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Assignment of Accounts Receivable Journal Entries

The assignment of accounts receivable journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting of accounts receivable assignment.

The assignment of accounts receivable journal entries are based on the following information:

• Accounts receivable 50,000 on 45 days terms
• Assignment fee of 1% (500)
• Initial advance of 80% (40,000)
• Cash received from customers 6,000
• Interest on advances at 9%, outstanding on average for 40 days (40,000 x 9% x 40 / 365 = 395)

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. 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 degree from Loughborough University.

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Assignment of receivables: how to generate cash flow with unpaid invoices

Assigning your accounts receivable to a third party is part of a group of short-term financing options for small businesses. If your customer payment terms are relatively long, you’re often caught short on the cash you need to pay suppliers and staff, or invest in exciting opportunities that arise. 

So the ability to turn unpaid invoices into liquid funds can be very appealing. 

But the process isn’t exactly simple, and many SMBs don’t know what’s involved. So here’s a brief guide to everything you need to know about the assignment of receivables.

Assignment of accounts receivable: definition

The assignment of accounts receivable is a fiscal mechanism by which a creditor (the “assignor”) transfers the rights over an invoice to a third party (the “assignee”) in exchange for a short term loan. 

Here’s an example: suppose a customer owes you a sum of money, due in two months’ time. You can assign that debt to another company as collateral for money up front (a loan). If you fail to repay the loan in time, the other company will then collect payment from the customer in due course. 

The costs can vary, but you can expect to pay interest and some form of processing fees along the way. Obviously, the sooner you repay, the less you’ll pay in the long run. 

Why opt for assignment of receivables? 

This is a strategic tool to optimise working capital and keep your business humming along.  Tangibly, the assignment of receivables puts more cash in your accounts today . This helps you keep up with payments and maintain better relations with your suppliers .

Companies can use assignment of receivables to meet their cash flow needs . It can therefore be useful in a number of contexts:

• Cash management : Assignment of receivables allows you to convert your invoices into immediate cash. You improve your cash flow and meet your short-term financing needs.
• Reducing credit risk : Any credit risk transfers to the assignee. This protects you against the risks associated with unreliable buyers or uncertain economic situations. Of course, the assignee is unlikely to assume too much risk, so this isn’t a sustainable or scalable way to bring down major credit risks.
• Financing and refinancing : Assignment of receivables can be used as a means of financing, enabling you to obtain funds to invest in new projects, cover expenses or repay existing debts.
• Outsourcing receivables management : Invoice administration can be complex and time-consuming. By assigning your receivables, you can outsource the management of collections and payments to the assignee, allowing you to concentrate on your core business.
• Mergers and acquisitions : As part of a company takeover, the assignment of receivables can facilitate the consolidation of financial operations and simplify the transition of commercial relations between the parties involved.

There are potential downsides, even if they’re relatively few: 

• Paying fees and/or interest means that you take home a smaller portion of what the customer owes you . But having the money in your pocket is often more important. 
• You’re involving a third party in your customer relationships , which could potentially become awkward. 
• It can be administratively complex and a slower process than you’d like. We’ll explore some ways to make it more efficient shortly. 

Despite these drawbacks, assigning receivables is often a very attractive option where you’ve done the hard work to sign customers and have real assets (invoices), but don’t have the cash you need.  

Technical requirements for assignments

To be valid, the assignment must be in a written document including certain information : 

• Identification of the parties 
• Nature of the claim
• Amount assigned
• Payment terms and conditions
• Notification to the debtor so that the assignment can be enforced (if necessary)

To get a little more legal , the assigned claim must also meet the following criteria:

• Certain: The claim must not be disputed
• Liquid: It must be quantified or quantifiable
• Due and payable: It must be due and payable on demand
• The debtor must be informed of the assignment by the assignor or the assignee, by registered letter with acknowledgement of receipt, bailiff's deed, or any other means proving receipt.
• Clauses prohibiting further assignments
• Automatic termination clauses
• Forfeiture in the event of assignment

The specific rules may vary from one country to another. Certain claims may be excluded from assignment , in particular those that are linked to the private people or to a particular relationship between the parties, such as alimony, civil or military pensions and wages. 

Legal or contractual restrictions may also limit the possibility of assigning a claim.

Who’s involved in the assignment of receivables?

The main players in the assignment of receivables are:

• The assignor : The company transferring the receivable, whether it is a commercial, industrial or service company.
• The assignee : The party acquiring the receivable, such as a bank or a factoring company. The assignee collects the sums due and assumes the risks of the debtor's insolvency if the assignor can’t repay their loan.
• The assigned debtor : The customer of the assigning company, who must pay its debt to the assignee.

What does an assignment of receivables entail?

The exact implications of an assignment of receivables will vary depending on the jurisdiction, applicable laws, and the agreement you reach. You are strongly advised to seek the advice of a legal professional for advice tailored to your particular situation. An expert will be able to guide you through the laws and regulations in force in your country and help you understand the specific implications of the assignment of receivables.

