Definition
The financial accounting term assignment of accounts receivable refers to the process whereby a company borrows cash from a lender, and uses the receivable as collateral on the loan. When accounts receivable is assigned, the terms of the agreement should be noted in the company's financial statements.
Explanation
In the normal course of business, customers are constantly making purchases on credit and remitting payments. Transferring receivables to another party allows companies to reduce the sales to cash revenue cycle time. 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. If the company does not fulfill its obligation under the agreement, the lender has a right to collect the receivables. There are two ways this can be accomplished:
General Assignment: a portion of, or all, receivables owned by the company are pledged as collateral. The only transaction recorded by the company is a credit to cash and a debit to notes payable. If material, the terms of the agreement should also appear in the notes to the company's financial statements.
Specific Assignment: the lender and borrower enter into an agreement that identifies specific accounts to be used as collateral. The two parties will also outline who will attempt to collect the receivable, and whether or not the debtor will be notified.
In the case of specific assignment, if the company and lender agree the lending institution will collect the receivables, the debtor will be instructed to remit payment directly to the lender.
Example
The journal entries for general assignments are fairly straightforward. In the example below, Company A records the receipt of a $100,000 loan collateralized using accounts receivable, and the creation of notes payable for $100,000.
Debit | Credit | |
Cash | $100,000 | |
Notes Payable | $100,000 |
In specific assignments, the entries are more complex since the receivable includes accounts that are explicitly identified. In this case, Company A has pledged $200,000 of accounts in exchange for a loan of $100,000.
Debit | Credit | |
Cash | $100,000 | |
Assigned Accounts Receivable | $200,000 | |
Notes Payable | $100,000 | |
Accounts Receivable | $200,000 |
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorNovember 6th, 2024
The financial accounting term current assets is generally defined as cash and other assets that can be converted into cash within one year or one operating cycle, whichever is longer. Current assets are a subcategory of assets, which appear on a company's balance sheet.Moneyzine EditorNovember 6th, 2024
The financial accounting term factoring refers to the process whereby a company sells its accounts receivable to another company. When accounts receivable is sold to a factor, the purchasing company assumes responsibility for collection of the money owed.Moneyzine EditorJanuary 17th, 2024
The financial accounting term disposition of accounts receivable is used to describe several approaches companies can take to accelerate the receipt of cash from receivables. The two most common methods include factoring and assignment; whereby the company transfers receivables to another party in exchange for cash.Moneyzine EditorJanuary 16th, 2024
The term allowance for doubtful accounts refers to the contra asset to accounts receivable. Allowance for doubtful accounts represents the portion of accounts receivable the company does not expect to collect from customers.Moneyzine EditorNovember 6th, 2024- The term special allowance accounts refers to a contra asset to accounts receivable that ensures the amount appearing on the balance sheet is stated in terms of net realizable value. Special allowance accounts are required to match anticipated and real expenses with the corresponding sales revenues.Moneyzine EditorNovember 6th, 2024
