Receivable Financing

Cards (15)

  • Receivable financing
    The financial flexibility or capability of an entity to raise money out of its receivables
  • During a general business decline, an entity may find itself in tight cash position because sales decrease and customers are not paying their accounts on time
  • The entity's current accounts and notes payable must continue to be paid if its credit standing is not to suffer
  • 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 receivable
    • Assignment of accounts receivable
    • Factoring of accounts receivable
    • Discounting of notes receivable
  • Pledge of accounts receivable
    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
  • Pledge of accounts receivable
    Borrowing entity makes the collections of the pledged accounts but may be required to turn over the collections to the bank in satisfaction for the loan
  • Loan recording
    Debit cash and discount on note payable if loan is discounted, and credit note payable
  • Loan repayment recording
    Debit note payable and credit cash
  • With respect to the pledged accounts, no entry would be necessary. It is sufficient that disclosure thereof is made in a note to financial statement
  • Notes Receivable

    A written promise to pay a specified amount of money on a specified future date
  • Accounts Receivable
    Money owed to a company by its customers for goods or services provided on credit
  • Loss on note discounting
    The difference between the face value of a note and the amount received when the note is discounted
  • Interest Income
    Revenue earned from lending money or extending credit
  • Discounting a note receivable
    1. Receiving cash for the note before its maturity date
    2. Recognising a loss on the discounting
    3. Recognising interest income on the discounted note