However, here is a list of common implications:

• Transfer of rights and obligations : The rights attached to the claim are transferred to the assignee, including the right to sue the debtor in the event of non-payment. The assignee may also acquire the obligations associated with the claim, such as the obligation to comply with the agreed repayment terms.
• Notification to the debtor : The assignor is generally required to notify the debtor (the customer) of the assignment of claims, informing them of the change of creditor and obliging them to make payments to the assignee rather than the assignor. The customer may be required to consent to the assignment of claims, depending on the applicable legislation.
• Payment to the assignee : The debtor must make payments to the acquiring company in accordance with the agreed terms. The latter has the right to claim and receive payments relating to the assigned receivable.
• Risks and guarantees : The assignee must assess the risks associated with the receivable before accepting the assignment, including the debtor's solvency and the existence of guarantees or sureties associated with the receivable.

Assignment of receivables vs factoring

While similar, the assignment of receivables is slightly different from factoring . Invoice factoring also involves assigning receivables to a third party, but in that case you essentially sell these assets rather than use them as collateral. A factor will buy a portfolio of invoices from you and take over the collection process from there. 

In both cases you get money now for customer debts that will come due later. The key differences are in the terms and the amount of credit you hand over. 

The assignment of receivables is a strategic tool for optimizing financial management and securing your commercial transactions . It allows the creditor to offload the collection of a debt or to mobilize funds, while offering the assignee the opportunity to acquire receivables at a lower cost and to diversify its portfolio. 

Ultimately, this helps you to keep up your payments and maintain better relations with your suppliers. 

Defacto, a less burdensome, simpler and more flexible alternative

Defacto offers an interesting alternative to the often complicated, legally-intense process described above. We offer short-term loans, using outstanding invoices as proof of your ability to honor them. 

Defacto financing is fast, flexible, and far more affordable than traditional invoice factoring or receivables-based loans. You choose which receivables you want to use to raise funds, and avoid the restrictive rules often imposed by other mechanisms.

In as little as 27 seconds, you can get the funds you need to help you business grow and thrive. See how easy it is here . 

Ready to grow on your own terms?

Every business needs financing, and we’re set on making it simple and fair for all businesses to access it.

Our Insights

Assignment of Accounts Receivable – Trap for the Unwary

By  Steven A. Jacobson

Most businesses are familiar with the mechanics of an assignment of accounts receivable. A party seeking capital assigns its accounts receivable to a financing or factoring company that 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. the account debtor. While fairly straightforward, this three-party arrangement has one potential trap for account debtors.

Most account debtors know that once they receive a notice of assignment of accounts receivable, they are obligated to commence payments to the factoring company. Continued payments to the assignee do not relieve the account debtor from its obligation to pay the factoring company.

It is not uncommon for a notice of assignment of accounts receivable to contain seemingly innocuous and boilerplate language along the following lines:

Please make the proper notations on your ledger and acknowledge this letter and that invoices are not subject to any claims or defenses you may have against the assignee.

Typically, the notice of assignment of accounts receivable is directed to an accounting department and is signed, acknowledged and returned to the factoring company without consideration of the waiver of defenses languages.

Even though a party may have a valid defense to payment to its assignee, it still must pay the face amount of the receivable to the factoring company if it has signed a waiver. In many cases, this will result in a party paying twice – once to the factoring company and once to have, for example, shoddy workmanship repaired or defective goods replaced. Despite the harsh result caused by an oftentimes inadvertent waiver agreement, the Uniform Commercial Code validates these provisions with limited exceptions. Accordingly, some procedures should be put in place to require a review of any notice of assignment of accounts receivable to make sure that an account debtor preserves its rights and defenses.

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Accounts Receivable Assignment: Key Concepts and Business Impact

Explore the essential concepts and business impact of accounts receivable assignment, including cash flow effects and advanced techniques.

Efficient management of accounts receivable is crucial for maintaining a healthy cash flow in any business. Assigning these receivables can be an effective strategy to optimize liquidity and reduce financial risk.

Understanding the implications of this practice helps businesses make informed decisions that align with their financial goals.

Key Concepts of Accounts Receivable Assignment

Accounts receivable assignment involves transferring the rights to collect receivables from a business to a third party, often a financial institution. This practice is typically used to secure immediate cash flow, allowing businesses to meet short-term obligations without waiting for customer payments. The third party, known as the assignee, then assumes the responsibility of collecting the receivables.

One of the primary concepts in accounts receivable assignment is the distinction between recourse and non-recourse agreements. In a recourse agreement, the business retains some liability if the receivables are not collected, meaning they may need to compensate the assignee for any uncollected amounts. Conversely, a non-recourse agreement transfers the full risk of non-payment to the assignee, providing the business with greater financial security but often at a higher cost.

Another important aspect is the discount rate applied by the assignee. This rate reflects the cost of the service and the perceived risk associated with the receivables. Factors influencing the discount rate include the creditworthiness of the customers, the average collection period, and the overall economic environment. Businesses must carefully evaluate these rates to ensure that the benefits of immediate cash flow outweigh the costs.

