Receivable Financing

• 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