The document discusses various methods of receivable financing including pledging, assignment, and factoring of accounts receivable, highlighting their accounting implications and processes during financial distress. It explains how these methods can provide liquidity to entities faced with cash flow issues and details journal entries required for each method, including calculations for loans, interest, and service charges. Additionally, it addresses the differences between assignment with notification and non-notification, along with the implications of factoring on ownership and responsibility for uncollectible accounts.

1. INANCING
oring
RECEIVABLE
F
F
Pledge, Assignment and Factoring
G

2. Technical Knowledge
To Know the accounting for pledge of accounts receivable
To know the accounting for assignment of accounts Receivable
To understand factoring of accounts receivable
To know the classification and presentation of pledged, assigned and
factored accounts receivable

3. During a general
business decline, an
entity may find itself in
tight cash position
because sale decrease
and customers are not
paying their accounts
on time
But the entity’s
current accounts
and notes payable
must continue to be
paid if its credit
standing is not to
suffer.
RECEIVABLE
FINANCING
Receivable
financing is the
financial flexibility or
capability of an
entity to raise money
out of its receivable

4. RECEIVABLE
FINANCING
The entity then 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
The common forms of
receivable financing are
pledge of accounts
receivable, assignment of
accounts receivable,
factoring of accounts
receivable and
discounting of notes
receivable

5. PLEDGE
OF
ACCOUNT
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
loan
• Normally the borrower makes the collection of the pledged accounts BUT
may required to turn over the collections to the bank satisfaction for the loan
• NO complex problem are in this form of financing except the accounting for
the loan
• The loan is recorded by debiting cash and discount on note payable if loan is
discounted, and crediting note payable
• The subsequent payment of the loan is recorded by debiting note payable
and crediting cash
• With respect to the pledged accounts, no entry would be necessary. Its is
sufficient that disclosure thereof is made in a note to financial statement

6. Face Amount of loan
Interest deducted in advance (1,000,000 x 12%)
On November 1, 2024, an entityt borrowed ₱1,000,000 from bank and issued a promissory note for the same.
The term of the loan is one (1) year and discounted at 12% the entity pledged account receivable of ₱2,000,000 to secure
the loan
If the loan is discounted, in the banking parlance this means that the interest for the term of the loan is deducted in
advance,
Illustration
Cash
Discount on note payable
Note Payable- bank
Net proceeds
880,000
120,000
1,000,000
1,000,000
(120,000)
880,000

7. Illustration
On December 31, 2024, using the the straight line method, the discount on note payable is
amortized as interest expanse for two moths for November 1 to December 31.
Interest Expense (120,000 x 2/12)
Discount on note Payable
20,000
20,000

8. 1,000,000
(100,000)
Illustration
If a statment of financial position is prepared on December 31, 2024, the note payable-bank and
discount on note payable are presented as current liability
Note Payable-bank
Discount on note payable
Carrying amount
• A note to financial statement should be made
• The note payable to bank matures on November 1, 2025 and is secured by accounts receivable with face amount of
₱200,000,000
• On November 1, 2025, the payment of the bank loan is recorded and this discount on note payable is finally amortized
Note Payable-Bank
Cash
Interest Expense
Discount on note payable
900,000
1,000,000
1,000,000
100,000
100,000

9. • Assignment of accounts receivable means that the borrower called the assignor Transfers right in some
accounts receivable to a lender called the assignee in consideration for a loan
• Actually, Assignment is more formal type of pledging of accounts receivable. Secured borrowing
evidenced by a financing agreement and promissory note both of which the assignor signs
• However, pledging is general because all accounts receivable serves as collateral security for the loan
• On other hand, assignment is specific because specific accounts receivable serves as collateral security
for the loan
ASSIGNMENT OF ACCOUNTS RECEIVABLE

10. ASSIGNMENT OF ACCOUNTS RECEIVABLE
Assignment May be done either nonnotification or
notification Basis
When accounts are assigned on
nonnotification basis, customers are
NOT informed that their accounts have
been assigned
As Results, the customer continue to
make payments to the assignor, who in
turn remits the collection to the
assignee

11. ILLUSTRATION- Nonnotification Basis
April
1 An entity assign ₱700,000 of accounts receivable to a bank under a nontotification arrangement. Th bank advances 80%nless a charge of ₱5,000
Accounts Receivable Assigned
Accounts Receivable
To Record Loan:
Cash (560,000 - 5,000)
Service Charge
Note Payable- Bank
5 Issued Credit memo for sales return to a customer whose account was assigned, ₱20,000
The entity signed a promissory note that provides for interest 1% per month on the unpaid loan balances
To separate the assigned accounts :
Sale Return
Accounts Receivable
10 Collected ₱300,000 of the assigned accounts less 2% discount
Cash
Sales discount (2% x 300,000)
Accounts receivable-assigned
30 Remitted the total collections to the bank plus interest for one (1) month
Note Payable- Bank
Interest Expense
Cash
700,000
700,000
555,000
5,000
560,000
20,000
20,000
294,000
6,000
300,000
294,000
5,000
299,000