Impact on Cash Flow

The assignment of accounts receivable can significantly influence a company’s cash flow dynamics. By converting receivables into immediate cash, businesses can bridge the gap between sales and actual cash inflows. This immediate liquidity can be particularly beneficial for companies facing seasonal fluctuations or those in industries with extended payment terms. For instance, a manufacturing firm might use receivable assignment to ensure it has the necessary funds to purchase raw materials, even if its customers take months to pay their invoices.

Moreover, the infusion of cash from receivable assignments can enable businesses to capitalize on growth opportunities. With more liquid assets on hand, companies can invest in new projects, expand operations, or take advantage of bulk purchasing discounts. This proactive approach to cash management can lead to increased profitability and a stronger market position. For example, a retail business might use the funds from assigned receivables to open new store locations, thereby increasing its market reach and revenue potential.

However, it’s important to recognize that while receivable assignment can provide immediate financial relief, it also comes with costs. The discount rate applied by the assignee reduces the total amount of cash received compared to the face value of the receivables. This reduction must be carefully weighed against the benefits of improved cash flow. Additionally, businesses must consider the potential impact on customer relationships, as the assignee will now be responsible for collections. Ensuring that the assignee maintains a professional and courteous approach is essential to preserving customer goodwill.

Accounting Treatment and Reporting

When it comes to the accounting treatment and reporting of accounts receivable assignments, businesses must adhere to specific guidelines to ensure accurate financial statements. The first step involves recognizing the assignment transaction in the accounting records. This typically requires debiting a cash account to reflect the immediate influx of funds and crediting the accounts receivable account to remove the assigned receivables from the company’s books. The difference between the receivables’ face value and the cash received, often due to the discount rate, is recorded as a financing expense or loss.

Proper disclosure is another critical aspect of accounting for receivable assignments. Financial statements must clearly indicate the nature and extent of the receivables assigned, including any recourse obligations if applicable. This transparency helps stakeholders understand the company’s financial position and the potential risks associated with the assigned receivables. For instance, notes to the financial statements should detail the terms of the assignment agreement, the discount rate applied, and any contingent liabilities that may arise from recourse provisions.

Additionally, businesses must consider the impact of receivable assignments on their financial ratios. Metrics such as the current ratio, quick ratio, and accounts receivable turnover can be significantly affected by the removal of receivables from the balance sheet. Analysts and investors often scrutinize these ratios to assess a company’s liquidity and operational efficiency. Therefore, it is essential to provide context and explanations for any substantial changes in these metrics due to receivable assignments.

Advanced Techniques in Receivable Assignment

Advanced techniques in receivable assignment can offer businesses more sophisticated ways to manage their cash flow and financial risk. One such technique is the use of securitization, where receivables are pooled together and sold as securities to investors. This method not only provides immediate liquidity but also diversifies the risk among multiple investors, making it an attractive option for companies with large volumes of receivables. Securitization can be particularly beneficial for industries like telecommunications or utilities, where customer bases are extensive and receivables are substantial.

Another advanced approach is dynamic discounting, which allows businesses to offer early payment discounts to their customers in exchange for quicker cash inflows. Unlike traditional discounting, dynamic discounting uses a flexible rate that can change based on the timing of the payment. This technique leverages technology platforms to automate and optimize the discounting process, ensuring that businesses can maximize their cash flow without sacrificing too much revenue. For example, a software company might use dynamic discounting to encourage its clients to pay invoices within 10 days instead of the standard 30, thereby improving its liquidity.

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Understanding Accounts Receivable (Definition and Examples)

Nick Zaryzcki

Reviewed by

Janet Berry-Johnson, CPA

May 1, 2024

This article is Tax Professional approved

Most small businesses sell to their customers on credit. That is, they deliver the goods and services immediately, send an invoice, then get paid a few weeks later. Businesses keep track of all the money their customers owe them using an account in their books called accounts receivable.

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Here we’ll go over how accounts receivable works, how it’s different from accounts payable , and how properly managing your accounts receivable can get you paid faster.

What is accounts receivable?

Accounts receivable is any amount of money your customers owe you for goods or services they purchased from you in the past. This money is typically collected after a few weeks and is recorded as an asset on your company’s balance sheet. You use accounts receivable as part of accrual basis accounting.

Why is accounts receivable important?

Having lots of customers is great. But if some of them pay late or not at all, they might be hurting your business. Late payments from customers are one of the top reasons why companies get into cash flow or liquidity problems.

When you have a system to manage your working capital , you can stay ahead of issues like these. Calculating your business’s accounts receivable turnover ratio is one of the best ways to keep track of late payments and make sure they aren’t getting out of hand.

How are accounts receivable classified and where do I find my AR balance?

You can find your accounts receivable balance under the ‘current assets’ section on your balance sheet or general ledger . Accounts receivable are classified as an asset because they provide value to your company. (In this case, in the form of a future cash payment.)

Your general ledger will show your total accounts receivable balance, but to dig into outstanding payments by individual customers, you’ll usually need to refer to the accounts receivable subsidiary ledger.

Does accounts receivable count as revenue?

