journal entries assignment of receivables

Example Journal Entries for the Assignment of Trade Receivables

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Introduction, brief explanation of trade receivables.

In this article, we’ll cover example journal entries for the assignment of trade receivables. Trade receivables, often referred to as accounts receivable, represent the amounts owed to a business by its customers for goods or services delivered but not yet paid for. These receivables are considered current assets on a company’s balance sheet and play a crucial role in the business’s cash flow and liquidity. They arise from the credit sales extended to customers, allowing businesses to increase sales by offering flexible payment terms.

Importance of Managing Trade Receivables Effectively

Effective management of trade receivables is vital for maintaining a healthy cash flow and ensuring the financial stability of a business. Proper handling of receivables can lead to:

• Improved Cash Flow: Timely collection of receivables ensures that the business has sufficient cash to meet its operational needs and invest in growth opportunities.
• Minimized Bad Debts: By regularly monitoring and managing receivables, businesses can reduce the risk of non-payment and minimize bad debt expenses.
• Enhanced Customer Relationships: Efficient receivables management fosters positive relationships with customers by offering them flexible payment options while ensuring timely follow-ups.
• Accurate Financial Reporting: Proper accounting for receivables ensures accurate financial statements, which are essential for making informed business decisions and maintaining investor confidence.

Overview of Assigning Trade Receivables (Reasons, Benefits, and Risks)

Assigning trade receivables involves transferring the rights to collect receivables from customers to a third party, such as a financial institution or a factoring company. This process can be beneficial for businesses seeking immediate cash flow improvements or those looking to mitigate the risks associated with credit sales. There are two main types of assignments: with recourse and without recourse.

Reasons for Assigning Trade Receivables:

• Immediate Cash Flow: Businesses can quickly convert receivables into cash, providing immediate funds for operational needs or investment opportunities.
• Risk Mitigation: By transferring the collection risk to a third party, businesses can reduce their exposure to potential bad debts.
• Improved Financial Ratios: Assigning receivables can improve liquidity and leverage ratios, making the business more attractive to investors and lenders.

Benefits of Assigning Trade Receivables:

• Enhanced Liquidity: Immediate access to cash improves the company’s liquidity position, enabling it to meet short-term obligations and invest in growth.
• Streamlined Operations: Outsourcing the collection process allows businesses to focus on core activities rather than chasing payments.
• Credit Protection: In a non-recourse assignment, the risk of non-payment is transferred to the third party, protecting the assignor from credit losses.

Risks of Assigning Trade Receivables:

• Cost: The fees associated with assigning receivables can be significant, impacting the overall profitability of the business.
• Customer Relationships: Involving a third party in the collection process can potentially strain relationships with customers if not managed carefully.
• Reliance on Third Parties: Businesses become dependent on the third party’s efficiency and effectiveness in collecting receivables.

Understanding the dynamics of trade receivables and the implications of assigning them is essential for businesses to make informed decisions and maintain financial health.

Understanding Trade Receivables

Definition of trade receivables.

Trade receivables, also known as accounts receivable, represent the money owed to a business by its customers for products or services provided on credit. These receivables are recorded as current assets on the balance sheet, as they are expected to be converted into cash within a year. Trade receivables arise from the sale of goods or services where the payment is deferred, creating a formal obligation for the customer to pay the business at a later date.

The Role of Trade Receivables in Business Operations

Trade receivables play a critical role in the financial health and operational efficiency of a business. Their importance can be summarized as follows:

• Revenue Recognition: Trade receivables are a direct result of sales on credit, contributing to the revenue generation of a business.
• Cash Flow Management: Effective management of trade receivables ensures a steady inflow of cash, which is vital for meeting day-to-day operational expenses, repaying debts, and investing in growth opportunities.
• Customer Relationships: Offering credit terms can enhance customer satisfaction and loyalty, as it provides flexibility and convenience in payment, potentially leading to increased sales.
• Financial Planning: Accurate recording and monitoring of trade receivables help in forecasting cash flow and planning financial strategies accordingly.

Difference Between Trade Receivables and Other Types of Receivables

Trade receivables are a specific type of receivable that arises from the sale of goods or services on credit. However, businesses may also have other types of receivables, which differ in their origin and nature:

• Trade Receivables: These are amounts due from customers for goods or services sold on credit, typically short-term and unsecured.
• Notes Receivable: These are formal, written promises to pay a certain amount at a future date, often with interest. Notes receivable are usually more formalized and can be long-term, providing greater security for the lender.
• Other Receivables: This category includes various types of receivables not directly related to the core business operations, such as loans to employees, tax refunds, or interest receivable. These receivables may not be as closely tied to sales activities and can have different collection terms and risks.

Understanding the nuances between trade receivables and other types of receivables is essential for accurate financial reporting and effective management of a company’s assets. By distinguishing between these categories, businesses can better track and manage their receivables, ensuring a more accurate representation of their financial position.

