and an interest rate. The amount the lender offers depends on factors like the probability of collecting on an invoice and the age of a receivable.

Presenting AR data in a well-organized format helps lenders understand your policies easily and increases the likelihood of you receiving more for your receivables. Typically, lenders offer between 70 to 80% of outstanding receivables.

Note that lenders hold your receivables as collateral when you pledge them. You're still responsible for collecting outstanding invoices. You (the company) bear default risk fully when pledging receivables .

How lenders evaluate your accounts receivable data

Loan underwriters review several AR-related datasets before deciding how much to loan a business. Most lenders offer between 70 to 80% of your outstanding receivables, as mentioned previously. However, much depends on the lender's underwriting limits and the state of your accounts receivable.

For instance, some lenders might review your AR aging tables and offer an amount that is a portion of outstanding invoices less than 45 days old. Others might extend that term to 60 days.

Once approved, lenders will charge you a service fee and present interest rates and other terms like the loan's duration. Interest rates depend on your industry and customer credit profile. While no reliable benchmarks exist, you can expect interest rates to track broad business financing rates.

The lender's policies are outside your control, but you can increase the odds of a positive result by ensuring you do the following:

Present AR data in an easily understood format.

Have supplementary evidence like delivery slips or sales contracts on hand.

Organize AR data to show an order-to-cash (O2C) audit trail .

Present customer-level collections data.

Present collection efficiency metrics like days sales outstanding ( DSO) and collection effectiveness index (CEI) as part of your dashboards.

Organize trade references and customer credit data in easily understood formats.

An example of pledging receivables

Once the lender approves the loan and you finalize terms, you'll have to record it on your books. Here's an example of the impact pledging receivables makes on your journal entries.

Loan amount—$250,000

Receivables pledged—$300,000

Interest rate—5%

4 differences between pledging, assigning, and factoring accounts receivable

Pledging receivables is similar to assigning or factoring them, but the devil is in the details. Here are the most important differences between these AR financing options you must understand.

What are the advantages of pledging receivables?

Like every financing option, pledging receivables offers your business a few advantages. Here are the most important ones to understand:

Pledging receivables is a relatively easy financing option.

Pledging receivables gives you more cash.

Pledging receivables does not impact customer relationships.

Pledging receivables forces AR process standardization.

Pledging receivables is a relatively easy financing option

Unlike other financing options such as business loans, securing a loan by pledging receivables is relatively easy. A big reason is receivables are assets lenders can quantify with a good degree of accuracy.

For instance, a lender can look at your DSO to approximate when your invoices will clear. They can look at your AR aging record to calculate how much cash your company will receive over the next month or quarter. They can look at your collection effectiveness index and calculate the probability of collecting outstanding invoices.

These numbers give lenders a good deal of confidence when lending money, making it relatively easy for you to secure working capital .

Pledging receivables can give you more cash

Pledging receivables might give you more cash upfront compared to invoice factoring. While much depends on your industry and customer credit quality, the interest rate a lender charges you could be lower than a factoring company's discount rate.

This gives you more cash upfront to finance your business, extending your liquidity runway.

Pledging receivables does not impact customer relationships

When you pledge your receivables, you retain control over collections and customer communication. Compare this to invoice factoring and assignments where a third party absorbs collections risks, and the impact on customer relationships is evident.

For instance, a long-time customer might suffer from a temporary cash-flow hole, preventing them from paying you. A factoring company is unlikely to prioritize your history with that customer, choosing to collect cash as quickly as possible.

This situation could leave a bad impression on the customer, reducing the likelihood of them returning to you when circumstances improve.

Pledging receivables forces AR process standardization

Pledging receivables, like all forms of AR financing, creates debt you must manage well. The process forces your finance department to collaborate and present data in an easily understood format.

For example, you must present customer credit data and your credit policy. Your AR team must work with sales to understand customer credit terms and refer to internal systems to validate invoice statuses and history.

Your team is more likely to rely on standardized processes, as a result, since an ad-hoc process will lead to inadequate or disorganized information, leading to lenders rejecting your application—an outcome no one wants.

Why accounts receivable automation is key to obtaining receivables financing

Accounts receivable data is the key to successfully pledging receivables. If you're processing a good deal of invoices each month—the average mid-sized company processes 2,433 invoices monthly —a manual AR process will likely leave you behind, unable to cope with lender requirements.

