Receivable 

Financing

Chapter 9
Concept of Receivable Financing

The entity would be in financial distress as collections of

receivable are delayed but cash payments for
obligations must be maintained.

Under these circumstances, if the situation becomes

very critical , the entity may be forced to look for cash
by financing its receivables.
 Common Forms of Receivable 
Financing
• Pledge of accounts receivables
• Assignment of accounts receivables
• Factoring of accounts receivables
• Discounting of accounts receivables

Terminologies used
Notification Basis – The customers are advised that they should make their 
payments directly to the assignee.
With Recourse ‐the seller bears responsibility for the sold asset if it turns out 
to be defective, and the buyer can seek recourse from the seller.
 Pledge 
When loans are obtained from the bank or any
lending institution, the accounts receivable may be
pledged as collateral security for the payment of
the loan.

Illustration:
On November 1, 2013, an entity borrowed
P1,000,000 from Philippine National Bank and
issued a promissory note for the same.
The term of the loan is one year and discounted at
12%. The entity pledged accounts receivable of
P2M to secure the loan.
 Journal Entries – A/R Pledge
To record the loan:

Nov 1, 2013
Cash 880,000
Discounts on notes payable 120,000
Note payable‐Bank 1,000,000

`Face value of loan P1,000,000
Less: Interest deducted in advance (1,000,000 x 12%) 120,000
Net proceeds P  880,000

To record amortization  (Nov 1‐ Dec 31)
Interest expense (120,000 x 12% x 2/12) 20,000
Discounts on notes payable 20,000
Payment of loan and final amortization of discount
Notes payable – Bank 1,000,000
Cash 1,000,000
Interest expense 100,000
Discount on notes payable 100,000
 Presentation
Statement of Financial Position 
December 31, 2013
Current Liabilities:
Notes Payable – Bank P1,000,000
Discount on note payable ( 100,000)
Carrying amount P 900,000

Notes to Financial Statement

The note payable to bank matures on November 1, 2014 and is secured by 
accounts receivable with face value of P2,000,000
 Assignment 
In substance, assignment of accounts receivable means that
a borrower called the assignor transfers its rights in some of
its accounts receivable to a lender called assignee in
consideration for a loan.

Pledging vs. Assignment

Pledging is general because all accounts receivable serve as

collateral security for the loan, while assignment is specific
because specific accounts receivables serve as collateral
security for the loan.
 Features of Assignment
1. Assignment may be done either on a non‐notification or notification basis. When
accounts are assigned on non‐notification basis, as is usually the case, the
customers are not informed that their accounts receivable have been assigned.

The customer continues to make payments to the assignor, who in turn remits
the collections to the assignee.
Notification basis , customers are notified to make their payments directly to
the assignee.

2. Before entering into an assignment, the assignee, usually a bank or a finance

entity, analyzes the borrower’s accounts receivable.
The assignee usually lends only a certain percentage of the face value of the
accounts assigned because the assigned accounts may not be fully realized by reason
of such factors as sales discount, sales return and allowances and uncollectible
accounts.
The percentage maybe 70%, 80% or 90% depending on the quality of the
accounts.
3. The assignee usually charges interest for the loan that it makes and required a
service or financing charge or commission for the assignment agreement.
 Illustration‐Non Notification
April 1‐
An entity assigned P700,000 of accounts receivable to a bank 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.

April 5 – Issued credit memo for sales return to a customer whose account
was assigned.

April 10 – Collected P300,000 of the assigned accounts less 2% discounts

April 30 – Remitted the total collections to the bank plus interest for one
month.
 Illustration‐Non‐Notification
April 1 ‐
To separate the assigned accounts:
Accounts receivable –assigned P700,000
Accounts receivable P700,000
To record the loan
Cash  555,000
Service Charge 5,000
Notes payable‐bank 560,000*
*(700,000 x 80%)

April 5 – Sales return
Sales return 20,000
Accounts receivable‐assigned 20,000

April 10 – Collection of receivable less 2% discount
Cash 294,000
Sales discount (2% x 300,000) 6,000
Accounts receivable 300,0000
30 – Remittance of total collection
Notes payable‐bank 294,000
Interest expense 5,600
Cash 299,600
 Factoring
Factoring is a sale of Accounts  Receivable on a without  recourse, notification 
basis.
In a factoring arrangement, an entity sells accounts receivable to a bank or 
finance entity called a factor.