Assignment of Trade Receivables

Definition and explanation of assigning trade receivables.

Assigning trade receivables involves transferring the rights to collect the receivables from the original holder (the assignor) to a third party (the assignee). This process allows businesses to convert their receivables into immediate cash, enhancing liquidity and improving cash flow management. The assignment can be done either as a sale of receivables or as a collateral for a loan.

In an assignment, the business still records the receivables on its balance sheet but reports the assignment as a separate liability or reduction in the value of the receivables, depending on the nature of the assignment. The key benefit of assigning trade receivables is that it allows businesses to access funds tied up in credit sales without waiting for customers to pay their invoices.

Types of Assignments

There are two main types of assignments: with recourse and without recourse.

Assignment with Recourse

In an assignment with recourse, the assignor retains the risk of non-payment by the debtor. This means that if the customer fails to pay the receivable, the assignor is obligated to reimburse the assignee. Assignments with recourse often have lower costs compared to non-recourse assignments because the risk remains with the assignor.

Journal Entry Example:

• When assigning the receivable:

Debit: Cash Debit: Loss on Sale of Receivables Credit: Accounts Receivable

If the receivable is not paid by the customer:

Debit: Accounts Receivable Credit: Cash

Assignment without Recourse

In an assignment without recourse, the risk of non-payment is transferred to the assignee. This means that if the customer fails to pay, the assignee bears the loss, not the assignor. Non-recourse assignments usually come at a higher cost due to the increased risk taken on by the assignee.

Common Scenarios Where Businesses Assign Trade Receivables

Assigning trade receivables can be a strategic move for businesses in various situations. Some common scenarios include:

• Improving Cash Flow: Businesses with seasonal sales patterns or those facing cash flow constraints may assign receivables to ensure a steady stream of funds.
• Financing Growth: Companies looking to finance expansion projects or new ventures might assign receivables to quickly raise capital without incurring additional debt.
• Risk Management: Firms seeking to reduce their exposure to credit risk may assign receivables, particularly in industries with high default rates or during economic downturns.
• Simplifying Collections: Businesses wanting to streamline their operations might assign receivables to a third party, outsourcing the collection process and reducing administrative burdens.
• Meeting Financial Covenants: Companies that need to comply with financial covenants set by lenders can use receivable assignments to improve their liquidity ratios and other financial metrics.

By understanding the various types of assignments and the scenarios in which they are used, businesses can make informed decisions to optimize their financial management and enhance operational efficiency.

Example Journal Entries

Detailed examples of journal entries for different scenarios.

Scenario: A company assigns $100,000 of trade receivables to a financial institution with recourse, receiving $95,000 in cash after a 5% service fee.

• Initial Assignment:

Debit: Cash $95,000 Debit: Loss on Sale of Receivables $5,000 Credit: Accounts Receivable $100,000

Explanation:

• Debit: Cash increases by $95,000, reflecting the cash received.
• Debit: Loss on Sale of Receivables records the 5% service fee ($5,000) as an expense.
• Credit: Accounts Receivable decreases by $100,000, indicating the assignment of the receivables.

Impact on Financial Statements:

• The company’s assets (cash) increase by $95,000.
• An expense of $5,000 is recognized, reducing net income.
• Accounts receivable decrease by $100,000.
• If the Receivable is Not Paid by the Customer:

Debit: Accounts Receivable $100,000 Credit: Cash $100,000

• Debit: Accounts Receivable reinstates the receivable as the company must now collect it.
• Credit: Cash decreases by $100,000, reflecting the reimbursement to the financial institution.
• Accounts receivable increase by $100,000.
• Cash decreases by $100,000.

Scenario: A company assigns $100,000 of trade receivables to a financial institution without recourse, receiving $90,000 in cash after a 10% service fee.

• Explanation: Debit: Cash increases by $90,000, reflecting the cash received. Debit: Loss on Sale of Receivables records the 10% service fee ($10,000) as an expense. Credit: Accounts Receivable decreases by $100,000, indicating the assignment of the receivables.
• Impact on Financial Statements: The company’s assets (cash) increase by $90,000. An expense of $10,000 is recognized, reducing net income. Accounts receivable decrease by $100,000.

Partial Assignment

Scenario: A company assigns $50,000 of its $200,000 trade receivables to a financial institution, receiving $47,500 in cash after a 5% service fee.

• Explanation: Debit: Cash increases by $47,500, reflecting the cash received. Debit: Loss on Sale of Receivables records the 5% service fee ($2,500) as an expense. Credit: Accounts Receivable decreases by $50,000, indicating the partial assignment of receivables.
• Impact on Financial Statements: The company’s assets (cash) increase by $47,500. An expense of $2,500 is recognized, reducing net income. Accounts receivable decrease by $50,000.

Factoring vs. Assignment

Factoring Example:

Scenario: A company sells $100,000 of trade receivables to a factoring company, receiving $90,000 in cash after a 10% discount.