Here's how AR automation can help you secure receivables financing:

Quick insights into AR data

Lenders need visibility into your AR data to understand aging timelines and credit risk. Automation helps you create these reports quickly and present real-time information. Automation also eliminates errors caused by manual work , reducing the time it takes you to present data and secure financing.

Frees AR’s time to analyze cash flow

Figuring out when you need financing is a critical task. Given the expense associated with AR financing, analyzing your cash flow is a critical AR task. Automation frees your AR team's time, giving them more space to dig deeper into cash flow bottlenecks .

☝︎ Hear from Versapay’s CFO , Russell Lester, on what you can do to enhance AR performance, now and in the future.

The result is greater AR efficiency you can rely on to plan financing ahead of time.

Guarantees AR data accuracy

Automation dramatically reduces invoice processing costs since you'll avoid common errors like incorrect pricing, discounts, or credit terms. You can trust your data and rely on it to create accurate working capital projections.

You'll avoid late payments and always have an accurate cash flow picture.

Pledging receivables is a great way to secure financing for your business, but make sure you organize your AR data in an easy-to-understand format.

Collaborative AR automation platforms help you centralize your data for quick cash flow insights and eliminate errors that increase expenses. Learn how Versapay's AR automation platform can help you accelerate cash flow and increase AR efficiency.

About the author

Vivek Shankar

Vivek Shankar specializes in content for fintech and financial services companies. He has a Bachelor's degree in Mechanical Engineering from Ohio State University and previously worked in the financial services sector for JP Morgan Chase, Royal Bank of Scotland, and Freddie Mac. Vivek also covers the institutional FX markets for trade publications eForex and FX Algo News. Check out his LinkedIn profile .

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Pledge vs Hypothecation vs Lien vs Mortgage vs Assignment

The difference between pledge, hypothecation, lien, mortgage, and assignment lies in the security charge that can be created on any asset held by a lender against the money lent (usually called the collateral). The type of asset charge defines whether the agreement can be classified as a pledge, lien, or mortgage. Let us see in detail the difference between pledge vs hypothecation vs lien vs mortgage vs assignment.

There are several types of security interests that can be adopted by banks or lenders depending upon the collateral involved and the circumstances. Different forms of creating charges on assets are as follows:

Hypothecation

Short summary table.

Pledge is commonly used for goods or securities such as gold, stocks, certificates, etc. The lender (pledgee) holds the actual possession of such securities until the borrower (pledger) has the borrowed amount with him. Once the borrowed amount has been returned, the securities are returned as well. If the pledger defaults on the loan amount, the pledgee can sell off the goods pledged to him as security in order to recover the principal and the interest amount. In this case risk of lending comparatively reduces because possession of assets is with the lender.

Hypothecation is usually when the charge is on movable assets rather than having a charge on fixed assets. However, hypothecation is different from pledges in the sense that the possession of such movable security stays with the borrower. Hence, in the event of default, the lender is first required to take possession / seize such property or asset in order to recover the principal and interest. An example of hypothecation is vehicle financing, where the lender has the asset that has been hypothecated against the loan with a bank. If the borrower defaults, the bank then takes possession of the vehicle after sufficient notice to recover the money.

Also Read: Hypothecation

Under a lien, the lender gets the right to hold up a property or machinery used as collateral against funds borrowed. However, unless the contract states otherwise, the lender doesn’t have the right to sell the property or the asset if the borrower defaults on the loan. Examples of lien include rent receivable, unpaid fees, etc. It is a right given to the creditor to retain/possess the security until the loan amount g. Since possession is with the creditor, it is the strongest form of security. Lien can be on both movable and immovable property. But generally, lending companies choose to have mortgages on immovable property and lien on movable security like shares, gold, deposits, etc.

Under a mortgage , the legal ownership of the asset can be transferred to the lender if the borrower defaults on the loan amount. However, the borrower continues to remain in possession of the property. A mortgage is usually used for immovable assets (example: house, land, building, or any property which is permanently fixed to the earth or attached to the land). Home loans classify as mortgages.