Accounts receivable is an asset account, not a revenue account. However, under accrual accounting , you record revenue at the same time that you record an account receivable.

Let’s say you send your friend Keith’s business, Keith’s Furniture Inc., an invoice for $500 in exchange for a logo you designed for them. You’d make the following entry in your books the moment you invoice Keith’s Furniture:

(If you want to understand why we’re making two entries to record one transaction here, check out our guide to double-entry accounting .)

But remember: under cash basis accounting , there are no accounts receivable. Under that system, a transaction doesn’t count as a sale until the money hits your bank account.

What is an accounts receivable aging schedule?

Keeping track of exactly who’s behind on which payments can get tricky if you have many different customers. Some businesses will create an accounts receivable aging schedule to solve this problem.

Here’s an example of an accounts receivable aging schedule for the fictional company XYZ Inc.

Accounts Receivable Aging Schedule

XYZ Inc., as of July 22, 2021

A quick glance at this schedule can tell us who’s on track to pay within 30 days, who’s behind schedule, and who’s really behind.

For example, you can immediately see that Keith’s Furniture Inc. is having problems paying its bills on time. You might want to give them a call and talk to them about getting their payments back on track.

What’s the difference between accounts receivable and accounts payable?

Though lenders and investors consider both of these metrics when assessing the financial health of your business, they’re not the same.

Accounts receivable are an asset account, representing money that your customers owe you.

Accounts payable on the other hand are a liability account, representing money that you owe another business.

Let’s say you send your friend Keith’s business, Keith’s Furniture Inc., an invoice for $500 in exchange for a logo you designed for them.

When Keith gets your invoice, he’ll record it as an accounts payable in his general ledger, because it’s money he has to pay someone else.

You (or your bookkeeper) record it as an account receivable on your end, because it represents money you will receive from someone else.

What is the “allowance for uncollectible accounts” account?

If you do business long enough, you’ll eventually come across clients who pay late, or not at all. When a client doesn’t pay and we can’t collect their receivables, we call that a bad debt .

Businesses that have been around for a while will often estimate their total bad debts ahead of time to make sure the accounts receivable shown on their financial statements aren’t unrealistically high. They’ll do this by setting up something called an “allowance for uncollectible accounts.”

Let’s say your total sales for the year are expected to be $120,000, and you’ve found that in a typical year, you won’t collect 5% of accounts receivable.

To estimate your bad debts for the year, you could multiply total sales by 5% ($120,000 * 0.05). You’d then credit the resulting amount ($6,000) to “allowance for uncollectible accounts,” and debit “ bad debt expense ” by the same amount:

What is the accounts receivable turnover ratio?

The accounts receivable turnover ratio is a simple financial calculation that shows you how fast your customers are at paying their bills.

We calculate it by dividing total net sales by average accounts receivable.

Let’s use a fictional company XYZ Inc.’s 2021 financials as an example.

Let’s say that at the beginning of 2021 (Jan 1), XYZ Inc. had total accounts receivable of $2,500. Let’s also say that at the end of 2021 (Dec 31) its total accounts receivable was $1,500. It also had total net sales of exactly $60,000 for 2021.

To get the average accounts receivable for XYZ Inc. for that year, we add the beginning and ending accounts receivable amounts and divide them by two:

$2,500 + $1,500 / 2 = $2,000

To calculate the accounts receivable turnover ratio, we then divide net sales ($60,000) by average accounts receivable ($2,000):

$60,000 / $2,000 = 30

This means XYZ Inc. has an accounts receivable turnover ratio of 30. The higher this ratio is, the faster your customers are paying you.

Thirty is a really good accounts receivable turnover ratio. For comparison, in the fourth quarter of 2021 Apple Inc. had a turnover ratio of 13.2.

To calculate the average sales credit period—the average time that it takes for your customers to pay you—we divide 52 (the number of weeks in one year) by the accounts receivable turnover ratio (30):

52 weeks / 30 = 1.73 weeks

This means that in 2021, it took XYZ Inc.’s customers an average of 1.73 weeks to pay their bills. Pretty good!

What can I do to make people pay faster?

Following up on late customer payments can be stressful and time-consuming, but tackling the problem early can save you loads of trouble down the road. Here’s how you can encourage customers to pay you on time.

Develop a crystal-clear credit policy

Instead of getting more flexible with your customers, which can be tempting when you’re starved for cash, develop crystal-clear guidelines for when you can and cannot extend credit to your customers. Then don’t hesitate to enforce them, even if it means turning down a few people in the short term.

Vet new customers, ask for up-front deposits on large orders, and institute interest charges for payments that come in after the due date. When a new customer signs up and sees these payment terms, they’ll understand from the get-go you’re serious about getting paid.

Give customers more ways to pay

If you only offer limited payment options, customers may be more inclined to drag their feet when the invoice due date rolls around. There are fees associated with accepting credit card payments, but allowing customers to pay using their credit cards is usually win-win: you’ll get paid faster and they can rack up points.