• Explanation: Debit: Cash increases by $90,000, reflecting the cash received. Debit: Factoring Expense records the 10% discount ($10,000) as an expense. Credit: Accounts Receivable decreases by $100,000, indicating the sale of receivables.

Assignment Example:

Scenario: A company assigns $100,000 of trade receivables to a bank as collateral for a $90,000 loan.

• Explanation:Debit: Cash increases by $90,000, reflecting the loan received. Credit: Loan Payable records the liability for the loan.
• Impact on Financial Statements: The company’s assets (cash) increase by $90,000. A liability (loan payable) of $90,000 is recognized. Accounts receivable remain on the balance sheet but are disclosed as collateral in the notes to the financial statements.

By understanding these journal entries, businesses can accurately record the financial transactions associated with different types of assignments and factoring of trade receivables, ensuring precise financial reporting and effective management of receivables.

Practical Applications and Implications

How businesses use assignments to manage cash flow.

Assigning trade receivables is a strategic financial tool used by businesses to manage cash flow more effectively. By converting receivables into immediate cash, companies can:

• Maintain Operational Liquidity: Businesses often face timing differences between cash inflows and outflows. Assigning receivables ensures that companies have sufficient cash to meet operational expenses such as payroll, inventory purchases, and utility bills.
• Invest in Growth Opportunities: Immediate access to cash allows businesses to invest in growth opportunities such as expanding production capacity, entering new markets, or developing new products.
• Reduce Borrowing Costs: By using assigned receivables to generate cash, companies can reduce their reliance on traditional loans, which might come with higher interest rates and more stringent repayment terms.
• Manage Seasonal Fluctuations: Businesses with seasonal sales patterns can use receivable assignments to smooth out cash flow throughout the year, ensuring they have funds during off-peak periods.

Impact on Financial Health and Creditworthiness

The assignment of trade receivables can have significant implications for a business’s financial health and creditworthiness:

• Improved Liquidity Ratios: Assigning receivables increases the company’s cash reserves, improving liquidity ratios such as the current ratio and quick ratio. These enhanced ratios signal better short-term financial health to investors and creditors.
• Enhanced Creditworthiness: Consistent management of cash flow through receivable assignments can improve a company’s creditworthiness. Lenders and suppliers may view the business as more financially stable and less risky.
• Balance Sheet Implications: While assigned receivables may still appear on the balance sheet (depending on the assignment type), the associated liabilities or reductions are also recorded. This transparency helps maintain accurate financial reporting.
• Expense Recognition: Fees and discounts associated with assigning receivables are recorded as expenses, which can impact net income. However, the benefits of improved cash flow and liquidity often outweigh these costs.

Legal Considerations and Documentation Required

Assigning trade receivables involves several legal considerations and requires thorough documentation to protect the interests of both the assignor and the assignee:

• Assignment Agreement: A formal agreement outlining the terms of the assignment is essential. This document should specify the receivables being assigned, the rights and obligations of each party, the fees or discounts applied, and the recourse terms if applicable.
• Notification of Debtors: In many cases, the debtor (customer) must be notified of the assignment. This notification ensures that payments are directed to the assignee and clarifies the debtor’s obligations.
• Compliance with Regulations: Businesses must comply with relevant laws and regulations governing the assignment of receivables. This includes adhering to accounting standards (e.g., GAAP or IFRS) and any industry-specific regulations.
• Protection of Interests: Both parties must ensure that their interests are protected in the event of non-payment. This might include specifying procedures for handling disputed receivables and detailing the steps to be taken if the assignor defaults on their obligations.
• Confidentiality Clauses: Assignment agreements often include confidentiality clauses to protect sensitive financial information about the receivables and the involved parties.

By understanding and addressing these practical applications, financial impacts, and legal requirements, businesses can effectively utilize the assignment of trade receivables to manage cash flow, enhance financial stability, and maintain compliance with legal standards.

Common Mistakes and How to Avoid Them

Frequent errors in recording journal entries for assignments.

• Error: Misclassifying assigned receivables as still fully owned by the business, leading to inaccuracies in financial statements.
• Correction: Ensure assigned receivables are properly recorded as either a sale or collateral, reflecting the true nature of the transaction.
• Error: Failing to account for service fees, discounts, or losses incurred during the assignment process.
• Correction: Always include any associated fees or losses as expenses in the journal entries to accurately reflect the cost of the assignment.
• Error: Not recording potential liabilities in assignments with recourse, which can misrepresent the company’s financial obligations.
• Correction: Record a liability for the potential repayment obligation in assignments with recourse to ensure all financial responsibilities are accurately documented.
• Error: Recording assigned receivables without removing them from the accounts receivable balance, resulting in double-counting.
• Correction: Ensure that the assigned receivables are deducted from the accounts receivable account to prevent inflation of asset values.
• Error: Failing to notify debtors of the assignment, leading to payment confusion and potential collection issues.
• Correction: Always notify debtors promptly and clearly about the assignment to ensure payments are directed correctly to the assignee.