An assignment is another type of charge on current assets or fixed assets. Under assignment, the charge is created on the assets held in the books. It is another mode of providing security against borrowing. Examples of assignments include life insurance policies, books of debts, receivables, etc., which the bank can finance. For example – A bank can finance against the book debts. The borrower assigns the book debts to the bank in such a case.

To get an idea about the difference between pledge vs hypothecation vs lien vs mortgage vs assignment, refer to the table below.

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Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

5 thoughts on “Pledge vs Hypothecation vs Lien vs Mortgage vs Assignment”

Really simple and so easy to refer .Especially good for nonfinance people who aims to move to general top management .

Thanks for sharing. I really like your explanations.

Tysm sir it helps me easily to understand n differentiate between all type of securities

Really great way illustration. It helped me a lot.

I love the concept; so very easy to understand.

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Home > Accounts Receivable > Assignment of Accounts Receivable Journal Entries

Assignment of Accounts Receivable Journal Entries

The assignment of accounts receivable journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting of accounts receivable assignment.

The assignment of accounts receivable journal entries are based on the following information:

• Accounts receivable 50,000 on 45 days terms
• Assignment fee of 1% (500)
• Initial advance of 80% (40,000)
• Cash received from customers 6,000
• Interest on advances at 9%, outstanding on average for 40 days (40,000 x 9% x 40 / 365 = 395)

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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Accounting for Pledge Receivable in Financial Management

Explore the intricacies of recording pledge receivables and their impact on financial statements across different sectors.

Financial management often grapples with the complexities of accounting for various types of receivables. Among these, pledge receivable is a unique category that requires careful consideration due to its implications on an organization’s financial health and reporting accuracy.

Pledge receivable represents commitments made by donors or patrons to contribute a certain amount of funds to an entity, typically observed in non-profit organizations but also relevant across different industries. The importance of accurately recording these pledges cannot be overstated as they play a significant role in budgeting, planning, and strategic decision-making processes.

Accounting for Pledge Receivable

The process of accounting for pledge receivable involves a series of steps that ensure these promises are captured in financial records in a manner that reflects their economic impact. This process is governed by specific accounting standards and principles that dictate how and when these pledges should be recognized, presented, and differentiated based on their conditions.

Recognition Criteria

The recognition of pledge receivable hinges on the guidelines set forth by the Financial Accounting Standards Board (FASB) in the United States, specifically within the Accounting Standards Codification (ASC). According to ASC 958-605, pledges must be recognized when they meet the criteria of being verifiable, measurable, and probable of collection. Verifiability requires that there is sufficient documentation to substantiate the pledge, while measurability ensures that the amount can be quantified with reliability. The probability of collection assesses the likelihood that the pledged amount will indeed be received, considering the donor’s creditworthiness and past payment history. When these conditions are met, the pledge can be recorded as an asset on the balance sheet and as revenue in the statement of activities.

Financial Statement Presentation

Once a pledge is deemed recognizable, it must be presented in the financial statements in a manner that provides clear information to users. Pledges receivable are typically classified as assets and can be further categorized as current or non-current based on the expected timing of fulfillment. Current pledges are those expected to be collected within one year, while non-current pledges are due beyond that timeframe. The presentation should also distinguish between restricted and unrestricted pledges, as this affects how the funds can be used and reported. For instance, restricted pledges may be tied to specific projects or purposes and are reported separately from unrestricted funds, which can be used at the organization’s discretion.

Conditional vs. Unconditional Pledges

A critical distinction in the accounting of pledges is between conditional and unconditional pledges. An unconditional pledge is a promise to give that depends only on the passage of time or demand for payment. In contrast, a conditional pledge depends on the occurrence of a specified future and uncertain event to bind the promisor. According to ASC 958-605, an unconditional pledge should be recognized when the aforementioned recognition criteria are met. However, a conditional pledge should not be recognized as revenue or as an asset until the conditions are substantially met. This distinction is crucial as it affects the timing of revenue recognition and the portrayal of an organization’s financial position.

Timing and Financial Ratios

The timing of pledge recognition can significantly influence an organization’s financial ratios, which are key indicators of financial health used by stakeholders to assess performance and stability. For example, the recognition of a large pledge as revenue can inflate the current period’s income, affecting profitability ratios such as the net margin. Conversely, recording a pledge as an asset increases the entity’s receivables, which impacts liquidity ratios like the current ratio. It is important for financial managers to consider the timing of these recognitions and their effect on financial ratios, as they can influence lending decisions, grant eligibility, and the perceptions of donors and investors regarding the organization’s financial management.