Offer a financial incentive

One way to get people to pay you sooner is to make it worth their while. Offering them a discount for paying their invoices early—2% off if you pay within 15 days, for example—can get you paid faster and decrease your customer’s costs. If you don’t already charge a late fee for past due payments, it may be time to consider adding one.

Call them and schedule regular reminders

Simply getting on the phone with a client and reminding them about unpaid invoices can often be enough to get them to pay. Sending email reminders at regular intervals—say, after 15, 30, 45, and 60 days—can also help jog your customers’ memory.

What if they don’t pay?

Let’s say you’ve done all of the above and those outstanding invoices remain unpaid. What now?

Cut off late-paying customers

Many companies will stop delivering services or goods to a customer if they have bills that are more than 120, 90, or even 60 days due. Cutting a customer off in this way can signal that you’re serious about getting paid.

Convert their account receivable into a long-term note

If you have a good relationship with the late-paying customer, you might consider converting their account receivable into a long-term note. In this situation, you replace the account receivable on your books with a loan that is due in more than 12 months and which you charge the customer interest for.

Hire a collection agency

If you can’t contact your customer and are convinced you’ve done everything you can to collect, you can hire someone else to do it for you.

Before deciding whether or not to hire a collector, contact the customer and give them one last chance to make their payment. Collection agencies often take a huge cut of the collectible amount—sometimes as much as 50 percent—and are usually only worth hiring to recover large unpaid bills. Coming to some kind of agreement with the customer is almost always the less time-consuming, less expensive option.

When an account receivable becomes bad debt

When it’s clear that an account receivable won’t get paid, we have to write it off as a bad debt expense.

For example, let’s say that after a few months of waiting, calling him on his cellphone, and talking to his family members, it becomes clear that Keith has disappeared and isn’t going to pay that $500 invoice you sent him.

In this case, you’d debit “allowance for uncollectible accounts” for $500 to decrease it by $500.

Remember that the allowance for uncollectible accounts is just an estimate of how much you won’t collect from your customers. Once it becomes clear that a specific customer won’t pay, there’s no longer any ambiguity about who won’t pay.

Once you’re done adjusting uncollectible accounts, you’d then credit “accounts receivable—Keith’s Furniture Inc.” by $500, also decreasing it by $500. Because we’ve decided that the invoice you sent Keith is uncollectible, he no longer owes you that $500.

So the resulting journal entry would be:

What if they end up paying me after all?

Let’s say a few more months pass, and a mysterious envelope with no return address appears in your mailbox. It’s a cheque from Keith’s Furniture Inc. for $500—he ended up paying you after all!

To record this transaction, you’d first debit “accounts receivable—Keith’s Furniture Inc.” by $500 again to get the receivable back on your books, and then credit revenue by $500.

Finally, to record the cash payment, you’d debit your “cash” account by $500, and credit “accounts receivable—Keith’s Furniture Inc.” by $500 again to close it out once and for all.

Accounts receivable as a standard for GAAP & IFRS

According to the industry standard rules for accounting, Generally Accepted Accounting Practices (GAAP), the accounts receivable balance should equal net realizable value, which is the amount of cash a business expects to collect from customers. Therefore, this balance would not include bad debt.

According to International Financial Reporting Standards (IFRS), which are used in Canada, the European Union, most of South American, Australia, and many other countries around the world, your accounts receivable would apply to any funds you expect to collect from customers within one year (current debt, in other words).

When to call something ‘bad debt’

If the costs of collecting the debt start approaching the total value of the debt itself, it might be time to start thinking about writing the debt off as bad debt—that is, debt that is no longer of value to you. Bad debt can also result from a customer going bankrupt and being financially incapable of paying back their debts.

The IRS says that bad debts include “loans to clients and suppliers,” “credit sales to customers,” and “business loan guarantees,” and that a business "deducts its bad debts, in full or in part, from gross income when figuring its taxable income .”

The IRS’s Business Expenses guide provides detailed information about which kinds of bad debt you can write off on your taxes.

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The Difference Between Assignment of Receivables & Factoring of Receivables

You can raise cash fast by assigning your business accounts receivables or factoring your receivables. Assigning and factoring accounts receivables are popular because they provide off-balance sheet financing. The transaction normally does not appear in your financial statements and your customers may never know their accounts were assigned or factored. However, the differences between assigning and factoring receivables can impact your future cash flows and profits.

How Receivables Assignment Works

Assigning your accounts receivables means that you use them as collateral for a secured loan. The financial institution, such as a bank or loan company, analyzes the accounts receivable aging report. For each invoice that qualifies, you will likely receive 70 to 90 percent of the outstanding balance in cash, according to All Business. Depending on the lender, you may have to assign all your receivables or specific receivables to secure the loan. Once you have repaid the loan, you can use the accounts as collateral for a new loan.

More For You

How to decrease bad debt expenses to increase income, what does "paid on account" in accounting mean, what is a financing receivable, what do liquidity ratios measure, what are some examples of installment & revolving accounts, assignment strengths and weaknesses.