Tips for Accurate Record-Keeping and Compliance with Accounting Standards

• Keep comprehensive records of all assignment agreements, including terms, conditions, and notifications sent to debtors. This documentation will support accurate journal entries and compliance with legal requirements.
• Conduct frequent reconciliations of assigned receivables to ensure that the recorded amounts match the actual assignments and collections. This practice helps identify and correct discrepancies promptly.
• Follow relevant accounting standards such as GAAP or IFRS when recording assignments. These standards provide guidelines on how to treat assigned receivables, ensuring consistency and accuracy in financial reporting.
• Establish strong internal controls over the assignment process to prevent errors and fraud. Controls should include authorization procedures, segregation of duties, and regular audits.
• Utilize accounting software that supports receivables management and assignment transactions. Software can automate calculations, track assignments, and generate accurate journal entries, reducing the risk of human error.
• Ensure that accounting personnel are well-trained in handling assignments of trade receivables. Regular training sessions and updates on new standards or practices can help maintain accuracy and compliance.
• When in doubt, seek advice from financial experts or auditors. Professional guidance can help navigate complex transactions and ensure that all assignments are recorded correctly and in compliance with accounting standards.

By being aware of common mistakes and following these tips for accurate record-keeping, businesses can avoid errors in recording journal entries for assignments of trade receivables and ensure compliance with accounting standards. This approach enhances the reliability of financial statements and supports effective financial management.

Case Studies and Real-World Examples

Case study of a business using assignment of trade receivables.

Company Background: XYZ Manufacturing is a mid-sized company that produces industrial machinery. The company experiences seasonal fluctuations in sales, with peak periods in the spring and fall. To manage cash flow during the slower winter months, XYZ Manufacturing decided to assign a portion of its trade receivables to a financial institution.

Scenario: In November, XYZ Manufacturing had $500,000 in outstanding trade receivables. To ensure sufficient cash flow for the upcoming winter, the company assigned $300,000 of these receivables to a financial institution with recourse. The institution provided $285,000 in cash upfront, after a 5% service fee ($15,000).

Journal Entries:

Debit: Cash $285,000 Debit: Loss on Sale of Receivables $15,000 Credit: Accounts Receivable $300,000

• Assume a customer defaults on a $50,000 receivable. Debit: Accounts Receivable $50,000 Credit: Cash $50,000

Analysis of the Financial Impact and Outcomes

Improved Cash Flow: By assigning $300,000 of trade receivables, XYZ Manufacturing received $285,000 in cash. This immediate infusion of funds allowed the company to cover operational expenses, such as payroll and supplier payments, during the slower winter months. The improved cash flow also enabled the company to take advantage of early payment discounts from suppliers, further reducing costs.

• Balance Sheet: The accounts receivable balance decreased by $300,000, reflecting the assigned receivables. The cash balance increased by $285,000, and an expense of $15,000 was recognized as a loss on the sale of receivables. If any customer defaulted, the company recorded the defaulted amount as a receivable again and reduced its cash balance by the same amount.
• Income Statement: The $15,000 service fee was recorded as an expense, reducing the company’s net income for the period. However, the improved cash flow and ability to capitalize on early payment discounts provided a net positive effect overall.

Creditworthiness and Financial Health:

• Creditworthiness: Assigning receivables with recourse meant XYZ Manufacturing retained some risk of non-payment. Despite this, the company’s creditworthiness improved due to better liquidity and a more favorable cash position. Lenders and suppliers viewed the company as more financially stable, leading to better credit terms and reduced borrowing costs.
• Financial Health: The immediate access to cash allowed XYZ Manufacturing to maintain smooth operations and avoid the financial strain typically associated with seasonal fluctuations. The company could also invest in maintenance and minor capital expenditures during the off-peak period, ensuring readiness for the next peak season.

Lessons Learned:

• Effective Cash Flow Management: The case of XYZ Manufacturing highlights the importance of using trade receivables assignment as a tool for managing cash flow, particularly for businesses with seasonal sales patterns.
• Cost-Benefit Analysis: Companies must weigh the costs of assigning receivables, such as service fees, against the benefits of improved liquidity and financial stability.
• Risk Management: Even with recourse assignments, businesses can manage the risk of customer defaults through careful credit evaluations and maintaining a diversified customer base.

The case of XYZ Manufacturing demonstrates how the strategic use of trade receivables assignments can enhance a company’s financial stability, improve cash flow, and support sustained growth, especially in the face of seasonal sales fluctuations.

Summary of Key Points

In this article, we explored the concept of trade receivables and the practice of assigning them to manage cash flow. We covered the definition and role of trade receivables in business operations, the different types of assignments (with recourse and without recourse), and provided detailed examples of journal entries for various scenarios. We also discussed the practical applications and implications of assigning trade receivables, including their impact on financial health and creditworthiness, and the legal considerations involved. Additionally, we highlighted common mistakes in recording journal entries and provided tips for accurate record-keeping and compliance with accounting standards. Finally, we examined a real-world case study to illustrate the benefits and challenges of trade receivables assignments.