Pledge Receivable in Non-Profits

Non-profit organizations often rely on pledges as a significant source of funding. These promises of future donations can be a lifeline for many such entities, enabling them to plan and execute their missions effectively. Unlike commercial entities, non-profits must navigate the unique challenge of accounting for donations that may be received over extended periods and are often earmarked for specific uses.

The management of pledges receivable in non-profits is nuanced, as it involves not only financial reporting but also donor relations and trust. Non-profits must ensure that they maintain transparency with their donors regarding how pledges are recorded and used. This transparency is not just a matter of ethical practice but also a regulatory requirement, as non-profits are subject to audits and must adhere to the principles of accountability.

The strategic impact of pledges on a non-profit’s operations is profound. Pledges can enable organizations to embark on long-term projects and initiatives that would otherwise be unfeasible. They provide a sense of financial security and predictability, which is particularly important for non-profits that may not have a steady stream of income. However, this also means that non-profits must be adept at forecasting and adjusting their financial strategies based on the reliability of these pledges.

Non-profits also face the task of cultivating and maintaining relationships with donors, which is intertwined with how pledges are managed. The stewardship of donor relations requires a careful balance between recognizing the generosity of pledges and the practical aspects of accounting for them. This involves regular communication with donors, providing updates on the organization’s work, and demonstrating the impact of their contributions.

Pledge Receivable in Various Industries

While non-profits are the most common entities associated with pledge receivables, this financial aspect also permeates various other industries. Each sector faces unique challenges and opportunities in managing these types of receivables, which can be integral to their financial strategies and operational success.

Higher Education

Institutions of higher education frequently engage in fundraising campaigns, where pledges play a central role. Universities and colleges often receive pledges from alumni, corporations, and philanthropists to support scholarships, capital projects, and endowments. The accounting for these pledges must be meticulous, as the amounts can be substantial and the terms often span multiple fiscal years.

The recognition and reporting of these pledges are subject to the same FASB standards as non-profits. However, higher education institutions may also need to consider the impact of pledges on their endowment funds and the associated spending policies. Pledges that contribute to endowments are subject to specific disclosure requirements, and the institutions must manage the expectations of both donors and beneficiaries regarding the timing and use of the funds. Additionally, the volatility of pledges, which can be affected by economic cycles and donor preferences, requires these institutions to maintain robust forecasting and financial planning processes.

Healthcare Organizations

Healthcare organizations, particularly those with non-profit status, encounter pledge receivables in the form of commitments from individuals, foundations, and corporations. These pledges can be directed towards research, facility improvements, equipment acquisition, or community health initiatives. The management of these pledges is critical, as healthcare organizations must balance immediate patient care needs with long-term development goals.

The accounting treatment of pledges in healthcare requires careful consideration of the conditions attached to the donations. For instance, a pledge for a new wing in a hospital may be contingent upon the organization raising additional funds or achieving certain operational milestones. Recognizing such pledges too early could misrepresent the organization’s financial position. Healthcare financial managers must also be adept at navigating the complexities of restricted versus unrestricted funds, ensuring that the organization complies with donor restrictions and reporting requirements.

Charitable Foundations

Charitable foundations, which often act as intermediaries between donors and beneficiary organizations, handle pledge receivables as part of their core operations. These foundations must account for pledges both as receivables from donors and as future grants payable to other entities. The dual role of foundations in the pledge process adds a layer of complexity to their financial management.

The recognition of pledges in charitable foundations must be precise to maintain the integrity of their financial statements and the trust of their stakeholders. Foundations must monitor the conditions of pledges closely, as these can affect the timing of fund availability and the subsequent distribution to beneficiaries. Additionally, foundations must be transparent in their reporting to ensure that donors understand how their pledges are being managed and allocated, which is essential for sustaining long-term donor relationships and ensuring the continuity of funding for their philanthropic activities.

