Definition
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.
Explanation
In the normal course of business, customers are constantly making purchases on credit and remitting payments. Over time, the relative size of accounts receivable may reach a point where the company has significant resources dedicated to managing this process.
By transferring receivables to another party, the company reduces the sales to cash revenue cycle time. Also known as disposition and transfers of accounts receivable, this process provides additional cash to the business, which can be used in operations or to purchase additional assets. Disposing of accounts receivable also relieves companies of the burden of creating and staffing additional resources in their billing and collections department.
Generally, there are two ways a company can dispose of, or transfer, receivables:
Assignment: the owner of the receivable borrows cash from a lender, using accounts receivable as collateral on the loan.
Factoring: the owner of the receivable sells it to a factor, which then assumes responsibility for collecting money owed directly from customers.
Example
In this first example, Company A would like to transfer $100,000 of receivables to First Factors Collection Group. Company A agrees to sell its receivables at a 5% discount, and will establish an account at 2% for sales discounts and returns customers may request when First Factors attempts to collect money owed. The factoring journal entries for Company A would be:
Debit | Credit | |
Cash | $93,000 | |
Due from Factor (sales discounts, returns) | $2,000 | |
Loss on Sale of Receivables | $5,000 | |
Accounts Receivable | $100,000 |
In this second example, Company A is obtaining a loan from First National Bank for $93,000 and will be using $100,000 of receivables as collateral. The assignment journal entry for Company A would be:
Debit | Credit | |
Cash | $93,000 | |
Notes Payable | $93,000 |
Company A would also disclose the use of $100,000 in accounts receivable as collateral in the notes to its financial statements.
Related Terms
Also referred to as "receivables," this is the accounting term used to describe claims the company has against others for goods, services, or money. Accounts receivable are usually non-written promises to pay for goods or services received but not yet paid for by a customer.
Moneyzine EditorNovember 6th, 2024
As it applies to the accounting discipline, cash includes paper money, coins, checks, money orders, and money on deposit with banks. In general, an item is classified as cash if a bank will accept it for deposit.Moneyzine EditorNovember 6th, 2024
The term assignment refers to a notification by the Options Clearing Corporation that the owner of an option exercised their rights. Assignments for equity and index options are made on a random basis.Moneyzine EditorJanuary 8th, 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 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
The term acquittance refers to a document that provides evidence the debt of a borrower has been extinguished. The most common example of an acquittance is a receipt stating a debt obligation has been paid in full.Moneyzine EditorNovember 6th, 2024