Importance of Accurate Journal Entries

Accurate journal entries are crucial for maintaining the integrity of financial records and ensuring compliance with accounting standards. Properly recorded entries provide a clear and accurate picture of a company’s financial position, which is essential for making informed business decisions. In the context of trade receivables assignments, accurate journal entries help businesses track their receivables, manage cash flow effectively, and ensure transparency in financial reporting. Mistakes in recording assignments can lead to financial discrepancies, misrepresentation of assets and liabilities, and potential legal issues.

Final Thoughts on Best Practices for Managing Trade Receivables Assignments

To effectively manage trade receivables assignments, businesses should adopt the following best practices:

• Thorough Documentation: Maintain detailed records of all assignment agreements, including terms, conditions, and notifications to debtors. This ensures transparency and supports accurate financial reporting.
• Regular Reconciliation: Conduct frequent reconciliations of assigned receivables to identify and correct discrepancies promptly, ensuring the accuracy of financial statements.
• Compliance with Standards: Adhere to relevant accounting standards (GAAP or IFRS) when recording assignments. These standards provide guidelines on how to treat assigned receivables consistently and accurately.
• Strong Internal Controls: Implement robust internal controls over the assignment process to prevent errors and fraud. This includes authorization procedures, segregation of duties, and regular audits.
• Use of Technology: Leverage accounting software that supports receivables management and assignment transactions. Automation can reduce the risk of human error and streamline the recording process.
• Training and Education: Ensure that accounting personnel are well-trained in handling assignments of trade receivables. Regular training sessions and updates on new standards or practices help maintain accuracy and compliance.
• Professional Guidance: Seek advice from financial experts or auditors when dealing with complex transactions. Professional guidance can help navigate the intricacies of receivables assignments and ensure proper recording.

By following these best practices, businesses can effectively manage the assignment of trade receivables, optimize their financial health, and maintain accurate and compliant financial records. This strategic approach supports sustainable growth and enhances overall financial stability.

Additional Resources and References

• Website: FASB
• Description: Provides information on accounting standards and updates for generally accepted accounting principles (GAAP) in the United States.
• Website: IFRS
• Description: Offers guidelines and standards for international financial reporting, including those relevant to trade receivables.
• Website: AICPA
• Description: A resource for accounting professionals providing guidance, standards, and best practices in accounting.
• Website: CFI
• Description: Provides courses and resources on financial analysis, accounting, and corporate finance, including trade receivables management.
• Website: Investopedia
• Description: Offers comprehensive articles and definitions related to finance and accounting, including trade receivables and assignments.

Glossary of Terms Used in the Article

• Amounts owed to a business by its customers for goods or services delivered on credit.
• The transfer of rights to collect receivables from the assignor (the business) to the assignee (a third party).
• A type of assignment where the assignor retains the risk of non-payment by the debtor.
• A type of assignment where the risk of non-payment is transferred to the assignee.
• The sale of receivables to a third party (factor) at a discount in exchange for immediate cash.
• An asset pledged as security for a loan, which can be forfeited in case of default.
• The ability of a business to meet its short-term obligations using its available assets.
• Assets that are expected to be converted into cash within one year, such as accounts receivable.
• An expense recorded when receivables are sold or assigned at a value lower than their book value.
• A fee charged by the assignee for the assignment of receivables, usually a percentage of the assigned amount.
• Metrics used to evaluate the financial health of a business, such as liquidity ratios and leverage ratios.
• The process of ensuring that two sets of records (e.g., bank statements and accounting records) are in agreement.
• Procedures and policies implemented by a business to ensure the integrity of financial and accounting information.

By consulting these additional resources and familiarizing yourself with the glossary of terms, you can gain a deeper understanding of the assignment of trade receivables and the associated accounting practices.

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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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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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Account Receivables

• First Online: 01 November 2022

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• Felix I. Lessambo 2  

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Receivable is a general term that refers to all monetary obligations owed to the business by its customers or debtors. As long as a business expects to recover the money from the debtors, it records its receivables as assets on its balance sheet because it expects to derive future benefits from them. It does not matter whether they are due in the current period or not.

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Rieva Lesonsky ( 2020 ): What Is the Difference Between Factoring and Accounts Receivable Financing?- https://fundbox.com/blog/difference-between-factoring-and-receivables-financing/ .

Adrian Katz ( 2011 ): Accounts Receivable Securitization, The Journal of Structured Finance Summer , 17 (2), pp. 23-27; https://doi.org/10.3905/jsf.2011.17.2.023 .

Adrian Katz (2011): Accounts Receivable Securitization, The Journal of Structured Finance Summer , 17 (2), pp. 23–27; https://doi.org/10.3905/jsf.2011.17.2.023 .