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• Receivables
• Notes Receivable
• Credit Terms
• Cash Discount on Sales
• Accounting for Bad Debts
• Bad Debts Direct Write-off Method
• Bad Debts Allowance Method
• Bad Debts as % of Sales
• Bad Debts as % of Receivables
• Recovery of Bad Debts
• Accounts Receivable Aging
• Assignment of Accounts Receivable
• Factoring of Accounts Receivable

Assignment of accounts receivable is an agreement in which a business assigns its accounts receivable to a financing company in return for a loan. It is a way to finance cash flows for a business that otherwise finds it difficult to secure a loan, because the assigned receivables serve as collateral for the loan received.

By assignment of accounts receivable, the lender i.e. the financing company has the right to collect the receivables if the borrowing company i.e. actual owner of the receivables, fails to repay the loan in time. The financing company also receives finance charges / interest and service charges.

It is important to note that the receivables are not actually sold under an assignment agreement. If the ownership of the receivables is actually transferred, the agreement would be for sale / factoring of accounts receivable . Usually, the borrowing company would itself collect the assigned receivables and remit the loan amount as per agreement. It is only when the borrower fails to pay as per agreement, that the lender gets a right to collect the assigned receivables on its own.

The assignment of accounts receivable may be general or specific. A general assignment of accounts receivable entitles the lender to proceed to collect any accounts receivable of the borrowing company whereas in case of specific assignment of accounts receivable, the lender is only entitled to collect the accounts receivable specifically assigned to the lender.

The following example shows how to record transactions related to assignment of accounts receivable via journal entries:

On March 1, 20X6, Company A borrowed $50,000 from a bank and signed a 12% one month note payable. The bank charged 1% initial fee. Company A assigned $73,000 of its accounts receivable to the bank as a security. During March 20X6, the company collected $70,000 of the assigned accounts receivable and paid the principle and interest on note payable to the bank on April 1. $3,000 of the sales were returned by the customers.

Record the necessary journal entries by Company A.

Journal Entries on March 1

Initial fee = 0.01 × 50,000 = 500

Cash received = 50,000 – 500 = 49,500

The accounts receivable don't actually change ownership. But they may be to transferred to another account as shown the following journal entry. The impact on the balance sheet is only related to presentation, so this journal entry may not actually be passed. Usually, the fact that accounts receivable have been assigned, is stated in the notes to the financial statements.

Journal Entries on April 1

Interest expense = 50,000 × 12%/12 = 500

by Irfanullah Jan, ACCA and last modified on Oct 29, 2020

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What is pledging of accounts receivables?

Pledging is when the company uses its accounts receivable balance (i.e. unpaid invoices) as collateral for a loan. The most common reason type of loan is in the form of a line of credit. This basically allows the company to receive cash immediately, rather than waiting until customers pay their invoices.

What does it mean to factor receivables?

When a company factors their receivables, it means they are “selling” the receivables to a 3rd party collection company in exchange for cash. The 3rd party collection company will then attempt to collect the receivables. The company would pay a transaction fee, which is typically a % of receivables. Companies can factor with recourse or...

What is the journal entry to record when a company factors its receivables?

Since the company receives cash from the 3rd party collection company, the debit would be to cash. Additionally, there would be a debit to factor expense, which is calculated using the % of total receivables. There would be a credit to accounts receivable for the full amount transferred. It is typical for the 3rd party...

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BA 114.1 > Chapter 14 Receivable Financing - Pledge, Assignment, and Factoring > Flashcards

Chapter 14 Receivable Financing - Pledge, Assignment, and Factoring Flashcards

Receivable Financing is the ____ or capability of an entity to ____ out of its receivables.

financial flexibility, raise money

The common forms of receivable financing are:

Pledge of A/R, Assignment of A/R, Factoring of A/R, Discounting of N/R

When loans are obtained from the bank or any lending institution, the A/R may be pledged as ___ for the payment of the loan.

collateral security

Normally, the borrowing entity makes the ____ but may be required to turn over the ____ to the ___ in satisfaction for the loan.

collections, collections, bank

With respect to the pledged accounts, is an entry necessary? If yes, give the entries.

No. It is sufficient that disclosure thereof is made in a note to financial statement.

(Pledging) The entries to record the loan is:

Dr. Cash at Net Proceeds (can also be thought of as balancing amount), Dr. Discount on Note Payable at Face Value of Loan - (Face Value of Loan Discount Rate), Cr. N/P-bank at Face Value of note. Note that (Face Value of Loan Discount Rate) = Interest deducted in advance. Note that Net Proceeds = Face Value of loan - Interest deducted in advance.