Using your receivables as collateral lets you retain ownership of the accounts as long as you make your payments on time, says Accounting Coach. Since the lender deals directly with you, your customers never know that you have borrowed against their outstanding accounts. However, lenders charge high fees and interest on an assignment of accounts receivable loan. A loan made with recourse means that you still are responsible for repaying the loan if your customer defaults on their payments. You will lose ownership of your accounts if you do not repay the loan per the agreement terms.

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How Factoring Receivables Works

When you factor your accounts receivable, you sell them to a financial institution or a company that specializes in purchasing accounts receivables. The factor analyzes your accounts receivable aging report to see which accounts meet their purchase criteria. Some factors will not purchase receivables that are delinquent 45 days or longer. Factors pay anywhere from 65 percent to 90 percent of an invoice's value. Once you factor an account, the factor takes ownership of the invoices.

Factoring Strengths and Weaknesses

Factoring your accounts receivables gives you instant cash and puts the burden of collecting payment from slow or non-paying customers on the factor. If you sell the accounts without recourse, the factor cannot look to you for payment should your former customers default on the payments. On the other hand, factoring your receivables could result in your losing customers if they assume you sold their accounts because of financial problems. In addition, factoring receivables is expensive. Factors charge high fees and may retain recourse rights while paying you a fraction of your receivables' full value.

• All Business: The Difference Between Factoring and Accounts Receivable Financing

Assignment of Accounts Receivable

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.

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.

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.

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What Is Accounts Receivable (AR)?

• Understanding AR
• Receivable vs. Payable
• What AR Can Tell You

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Accounts Receivable (AR): Definition, Uses, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Accounts receivable (AR) is an accounting term for money owed to a business for goods or services that it has delivered but not been paid for yet. Accounts receivable is listed on the company's balance sheet as a current asset .

Key Takeaways

• Accounts receivable (AR) is an item on a company's balance sheet that represents money due the company for products or services it has already delivered.
• Accounts receivable is considered an asset to the company.
• The opposite of accounts receivable is accounts payable, which reflects money that a company owes but has not yet paid.

Joules Garcia / Investopedia

Understanding Accounts Receivable (AR)

Accounts receivable represents money that a business is owed by its clients, often in the form of unpaid invoices. "Receivable" refers to fact that the business has earned the money because it has delivered a product or service but is, at that point in time, still waiting to receive the client's payment.

Accounts receivable, or receivables, can be considered a line of credit extended by a company and normally have terms that require payments be made within a certain period of time. If effect, the company has accepted an IOU from the client. Depending on the agreement between company and client, the payment might be due in anywhere from a few days to 30 days, 60 days, 90 days, or, in some cases, up to a year. At some point along the way, interest on the debt might also begin to accrue.

Companies record accounts receivable as assets on their balance sheets because the customer has a legal obligation to pay the debt and the company has a reasonable expectation of collecting it. They are considered liquid assets because they can be used as collateral to secure a loan to help the company meet its short-term obligations. Receivables are part of a company's working capital .

Furthermore, accounts receivable are classified as current assets, because the account balance is expected from the debtor in one year or less. Other current assets on a company's books might include cash and cash equivalents , inventory , and readily marketable securities.

Assets that could not easily be converted into cash within a year are recorded as noncurrent assets . That category often includes things like physical property, long-term investments, and intellectual property, such as trademarks.

Accounts Receivable vs. Accounts Payable

When a company owes debts to its suppliers or other parties, those are accounts payable . Accounts payable are the opposite of accounts receivable. To illustrate, Company A cleans Company B's carpets and sends a bill for the services.

Company B now owes Company A money, so it lists the invoice in its accounts payable column. While Company A waits to receive the money, it records the amount in its accounts receivable column.

What Accounts Receivable Can Tell You

Accounts receivable are an important element in fundamental analysis , a common method investors use to determine the value of a company and its securities. Because accounts receivable is a current asset, it contributes to a company's liquidity or ability to cover short-term obligations without additional cash flows. 

Fundamental analysts often evaluate accounts receivable in the context of turnover, also known as the accounts receivable turnover ratio . It measures the number of times a company has collected its accounts receivable balances during an accounting period and is considered an indicator of both how efficient the company is in collecting its debts and the credit quality of its customers.

Further analysis would include assessing days sales outstanding (DSO) , which measures the average number of days that it takes a company to collect payments after a sale has been made.

Example of Accounts Receivable

An everyday example of accounts receivable would be an electric company that bills its clients after the clients receive and consume the electricity. The electric company records an account receivable for unpaid invoices as it waits for its customers to pay their bills. 

Most companies operate by allowing a portion of their sales to be on credit. Sometimes, businesses offer such credit to frequent or special customers, who receive periodic invoices rather than having to make payments as each transaction occurs. In other cases, businesses routinely offer all of their clients the ability to pay within some reasonable period after receiving the products or services.

When Does a Debt Become a Receivable?

A receivable is created any time money is owed to a business for services rendered or products provided that have not yet been paid for. For example, when a business buys office supplies, and doesn't pay in advance or on delivery, the money it owes becomes a receivable until it's been received by the seller.