Rieva Lesonsky (2020): What Is the Difference Between Factoring and Accounts Receivable Financing?- https://fundbox.com/blog/difference-between-factoring-and-receivables-financing/ .

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Lessambo, F.I. (2022). Account Receivables. In: Financial Statements. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-15663-2_4

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Accounts Receivable Journal Entry – Debit or Credit

Updated on : Oct 23rd, 2023

Accounts receivable refers to the balance owed to an enterprise by their customers for the sale of goods and services on credit. An accounts receivable journal entry is passed to account for the credit sales as well as to create a debtors' account, otherwise known as accounts receivable, in the books.

In this article, we explain the important accounts receivable journal entries.

What are accounts receivable journal entries?

Accounts receivables or AR are assets in the seller’s books, as the customer owes the sum of money against such sale of goods and services. Accounts receivables or trade receivables are maintained debtor-wise allowing the business to manage their overdue sales and non-payments. 

Accounts receivables journal entries are crucial as they are the cornerstone of its finances. The journal entry for account receivables is made by debiting the accounts receivable account and crediting the sales account. 

Kinds of journal entries for accounts receivable

There might be several journal entries pertaining to different transactions. The basic and common journal entries relating to accounts receivables are shown below.

1.  Journal entry for credit sales

2.  Journal entry for cash received in full for credit sales

3.  Journal entry for cash received for credit sales after-sales discount

4. Journal entry for transferring sales discount to profit/loss account

5.  Journal entry recording credit sales as a bad debt – i.e. debt that cannot be recovered

6. Journal entry for transferring bad debt to profit/loss account

Are accounts receivable a debit or credit in the books of accounts?

Accounts receivable is the balance a company is owed from its debtors and is an asset for the company. The company will benefit from this asset in the future in the form of cash payments. Hence, like any asset, accounts receivable is a debit balance. It forms a part of the current assets on the asset side of the company’s balance sheet.  

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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

Factoring Receivables Journal Entry

Factoring receivables journal entry.

The due from factor in this journal entry is the amount that the factor withholds in order to cover the risk of bad debts that may occur. Likewise, the factor will pay this withheld amount to the company when those amounts in invoices are collected.

Factoring receivables example

For example, the company ABC sells its receivables of $100,000 to a factoring company in order to receive early cash for its business operation. The company receives total cash of $80,000 from the sale transaction while the amount of $15,000 is retained by the factor as security against bad debts and at the same time, the factor charges a 5% fee on receivables which is $5,000.

Factoring receivables with recourse vs non-recourse

Factoring receivables with recourse.

Likewise, the factoring receivables with recourse will result in contingent liability on the company. The company is usually required to disclose this contingent liability in the notes to financial statements.

For example, assuming the factoring receivables of $100,000 in the example above is with recourse. And based on past experiences, the company ABC estimates the fair value of the recourse liability to be $8,000.

Factoring receivables without recourse

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Home > Accounts Receivable > Factoring Accounts Receivable Journal Entries

Factoring Accounts Receivable Journal Entries

The factoring 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 factoring.

No Recourse Factoring Accounts Receivable Journal Entries

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

• No recourse
• Accounts receivable 50,000 on 45 days terms
• Factoring fee of 5% (2,500)
• Initial advance of 80% (40,000)
• Interest on advances at 9%, assuming outstanding on average for 40 days (40,000 x 9% x 40 / 365 = 395)
• Bad debt allowance already recorded in the accounting records of the business of 2% (1,000)
• Sales returns and allowances 2,000

With Recourse Accounts Receivable Factoring

Supppose the business decides that the estimated bad debts are 2% (1,000), then a recourse liability is established.

If subsequently the accounts are not collected from the customers, under a with recourse factoring arrangement the business buys the accounts back from the factoring company. In the above example, the factoring company owed the business the retention balance of 5,105, the with recourse liability of 1,000 is deducted from this and the balance of 4,105 paid over.

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Accounting for Notes Receivable

Notes receivable are financial assets of a business which arise when other parties make a documented promise to pay a certain sum on demand or on a specific date. Notes receivable are different from accounts receivable because they are formally documented and signed by the promising party, known as the maker of the note, to the party who receives the payment, known as the payee.

Since notes receivable have a longer duration than accounts receivable , they usually require the maker to pay interest in addition to the principle, at the maturity of the note. Interest receivable is recognized on the balance sheet in addition to the face value of notes receivable.

Notes receivable usually arise when accounts receivable are converted to notes receivable when the customer wants to extend the date of payment and in return agrees to pay interest. Such agreement is recorded formally as a promissory note. Notes receivable also arise when a business lends an amount to another party against a documented promise to pay it back.

The amount promised on a note may be receivable in a single sum or in multiple installments. Notes receivable appear in balance sheet, either as a current asset or a non-current asset. The portion that is due within 12 months is recorded as current asset and the rest is recognized as a non-current asset.