(Pledging) Accounts were pledged at December 1, 2015 and the term of the related loan is one year. On December 31, 2015 (reporting period), the entries to record the accrued interest expense are:

Dr. Interest Expense at (Face Rate Time), Cr. Discount on note payable at the same amount.

Carrying amount of the N/P =

N/P - Carrying amount of Discount on N/P

(Pledging) Accounts were pledged at December 1, 2015 and the term of the related loan is one year. On December 1, 2015, the entries to record the payment of the bank loan are:

Dr. N/P-bank at face value, Cr. Cash at the same amount. And the discount on N/P is finally amortized as follows: Dr. Interest Expense at the carrying amount of the Discount on N/P, Cr. Discount on N/P at its carrying amount

Assignment of A/R means that a ___ called the ___ transfers its rights in some of it?s A/R to a ___ called the ___ in consideration for a loan.

borrower, assignor, lender, assignee

Assignment is a more ____ type of pledging of A/R

Assignment is secured borrowing evidenced by a ____ and a ___ both of which the assignor signs.

financing agreement, promisorry note

Pledging is ___ because ___ A/R serve as collateral security for the loan.

general, all

Assignment is ___ because ____ A/R serve as collateral security for the loan.

specific, specific.

Assignment may be done either on a ____ or ____ basis

nonnotification, notification

When accounts are assigned on a nonnotification basis, as is usually the case, customers are ______, that their accounts have been _____. As a result, the customers continue to make payments to the ____, who in turn remits the collections to the ____

not informed, assigned, assignor, assignee

When accounts are assigned on a notification basis, customers are ___ to make their ___ directly to the ____

notified, payments, assignee

The assignee usually lends only a certain percentage of the face value of the accounts assigned because the assigned accounts may not be _____ by reason of such factors as ___, ____, and ____.

fully realized, sales discount, sales return and allowances, uncollectible accounts

The assignee usually charges ____ for the loan that it makes and requires a ___ or ____ for the assignment agreement.

interest, service/financing charge, commission

(Assignment) The entry to separate the assigned accounts and to record the loan are:

Dr. A/R-assigned at amount of assigned A/R, Cr. A/R at the same amount; Dr. Cash at balancing amount, Cr. Service Charge at specified amount, Cr. N/P-bank at the amount advanced by the bank. Note: The entries to separate the assigned accounts and to record the loan are the same under the nonnotification and notification basis.

(Assignment-Nonnotification) The entry to record the issuance of a credit memo for sales return to a customer whose account was assigned is:

Dr. Sales Return at the specified amount, Cr. A/R-assigned at the same amount

(Assignment-Notification) The entry to record the receipt of notice from the bank of a collection from assigned accounts with a sales discount and the payment of interest for the interest due:

Dr. N/P-bank at total cash collected by the bank, Dr. Sales Discount at the discount availed, Cr. A/R-assigned at the balancing amount.

(Assignment-Nonnotification) The entry to record the collection of assigned account less a discount is:

Dr. Cash at total cash collected Dr. Sales Discount at discount availed, Cr. A/R-assigned at the balancing amount.

(Assignment-Nonnotification) The entry to record the remittance of total collections to the bank plus interest:

Dr. N/P-bank at the total cash remitted to the bank (which is equal to the total collection made by the assignor), Dr. Interest Expense at the (Carrying Amount of the N/P*Interest Rate specified by the bank during the assignment), Cr. Cash at balancing amount.

(Assignment-Nonnotification) The entry to record the writeoff of assigned accounts is:

Dr. ADA at the amount, Cr. A/R-assigned at the same amount.