12. ILLUSTRATION- Nonnotification Basis
May
7 Assigned Accounts of ₱ 15,000 proved worthless
Allowance for Doubtful Accounts
Accounts receivable- assigned
15,000
15,000
20 Collected ₱ 300,000 of the assigned accounts
Cash
Accounts Receivable- Assigned
300,000
300,000
30 Remitted the total amount due the bank to pay off the loan balance plus interest for one (1) month
Note Payable- Bank (560,000 - 294.000)
Interest Expense (1% x 266,000)
Cash
266,000
To transfer the remaining balance of assigned accounts to accounts :
Accounts Receivable
Accounts Receivable- Assigned
65,000
65,000
Total Accounts Receivable - Assigned
Less: Collection
Sale Discount
Sale Return
Worthless Accoun
Balance
2,660
268,880
700,000
65,000
594,000
(294,000 + 300,000)
6,000
20,000
15,000 (635,000)

13. ASSIGNMENT OF ACCOUNTS RECEIVABLE
Assignment May be done either nonnotification or
notification Basis
When accounts are assigned on notification basis,
customers are nitified to make their payments directly
to the assignee.
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, sale return
and allowances and uncollectible accounts
The percentage may be 70%, 80% or 90% depending on
the quality account
The assignee usually charges interest for the loan that it
makes and requires a service or financing charge or
commission for assignment agreement.

14. ILLUSTRATION- Notification Basis
JULY
1 An entity assign ₱ 1,000,000 of accounts receivable to a bank under a notification arrangement
The bank loans 80% less 4% service charge on the gross amount assigned.
The entity signed promissory note the provides for 1% interest per moth on the unpaid loan balance
July 1 Account Receivable - Assigned 1,000,000
Account Receivable 1,000,000
Cash (800,000 - 40, 000) 760,000
Service Charge (4% x 1,000,000) 40,000
Note Payable- Bank 800,000
31 Received notice from bank that ₱ 600,000 of the assigned accounts were collected less 2% discount. A check was sent to the bank for the interest due.
Note Payable- Bank 588,000
Sales Discount (2% x 600,000) 12,000
Accounts receivable- assigned 600,000
Interest Expense (1% x 800,000) 8,000
Cash 8,000

15. ILLUSTRATION- Notification Basis
AUGUST
31 Received notice from bank that ₱ 300,000 of the assigned accounts were collected. Final settlement was made by the bank for
excess collection together with the uncollected assigned accounts of ₱ 100,000
Cash 85,000
Interest Expense 2,120
Note payable- bank 212,000
Accounts Receivable- Assigned 300,000
Accounts Receivable 100,000
Accounts receivable- assigned 100,000

16. An Entry provided the following accounts at year- end
Accounts Receivable - unassigned
Accounts Receivable- Assigned
Allowance for Doubtful Accounts
Notes Payable- Bank (related to assignment)
Accounts Receivable- Unassigned
Account Receivable- Assigned
Total
Allowance for doubtful accounts
Net Realizable value
STATEMENT
PRESENTATION
ILLUSTRATION- Notification Basis
COMPUTATION
Loan from Bank
Less: July collection by bank
Balance Due the Bank
August Collection by Bank
Less: Loan balance
Excess Collection
Less: Interest (1% x 212, 000)
Remittance from bank
800,000
558,000
212,000
300,000
212,000
88,000
2,120
85,880
₱
4,000,000
1,000,000
100,000
400,000
4,000,000
1,000,000
5,000,000
(100,000)
4,900,000

17. EQUITY IN ASSIGNED ACCOUNTS
ILLUSTRATION- Notification Basis
Moreover, the entity shall disclose its equity in the assigned accounts.
The Equity in assigned accounts is equa; to the balance of assigned accounts receivable minus the balance of the related note payable to
bank
Accounts Receivable - assigned
Note Payable- Bank
Equity in assigned accounts
1,000,000
(400,000)
600,000

18. FACTORING
Factoring is a sale of accounts receivable usually on without resource, notification basis. In a factoring arrangement, an
entity sells accounts receivable to a bank or finance entity called a factor
A gain or loss is recognized for the difference between the proceeds received and the net carrying amount of the
accounts receivable
Differs from an assignment in that an entity actually transfer ownership of the accounts receivable to the factor.
Factors assumes responsibility for assumes responsibility for uncollectible factored accounts.
In assignment, the assignor retains ownership of the accounts receivable assigned
Because of the nature of the transaction, the customers whose accounts are factored are notified and required to pay
directly to the factor
May take the form of casual casual factoring and factoring as a continuing arrangement.