Where Do I Find a Company's Accounts Receivable?

Accounts receivable are recorded on a company's balance sheet. Because they represent funds owed to the company (and that are likely to be received), they are booked as an asset.

How Are Accounts Receivable Different From Accounts Payable?

Accounts receivable represent funds owed to a company and are booked as an asset. Accounts payable, on the other hand, represent funds that a company owes to others and are booked as liabilities.

What Happens If Customers Never Pay What's Due?

When it becomes clear that a receivable won't be paid by the customer, it has to be written off as a  bad debt expense or a one-time charge. Companies might also sell this outstanding debt to a third party debt collector for a fraction of the original amount—creating what accountants refer to to as accounts receivable discounted .

What Are Net Receivables?

Net receivables is an accounting term for a company's accounts receivable minus any receivables it has reason to believe it will never collect. It is typically expressed as a percentage of uncollectible debts relative to collectible ones, and the lower the percentage, the better.

Accounts receivable is one of the most important line items on a company's balance sheet. It reflects the money owed to a company from the sale of its goods or services that remains to be paid by the buyer. Even though it is not yet in hand, it is considered an asset because the company expects to receive it in due course. The shorter the period of time a company has accounts receivable balances, the better, as it means the company can use that money for other business purposes.

Cornell Law School Legal Information Institute. " Accounts Receivable ."

Office of the Comptroller of the Currency. "Accounts Receivable and Inventory Financing"

• Terms of Service
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• Receivables
• Notes Receivable
• Credit Terms
• Cash Discount on Sales
• Accounting for Bad Debts
• Bad Debts Direct Write-off Method
• Bad Debts Allowance Method
• Bad Debts as % of Sales
• Bad Debts as % of Receivables
• Recovery of Bad Debts
• Accounts Receivable Aging
• Assignment of Accounts Receivable
• Factoring of Accounts Receivable

Accounting for Receivables

Receivables are amounts that a company is entitled to receive in cash/bank, with a receipt being due either at present or in future. Receivables may arise as a consequence of the company’s main operations i.e. the usual business or they may sometimes originate from other transactions.

Receivables are broadly classified into trade-receivables and non-trade receivables. Trade receivables are those receivables which originate from sales of goods and services by a business in the ordinary course of business. Non-trade receivables are the amounts due from third parties for transactions outside the primary course of business. Another way receivables may be classified is whether interest is chargeable on the amount outstanding.

Receivables are normally current assets, but some may have a non-current portion depending on their maturity.

Trade receivables include:

Accounts receivable

Notes receivable.

Accounts receivable are current assets which represent amounts to be collected from customers for goods sold or services provided. When a company sells goods or provides services, the customers usually do not make a payment on the spot. Instead, they are required to make payment within a certain time period, called credit period. The terms that determine the due date and the discount available if payment is made by a certain date are called credit terms .

When sales are made on credit, accounts receivable are created, which are recorded through the following journal entry:

The accounts receivable balance is presented on the balance sheet, net of any allowance for doubtful accounts as follows.

When cash is collected from the customer, the accounts receivable balance on the balance sheet is reduced through the following journal entry:

Many companies allow customers a certain percentage as cash discount when they make the payment quickly. The cash discount depends on the credit terms of the sale.

Note receivable are receivables supported by a written statement by the debtor to pay a specified sum on a specified date. Like accounts receivable, notes receivable arise in the ordinary course of business; but unlike accounts receivable they are in written form. Notes receivable usually require the debtor to pay interest. They may be current and non-current.

When a company receives a note receivable it records it using the following journal entry:

Interest on notes receivable is accrued as follows:

Non-trade receivables

None-trade receivables are receivables that arise from transactions other than those related to the company’s main course of business. Examples include:

• Advances to employees
• Advance tax paid
• Deposits placed with other companies (if advancing money is not the primary business)

Scarlet Systems, Inc. (SS) developed an ERP software for Johnson Tools, LLC (JT) for $200,000 due within 30 days of successful testing of the system. Testing was completed on 30 April and the software became operational. JT paid an amount of $100,000 on 15 May.

JT had to settle another large liability in April which resulted in it not being able to pay the remaining invoice amount (i.e. $100,000) by 30 May. On 1 June, JT CFO convinced SS finance team to accept a note receivable due within 60 days carrying interest rate of 5% per annum for the remaining outstanding balance. JT paid the interest and principal of the note receivable at its maturity.

Required: Journalize the above transactions.

The sale of software and related services is recorded through the following journal entry:

Payment by JT on 15 May is journalized as follows:

Conversion of accounts receivable to a note receivable on 1 May is booked via the following journal entry:

The following journal entry is made to account for the receipt of note receivable principal and interest:

Whereas, the interest income is calculated as: $100,000 × 5% × 60/360

by Irfanullah Jan, ACCA and last modified on Oct 24, 2020

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Assignment of Accounts Receivable: Definition, Benefits, and Emerging Trends

Last updated 03/28/2024 by

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What is assignment of accounts receivable, how does assignment of accounts receivable work, what are some special considerations for assignment of accounts receivable, emerging trends in assignment of accounts receivable, fintech solutions.