(Assignment-Nonnotification) The entry to record the transfer the remaining balance of A/R-assigned to A/R after the total payment of the loan:

Dr. A/R at the same amount, Cr. A/R-assigned at the remaining balance after the total payment of the loan

(Assignment-Notification) The entry to record the collection of assigned accounts, and the final settlement (inclusive of interest payment and the settlement of the uncollected assigned accounts)

Collection and Interest Payment: Dr. Cash at Remittance from bank, Dr. Interest expense at Interest, Dr. N/P-bank at Balance due to the bank, Cr. A/R-assigned at Collection of bank on the month of settlement. Settlement of Uncollected Assigned Accounts: Dr. A/R at the same amount, Cr. A/R-assigned at the remaining balance after the total payment of the loan. Note: Face value of loan - Total Cash collected by the bank [not including the collection in the month of settlement] = Balance due to the bank. Collection of bank on the month of settlement - Balance due to the bank = Excess Collection. Excess Collection - Interest = Remittance from bank. Interest = Balance due to the bank*Interest specified

Balance of A/R-assigned uncollected =

Total A/R-assigned - (Collections by the bank + Sales Discount + Sales Return + Worthless Accounts)

Factoring is a sale of A/R on a ____, ____ basis

without recourse, notification

In a fatoring arrangement, an entity sells A/R to a bank or finance entity called a ___

Accordingly, a gain or loss is recognized for the difference between the ____ and the _____

proceeds received, net carrying amount

Factoring differs from an assignment in that an entity actually ___ of the A/R to the factor.

transfers ownership

Thus, the factor assumes ___ for the uncollectible factors account

responsibility

In assignment, the assignor ____ ownership of the accounts

Because of the anture of the transcation, the customers whose accounts are factored are notified and required to pay to ___

the factor (directly to it)

The entries to record casual factoring are:

Dr. Cash at the cash received, Dr. ADA (if any) at the amount related to the A/R factored , Dr. Loss on factoring (if any) at the balancing amount, Cr. A/R at the amount factored

(Factoring as a continuing agreement) Before a merchandise is shipped to a customer, the selling entity requests the factor’s ____

credit approval

(Factoring as a continuing agreement) The factor then assumes the ___ function as well as the ___function

credit, collection

(Factoring as a continuing agreement) For compensation, typically the factor charges a ____ or ____ for its services of credit approval, billing, collecting, and assuming uncollectible

commission, factoring fee

T/F: (Factoring as a continuing agreement) The factor can’t withhold a predetermined amount as a protection against customer returns and allowances and other special adjustments.

False. The factor can. This is known as “factor’s holdback”

The factor’s holdback is a ___ from factor and classified as ____

receivable, current asset

Final settlement of the factor’s holdback is made after the ______ have been _______

factored receivables, fully collected

The entries to record factoring as a continuing agreement are:

Dr. Cash at balancing amount, Dr. Sales discount (if any) at the discount computed, Dr. Commission at the computed commission, Dr. Receivable from factor at the withheld amount, Cr. A/R at the face amount of receivables factors

(Factoring as a continuing agreement) The entries to record allowance of credit for damaged merchandise are:

Dr. Sales Return and Allowance at the credit given, Cr. Sales Discount at the credit given*discount rate, Cr. Receivable from factor at balancing amount

(Factoring as a continuing agreement) The entries to record the final settlement with the factor is recorded as follows:

Dr. Cash at the same amount, Cr. Receivable from factor at the balance remaining

(Credit card) The entries to record the sales (recording entity is the seller):

Dr. A/R-credit card company at the sale price, Cr. Sales at the same amount

(Credit card) The entries to record the payment from the credit card company:

Dr. Cash at the balancing amount, Dr. Credit card service charge at total sale price *service charge percent, Cr. A/R-Credit card service charge at the sale price

T/F: Some credit card companies allows the retailer business to deposite the credit card receipts directly to a current account.

True. This is a form of factoring of A/R because the credit card sales are treated as cash sales by the retailers.

Net Realizable Value of A/R=

(A/R-unassigned + A/R-assigned) - ADA

Equity in assigned accounts =

A/R-assigned - N/P-bank(related to assignment)

BA 114.1 (10 decks)

• IAS 2: Inventories
• IAS 41: Agriculture
• Chapter 10 Accounts Receivable
• Chapter 12 Notes Receivable
• Chapter 14 Receivable Financing - Pledge, Assignment, and Factoring
• Chapter 15 Receivable Financing - Discounting of Notes Receivable
• Chapter 8 Bank Reconciliation
• Chapter 7 Cash and Cash Equivalents
• Chapter 18 LCNRV
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Chambers later sat down in conversation with Republican Senators, Steve Daines and Dan Sullivan | Photo: Shutterstock

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