RECEIVABLE

FINANCING
Definition of Receivable Financing
 The financial flexibility or capability of
an entity to raise money out of its
receivables.
Common Forms of Receivable
Financing

1. Pledge of Accounts Receivable

2. Assignment of Accounts Receivable
3. Factoring of Accounts Receivable
4. Discounting of Notes Receivable
1. Pledge of Accounts Receivable
 A/R may be pledged as collateral
security for the payment of the loan.
 Borrower makes the collection but may
be required to turn over the collections
to the bank in satisfaction of the loan.
 No entry is necessary for pledged
accounts but only DISCLOSURE
On 11/1/20 an entity borrowed P1M from
PNB, promissory note was issued for one
year loan and discounted at 12%. The entity
pledged A/R of P2M to secure the loan.
Entries:
11/1/20 Cash 880,000
Disc. On Notes Payable 120,000
Notes Payable 1,000,000

FV of the loan 1,000,000

Discount (12%) 120,000
Net Proceeds 880,000
* The pledged A/R will be presented in the Notes to
Financial Statement
Subsequent entries:
12/31/20
Interest Expense 20,000 (120Kx2/12)
Discount of Notes Payable 20,000
Carrying amount of Note Payable – 900,000

11/1/21
Interest Expense 100,000
Discount of N/P 100,000
Notes Payable 1,000,000
Cash 1,000,000
2. Assignment of Accounts Receivable
 The borrower/assignor transfers its rights in
some of its accounts receivable to a
lender/assignee in consideration of the loan.
 Formal type of pledge
 Secured borrowing evidenced by promissory
note and financing agreement
 Vs. Pledge:
Pledge - all A/R
Assignment – specific A/R
Features of assignment:
 Notification/Non-notification Basis
 Analysis of borrower’s accounts receivable
 Service/Financing charge
 Assignment, Non-notification Basis
 On 4/1/20, an entity assigned P700,000 of A/R under a
non-notification arrangement. The bank advances 80%
less a service charge of P5,000. The entity signed a
promissory note that provides for interest of 1% per month
on the unpaid loan balance.
Entry:
Accounts Receivable -assigned 700,000
Accounts Receivable 700,000
Cash 555,000 (700Kx80%-5K)
Service charge 5,000
Note Payable 560,000
 Assignment, Non-notification Basis
• On 4/5/20 issued CM, P20,000 for sales return to a customer
whose account was assigned.
Sales Return 20,000
Accounts Receivable-assigned 20,000
• On 4/10, collected P300K of the assigned account less 2%
discount.
Cash 294,000
Sales Discount 6,000
Accounts Receivable-assigned 300,000
• On 4/30/20, remitted the collections to the bank plus interest.
Notes Payable 294,000
Interest expense 5,600 (560Kx1%)
Cash 299,600
 Assignment; Notification Basis
 On 4/1/20, an entity assigned P700,000 of A/R under a
notification arrangement. The bank advances 80% less a
service charge of P5,000. The entity signed a promissory
note that provides for interest of 1% per month on the
unpaid loan balance.
Entry:
Accounts Receivable -assigned 700,000
Accounts Receivable 700,000
Cash 555,000 (700Kx80%-5K)
Service charge 5,000
Note Payable 560,000
Assignment; Notification Basis
On 4/31/20, received a notice from the bank
that P300,000 of the assigned accounts were
collected less 2% discount. A check was sent
to the bank for the interest due.
Entry:
Notes Payable 294,000
Sales discount 6,000
A/R-assigned 300,000
Interest expense 5,600 (560Kx1%)
Cash 5,600
Statement Presentation-
Assignment
Accounts Receivable –unassigned 4,000,000
Accounts Receivable –assigned 1,000,000
Total 5,000,000
Less: Allowance for D/A 100,000
Net Realizable Value 4,900,000*

* Included in the caption “trade and other

receivables” under current asset.
3. Factoring of Accounts Receivable
 The entity sells its accounts receivable on
a without recourse, notification basis to a
bank or financing entity/FACTOR.
 The FACTOR assumes responsibility of
accounts receivable (collectible or
uncollectible), recording and collecting the
accounts.
 Forms:
 Casual Factoring
 Factoring as a continuing agreement
Casual Factoring
Example: An entity factored P100,000 of A/R
with an allowance for D/A of P5,000 for
P80,000.

Entry:
Cash 80,000
Allowance for D/A 5,000
Loss on Factoring 15,000
Accounts Receivable 100,000
* Ordinary sale of asset
Factoring by Continuing Agreement
 An entity purchases all of the accounts
receivable of a certain entity.
 Before the merchandise is shipped to the
customer, the selling entity request the
factor’s approval.
 Factor assumes the credit and collection
function.
 Factor charges commission charges for its
services rendered
 Factor’s holdback-Receivable from the factor
Example: An entity factored P500,000 A/R with
credit terms, 2/10, n/30 and the factor charged a
5% commission and 20% holdback based on
gross amount of receivables factored.
Entries:
Cash 365,000
Sales Discount 10,000
Commission 25,000
Receivable from factor 100,000
Accounts Receivable 500,000
Credit Card
Example:
Credit card sales to customers using HSBC Visa card
amount to P200,000. Receipts were forwarded to
HSBC and subsequently received a payment from
HSBC less 3% service charge.
Entry for sales:
A/R-HSBC 200,000
Sales 200,000
Entry for payment:
Cash 194,000
CC Service Charge 6,000
A/R-HSBC 200,000
 Notes payable 4M
Finance fee (5%) 250K
Cash 3,750,000

Notes Payable 4M
Less: Net Remittance
(1.8M -40K interest) 1,760,000
Notes Payable 2,240,000 A/R Assigned 5M
Remittance (1.8M)
Sales Disc (200K)
Sales Returns (100K)
W-off (300K)
A/R-assigned 2,600,000
NP-CV 2,240,000
Equity 360,000
Factored A/R 8M
Assessed Fee (5%) (400K)
Holdback(10%) (800k)
Interest (15%x30/365) 98,630
Net Cash 6,701,370

Assessed Fee 400,000

Interest 98,630
Total 498,630

FC 100k
RO 50k
Total 150K
A/R factored 6M
Assessed fee (3%) 180K
Holdback (5%) 300K
Interest (15%x54/365) 133,150
Net Cash 5,386,850

AF 180K
Interest 133,150
Total 313,150

Recourse Obl. 100K

AF 180K
Interest 133,150
Total 413,150
Cash from factoring 1.39M
Cash from assignment:
2.5M – 50K 2.45M
Total 3,840,000

A/R- unassigned 1M
A/R-assigned 5M
Total 6M

ADA, end (6Mx10%) 600K

ADA, before adj 100k
Expense 500,000