The accounting treatment of interest that is accrued but remains unpaid up to balance sheet date, depends on whether the interest is compound or simple. If it is a compound interest, the accrued interest that remains unpaid is added to the principal of note receivable and carried over to the next accounting period.

• Journal Entries

When accounts receivable are converted to notes receivable, the following journal entry is required:

When a business sells goods/services or lends money to other parties against promissory notes, it is recognized as follows:

Interest accrued on a note receivable is calculated using the following formula:

Interest Accrued = Principal Amount × Interest Rate × Time Periods

If a note carries simple interest , it is journalized as:

If a note is carried at compound interest , the accrued interest is debited to the notes receivable account itself because the future period interest is calculated based on the principal amount of note plus any unpaid interest:

When the principal amount and interest accrued on a note is received, it is recorded as follows:

Cash or bank is debited by the sum of principal amount and interest not yet received. Interest receivable account is credited where the note carries simple interest. Interest income account is credited when the interest received has not been recognized already. No interest receivable account is used when the note carries compound interest, because in that case the carrying amount of notes receivable is increased by debiting it, as seen above.

On 1 May 20X4, PQR, Inc. lent $2 million to ABC, LLC for 2 years against a documented promissory note. DEF, Inc., another client of PQR, Inc. issued a 2-month promissory note against their outstanding balance of $3 million on 1 November 20X4. Note receivable from ABC LLC carried 5% simple interest rate payable annually while the one from DEF Inc. carried 8% interest compounded monthly. PQR financial year ends on 31 December.

On 1 May 20X4, PQR needs to record the following journal entry:

Note receivable form DEF is recognized as follows, on 1 November 20X4:

Note receivable from DEF carries interest compounded monthly, so at the end of November, interest is accrued as follows:

At the end of December 20X4, interest is accrued on both ABC and DEF notes receivable:

The amount debited to notes receivable represent the interest earned in month of December on the carrying amount at the end of November because the note carries compound interest. The amount debited to interest receivable represent simple interest earned on note receivable from ABC.

At the end of December when DEF pays off the notes receivable, the following journal entry is needed:

As at 31 December, the note receivable from ABC is classified as a non-current asset because it is due after 12 months from 31 December. Interest receivable on the note as a 31 December is reported as current asset because it is to be received at the end of April 20X5.

by Irfanullah Jan, ACCA and last modified on Oct 24, 2020

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• Implementing Joint Venture Management

Derive the Partner Account for Reimbursement Invoices

To derive the partner account for receivables invoices that are created to reimburse the joint venture costs incurred by the managing partner, you need to complete the following tasks:

Create a mapping set.

Create an account rule.

Add journal entry rule sets to an accounting method.

Associate the accounting method with the primary ledger of the joint venture business unit.

If your joint venture uses partner contributions to cover joint venture costs, then your invoice will include separate invoice lines for the partner contribution amount and the net invoice amount. Information on how to override the revenue account for partner contribution invoice lines is detailed separately in the section Derive the Liability Account for Partner Contribution Invoice Lines in Joint Venture Invoices .

Create a Mapping Set

Create a mapping set to replace the value of at least a segment of the partner account with a specific account that’s not set up as distributable in Joint Venture Management. This prevents processed transactions from routing back into Joint Venture Management.

This topic provides an example on how to replace the natural account segment value of the partner account.

Navigate to Setup and Maintenance and select the Receivables functional area under the Financials offering.

Select Show – All Tasks and then click the Manage Mapping Sets task.

On Manage Mapping Sets: Receivables, click Create.

Enter the following details:

Short Name.

Output Type. Change the output type to Segment.

In the Input Sources section, click Select and Add and then enter details for the following search criteria:

Subledger Application. Select Receivables.

Event Class. Select Invoice.

Source. Search for and select all or a combination of the following input sources.

Transaction Source Name. This will enable you to select only joint venture invoices.

Transaction Line Flexfield Attribute 1. This attribute will enable you to select joint venture invoices by joint venture.

Transaction Line Flexfield Attribute 2. This attribute will enable you to select joint venture invoices by the primary segment value.

Transaction Line Flexfield Attribute 4. This attribute will enable you to select joint venture invoices by joint venture distribution type.

In the Chart of Accounts section, click Add and enter the chart of accounts of the primary ledger for the joint venture and select the segment for which you want to override the value of.

In your "your chart of accounts name": Mappings section, click Add.

The Input section displays columns based on your input sources.

Enter the following input values to filter and select joint venture invoices for which you want to replace the default natural account segment value:

Transaction Source Name. Enter Oracle Joint Ventures. This value distinguishes joint venture invoices from other invoices.

Transaction Line Flexfield Attribute 1. Enter the joint venture for which invoices will be selected.

Transaction Line Flexfield Attribute 2. Enter the primary segment value based on which invoices will be selected. You can enter * to include all primary segment values.

