Assignment of accounts receivable is an agreement in which a business assigns its accounts receivable to a financing company in return for a loan. It is a way to finance cash flows for a business that otherwise finds it difficult to secure a loan, because the assigned receivables serve as collateral for the loan received.
By assignment of accounts receivable, the lender i.e. the financing company has the right to collect the receivables if the borrowing company i.e. actual owner of the receivables, fails to repay the loan in time. The financing company also receives finance charges / interest and service charges.
It is important to note that the receivables are not actually sold under an assignment agreement. If the ownership of the receivables is actually transferred, the agreement would be for sale / factoring of accounts receivable. Usually, the borrowing company would itself collect the assigned receivables and remit the loan amount as per agreement. It is only when the borrower fails to pay as per agreement, that the lender gets a right to collect the assigned receivables on its own.
The assignment of accounts receivable may be general or specific. A general assignment of accounts receivable entitles the lender to proceed to collect any accounts receivable of the borrowing company whereas in case of specific assignment of accounts receivable, the lender is only entitled to collect the accounts receivable specifically assigned to the lender.
The following example shows how to record transactions related to assignment of accounts receivable via journal entries:
On March 1, 20X6, Company A borrowed $50,000 from a bank and signed a 12% one month note payable. The bank charged 1% initial fee. Company A assigned $73,000 of its accounts receivable to the bank as a security. During March 20X6, the company collected $70,000 of the assigned accounts receivable and paid the principle and interest on note payable to the bank on April 1. $3,000 of the sales were returned by the customers.
Record the necessary journal entries by Company A.
Journal Entries on March 1
Initial fee = 0.01 × 50,000 = 500
Cash received = 50,000 – 500 = 49,500
| Cash | 49,500 |
| Finance Charge | 500 |
| Notes Payable | 50,000 |
The accounts receivable don't actually change ownership. But they may be to transferred to another account as shown the following journal entry. The impact on the balance sheet is only related to presentation, so this journal entry may not actually be passed. Usually, the fact that accounts receivable have been assigned, is stated in the notes to the financial statements.
| Accounts Receivable Assigned | 73,000 |
| Accounts Receivable | 73,000 |
Journal Entries on April 1
| Cash | 70,000 |
| Sales Returns | 3,000 |
| Accounts Receivable Assigned | 73,000 |
Interest expense = 50,000 × 12%/12 = 500
| Notes Payable | 50,000 |
| Interest Expense | 500 |
| Cash | 50,500 |
by Irfanullah Jan, ACCA and last modified on Oct 29, 2020