Gain or loss is recognized for the difference between the proceeds received 
and the net carrying amount of the receivables factored.

Factoring vs. Assignment – The Entity actually transfer ownership of the 
accounts receivable to the factor. In assignment retains ownership of the 
accounts assigned.

2 Factors of Factoring
a. Casual factoring
b. Factoring as a continuing agreement
 Casual Factoring Illustration
An entity factored P100,000 of accounts receivable with an allowance for 
doubtful accounts of P5,000 for P80,000

JOURNAL ENTRY TO RECORD THE SALE

CASH        80,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS           5,000
LOSS ON FACTORING        15,000
ACCOUNTS RECEIVABLE  100,000
Factoring as Continuing Agreement
Factoring may involve a continuing arrangement where a finance entity purchase all 
of the accounts receivable of a certain entity.

Before a merchandise is shipped to a customer, the selling entity request the factor’s 
credit approval.

If it is approved the account is sold immediately to the factor after shipment of the 
goods.

The factor then assumes the credit function as well as the collection function.

Factor charges a commission or factoring fee of 5%, to 20% for its services of credit 
approval, billing, collecting and assuming uncollectible factored accounts.

Factor may withhold a predetermined amount  as protection against customers 
returns and allowances and other special adjustments. Or Factor’s Holdback.

Factor’s holdback is actually a receivable from factor and classified as asset.
Final settlement of the factor’s holdback is made after the factored receivables have 
been fully collected.
Factoring as Continuing Agreement
An entity factored account receivable of P500,000 with credit terms of 2/10, n/30
immediately after shipment of the goods to the customer. The factor charged a 5%
commission based on the gross amount of the receivable factored. In addition, the
factor withheld 20% of the amount of the receivables factored to cover sales return and
allowance.

JOURNAL ENTRY TO RECORD THE FACTORING
CASH        365,000
SALES DISCOUNT           10,000
COMMISSION           25,000
RECEIVABLE FROM FACTOR        100,000
ACCOUNTS RECEIVABLE        500,000

GROSS AMOUNT        500,000
Sales Discount (2%  x 500k)           10,000
Commission(5%x 500k)           25,000
Factor's Holdback(20%x 500k)        100,000        135,000
Cash Received from Factoring        365,000
Factoring as Continuing Agreement
Customer  is subsequently allowed a credit of P50,000 for damanged merchandise

Sales return and allowance           50,000
Sales Discount (2% x 50,000)             1,000
Receivable from Factor           49,000

Final Settlement
Cash (100,000‐49,000)           51,000
Receivable from Factor           51,000
 CREDIT CARD
It is a plastic card which enables the holder to obtain credit up to a 
predetermined limit from the issuer of the card for the purchase of 
goods and services.

The major cards in the Philippines are Diners Club, American 
Express, VISA and Master card.

These entities are generally responsible fro approving the credit of 
customers and collecting  the receivables for a service fee from 1% 
to 5% of the credit card sales.

Two entries necessary, one entry at the time of sale and another 
entry when payment is received  from the card issuer.
 CREDIT CARD
Credit card sales to customers using Diners Club amount to P200,000 for a certain
period. The credit card receipt are forwarded to Diners Club and payment is
subsequently received from Diners Club minus a 3% service charge.

CREDIT CARD SALES
ACCOUNTS RECEIVABLE‐DINERS CLUB        200,000
SALES        200,000

PAYMENT FROM DINERS CLUB

CASH        194,000
CREDIT CARD SERVICE CHARGE             6,000
ACCOUNTS RECEIVABLE‐DINERS        200,000