Transaction Line Flexfield Attribute 4. Enter the joint venture distribution type based on which invoices will be selected. This can be operating expenses, capital expenditures, overhead, or fees and other charges and are recorded as account type E (Expense), A (Assets), H (Overhead), and F (Fees and other charges) respectively in the Joint Venture Distributions work area.

Under Output, in the Account field, enter an account to override the original natural account in the partner account for the selected joint venture invoices.

Click Save.

The following image shows the Edit Mapping Set page for a mapping set that has "Joint Venture Expense Reimbursement Account" as the name and description, and output type "Segment." The input sources selected for the mapping set are: Transaction Source Name, Transaction Line Flexfield Attribute 2, and Transaction Line Flexfield Attribute 4.

The following image shows the Mappings section of the page. It includes two mapping set rows with the values "Oracle Joint Ventures" in the Transaction Source Name column and "1001" in the Transaction Line Flexfield Attribute 2 column. This means that the system will map output values only for joint venture invoices that are created for the cost center 1001. The Transaction Line Flexfield Attribute 4 shows different values for each row. The value of E (Expense) in this column indicates that all joint venture invoices that are created to reimburse the operating expenses for cost center 1001 will be recorded in the natural account 49001. The value of A (Assets) in the second row indicates that the joint venture invoices created to reimburse the capital expenditures for cost center 1001 will be recorded in the natural account 49002.

Create an Account Rule

Create an account rule to assign the mapping set that you created in the preceding task.

Navigate to Setup and Maintenance and select the Receivables functional area.

Select Show – All Tasks and then click the Manage Account Rules task.

On Manage Account Rules: Receivables, click Create.

On Create Account Rule, enter the following details:

Chart of Accounts. Select the chart of accounts of the primary ledger of your joint venture.

Rule Type. Select Segment.

Then, for the chart of accounts you selected, select the natural account segment value from the drop-down list.

In the Rules section, click Add and enter the following details:

Value Type. Select Mapping set.

Value. Select the name of the mapping set that you created in the preceding task.

The following image shows the Create Account Rule page with information entered to create an account rule with the Rule Type “Natural Account Segment.” A mapping set is specified in the Value field. This indicates that the mapping set referenced in this account rule is for the natural account segment for receivables invoices.

Add a Journal Entry Rule Set to an Accounting Method

The account rules that you created must be assigned to journal entry rule sets. Journal entry rule sets provide the definition for generating a complete subledger journal entry for an accounting event. For joint venture receivables invoices, you must create journal entry rule sets for the accounting events, invoice and credit memo, and assign the rule sets to an accounting method.

Accounting methods are specific to chart of accounts. Therefore, you will assign journal entry rule sets for Oracle Joint Venture Management to the accounting method that is defined with the chart of accounts used in your joint venture.

You can create journal entry rule sets before you assign them to accounting methods. The following steps show how to create or edit journal entry rule sets within an accounting method.

Select Show – All Tasks and then click the Manage Accounting Methods task.

On Manage Account Methods: Receivables, select your accounting method, click the Actions drop-down menu and click Duplicate.

On Create Accounting Method, enter the following details and click Save and Close:

The Edit Accounting Method page is displayed for the accounting method you created.

The following example shows an accounting method for a chart of accounts.

In the Journal Entry Rule Set Assignments section for Receivables, check if a record already exists for event class “Invoice” and event type “All”. If it exists, click the rule set to edit the credit line. If it doesn’t, you need to create the record. To do so, click Add (+ icon) and enter the following details:

Event Type. Select All.

Rule Set. If a rule set already exists with the following information, then you just need to select the rule set. If it doesn’t exist, click Create from the drop-down list and enter the following details:

In the Create Subledger Journal Entry Rule Set page, enter the Name and Short Name that identifies that the journal entry rule set is for joint venture invoices.

Under Journal Lines, you can add a new journal line or edit existing journal lines.

To add a new journal line, click Add and enter the following details:

Line Type. Select Credit.

Journal Line Rule. Select Invoice Revenue.

Account Combination Rule. Make sure this field is populated with the default account rule, Transaction Distribution GL Account.

Natural Account Segment. Search and select your account rule that you created to derive the natural account segment of the partner account for joint venture invoices.

Click Save and Close.

The following image shows a journal entry rule set that’s set up with an account rule in the Natural Account Segment column. This account rule will derive the natural account with the account specified in the associated mapping set.

Verify that the journal entry rule sets for the other systems that you stored in this accounting method are intact.

To activate the journal entry rule set, click Activate.

Make sure the status of the accounting method is Active and then save it.

Associate the Copied Accounting Method with the Primary Ledger of the Joint Venture Business Unit

You must associate the copied accounting method with the primary ledger of the joint venture business unit.

In Functional Setup Manager, access the General Ledger functional area under the Financials offering.

Click the Specify Ledger Options task.

On Specify Ledger Options: <your ledger name>, in the Accounting Method field, enter the name of your copied accounting method. You can search for and select the accounting method from the drop-down list.