Assignment Of Accounts Receivable

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Transferring receivables to another party allows companies to reduce the sales to cash revenue cycle time.A party seeking capital assigns its accounts receivable to a financing or factoring company which advances that party a stipulated percentage of the face amount of the receivables.The factoring company, in turn, sends a notice of assignment of accounts receivable to the party obligated to pay the factoring company’s assignee, i.e. While fairly straightforward, this three party arrangement has one potential trap for account debtors.The journal entries for general assignments are fairly straightforward.In the example below, Company A records the receipt of a 0,000 loan collateralized using accounts receivable, and the creation of notes payable for 0,000.He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.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.The entry to recognize an assignment is recorded by debiting assigned accounts receivable and crediting accounts receivable for the amount of accounts pledged as collateral.The cash advance less the initial fee charged by the lending company is recorded by debiting the Cash account for the amount of the loan less the initial fee, debiting the finance charge account for the amount of the initial fee, and crediting Notes payable by the amount of the loan, if the borrowing company issues a promissory note.