19. CASUAL FACTORING
If an entity finds itself in a critical cash position, it may be forced to factor some or all of its accounts receivable at a
substantial discount to a bank. For example , an entity factored ₱ 100,000 of accounts receivable with an allowance
for doubtful accounts of ₱5,000 for ₱80,000
Cash
Allowance for doubtful accounts
Loss on factoring
Accounts Receivable
80,000
5,000
15,000
100,000

20. FACTORING AS A CONTINUING AGEREEMENT
In this setup, before a merchandise is shipped to a customer, the selling entity requests 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.
For comprehension, the factor typically charges a commission of factoring fee of 5% to 20%
Moreover, the factor may withhold a predetermined amount as a protection against customer returns and allowance
and other special adjustment known as the “factor’s holdback”
The factor’s holdback is actually a receivable from factor and classified as current asset

21. ILLUSTRATION
An entity factored accounts receivable of ₱500,000 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 receivables 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
Sale discount
Commission
Receivable from factor
Accounts Receivable
365,000
10,000
25,000
100,000
500,000

22. ILLUSTRATION
COMPUTATION
Gross Amount
Less: Sales discount
Commission
Factor’s holdback
Cash received from factoring
(2% x 500,000)
(5% x 500,000)
(20% x 500,000)
If the customer is subsequently allowed a credit of ₱ 50,000 for damaged merchadise:
Sales return and allowance
Sales discount (2% x 50,000)
Receivable from factor
When all the accounts receivable factored are collected by the factor with no factor with no further returns and allowances, the final
settlement with factor is normally recorded
Cash (100,000 - 49,000)
Receivable from factor
500,000
10,000
25,000
100,000 135,000
365,000
50,000
1,000
49,000
51,000
51,000

23. ILLUSTRATION-With recourse for nonpayment
COMPUTATION
An entity factored ₱3,000,000 of accounts receivable at year-end. Control was surrendered.
The factor accepted the accounts receivable subject to recourse for non payment.
The factor assessed a fee of 6% and retained a holdback equal to 10% of the accounts receivable
In addition, the factor charged 12% interest compound on weighted-average time to maturity 50 days
Accounts Receivable 3,000,000
Factor’s holdback
Factoring fee
Interest
(10% x 3,000,000) (300,000)
(6% x 3,000,000) (180,000)
( 3,000,000 x 12%x 50/365) (49,000)
Cash initially received from factory 2,470,685
If the interest is computed on weighted average time basis, the denaminator is 365 days
In the absence of any contrary statement, the simple interest is computed using 360 days as denominator
Factoring fee 180,000
Interest 49,315
Recourse Obligation 100,000
Total loss on factoring initially recognized 329,315
Note that the recourse obligation in initially recorded as loss on factoring

24. Journal Entries
To record the recording
To reverse the recourse liability assuming the accounts are fully collected by the factor
Cash
Due from factor
Factoring fee
Interest expense
Loss on recourse obligation
Accounts receivable
Recourse Liability
Recourse Liability
Loss on recourse obligation
This means that the net loss from factoring ₱329,315 minus ₱100,000 or ₱229,315
Cash
Due from factor
To collect the factor’s holdback
2,470,685
300,000
180,000
49,315
100,000
3,000,000
100,000
100,000
100,000
300,000
300,000

25. Assuming the accounts are not collected by the factor
To settle the recourse obligation to the factor
Recourse Liability
Cash
To collect the factor’s holdback
Cash
Due from factor
The two entries can be compounded
Cash
Recourse liability
Due from factor
Normally, the factor deducts the recourse liability from the factor’s holdback upon final settlement
100,000
100,000
300,000
300,000
200,000
100,000
300,000

26. Credit Card
A Credit Card is a plastic card which enables the holder to obtain credit up to predetermined limit from the
issuer of the card for the purchase of goods and services
The credit card has enabled retailers and other businesses to continue to sell goods and services where
the customers obtain possession of the goods immediately but do not have to pay for the goods for about
one month
Most banks offer credit cards to their depositor. The major credit cards in the Philippines Security bank
card, BDO Card, Metrobank Card, BPI Express Credit, Dinners Club, American Express, VISA and
MasterCard
These entities are generally responsible for approving the credit of customers and collecting the accounts
receivable for service fee from 1% to 5% of the credit sales.
Generally, if a customers buys good and uses a credit card, the credit card receipt must be forwarded by
the retailer the appropriate amount minus the credit service charge
Two entries are necessary , one entry at the time of sale and another entry when payment is received
from card issuer

27. Illustration
Credit card sales to customers using Master Card amounted to ₱200,000 for a certain period
The credit card receipts as forwarded to Master Card minus a 3% service charge
1 to record the credit card sales:
Accounts receivable- Master Card
Sales
to record the payment from credit card sales:
2
Cash
Credit card services charge (200,000 x 3%)
Accounts receivable- Market Card
200,000
200,000
200,000
194,000
6,000

28. THANK
YOU
Prof. Justiniano L. Santos, CPA, MBA