• Access to immediate cash flow
• Allows businesses to leverage their accounts receivable
• May be available to companies with limited credit history or poor credit
• Provides an alternative financing option when traditional loans are not available
• Helps businesses manage cash flow fluctuations
• Higher cost compared to traditional financing options
• Interest rates and service charges can be substantial
• May indicate financial distress to stakeholders
• Loss of control over customer relationships and collections process
• Defaulting on the loan can result in loss of assets

Frequently asked questions

How does assignment of accounts receivable differ from factoring, can any business use assignment of accounts receivable, what happens if a customer defaults on payment, is assignment of accounts receivable a sign of financial distress, what are the eligibility criteria for assignment of accounts receivable, how does assignment of accounts receivable affect financial statements, are there any alternatives to assignment of accounts receivable, how can businesses mitigate the risks associated with assignment of accounts receivable, key takeaways.

• Assignment of accounts receivable allows businesses to access immediate cash flow by leveraging their outstanding invoices.
• While it provides an alternative financing option, it can be costly compared to traditional loans.
• Fintech companies are transforming the accounts receivable financing market with innovative digital solutions.
• Businesses should carefully evaluate the terms and implications of assigning their accounts receivable before entering into agreements with lenders.

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Accounts Receivable (AR)

What Is Accounts Receivable?

Accounts receivable (AR) are the amounts owed by customers for goods or services purchased on credit. The money owed to the company is called 'accounts receivable' and is tracked as an account in the general ledger , and then reported as a line on the balance sheet.

Where Do You Find Accounts Receivable?

Look for accounts receivable on the company’s balance sheet under the current assets category . Because accounts receivable converts to a cash payment at some time in the future, it will be listed as a current asset. Current assets are those that are expected to be paid within 12 months.

Who Uses Accounts Receivable?

Most businesses use accounts receivable to extend payment terms to their customers.

Businesses also examine their accounts receivable and the A/R turnover rate (described below) to understand how quickly and how well they are collecting payments due to them.

How to Calculate Accounts Receivable

To calculate accounts receivable, add up all of the company’s sales on net credit terms. Net terms may be represented as net 15, net 30, net 60, and so on. The number refers to the amount of time extended to the customer to pay the invoice. For example, “net 15” would mean that the customer must pay in full within 15 days.

Accounts Receivable Example

Let’s assume that an office supply company receives an order from a New York consulting firm for $1,000 in office supplies. The office supply company ships the order and extends net 60 credit terms to their customer.

Once the office supply company receives the order and sends the invoice, it decreases its inventory account by $1,000 and increases its accounts receivable by $1,000.

The consulting firm pays their invoice within 60 days. The office supply company now increases their cash by $1,000 and reduces its accounts receivable by $1,000.

What Is the Accounts Receivable Turnover Ratio?

The accounts receivable turnover ratio is used to assess how well a company collects payment from its customers.

Collecting accounts receivable on time is important because companies need cash to pay for their own operations. A high accounts receivable balance can lead to cash flow shortages for a company until it is able to collect on its debt. It may indicate that the company has a problem collecting its debts.

A/R turnover ratio is calculated as:

Where: Net credit sales = the total number of sales minus returns for a given period. Average accounts receivable = starting balance of A/R + ending balance of A/R for the period divided by 2.

Example of Accounts Receivable Turnover Ratio

Using the previous example of an office supply firm, let’s look at their A/R turnover ratio.

If the total number of sales for the office supply company for the quarter is $20,000 (with no returns), the net credit sales is $20,000. Assuming the starting A/R balance is $3,000 and the ending balance is $1,000, we get $4,000/2 = $2,000.

$20,000 = 10 $2,000

The A/R turnover ratio means that the company has collected its A/R 10 times that quarter. Comparing that figure to the A/R turnover ratio from other quarters can help management assess whether the company is improving its ability to collect on A/R – or whether it is having difficulty collecting.

Aging Schedule for Accounts Receivable

An aging schedule for accounts receivable displays the amount of A/R owed by time period. It can help a company estimate how much A/R remains outstanding and predict cash flow. It can also be used to project “doubtful debt”, which is any debt that might be completely uncollectible in the future.

Companies can use past aging schedules to assess how much aging debt may need to be written off. They can review their history of collecting on debts at each stage of the aging schedule and then make an informed guess as to how much might become “bad” debt.

The Advantages and Disadvantages of Accounts Receivable

Using accounts receivable has several advantages:

• Using payment terms and invoicing customers is a standard business practice and is thus favorably received.
• It allows customers to receive goods and services on credit and pay according to terms.
• Businesses can sell more through payment terms.

It has some disadvantages, however:

• Companies may find it challenging to collect on open balances. They may need to send multiple reminders – or even send collection agencies – to collect on the debts owed to them.
• Cash flow may be tight during times when the company has many outstanding receivables.

Accounts Receivable vs. Accounts Payable

Accounts receivable is the money owed to a company. Accounts payable is money the company owes to others. An easy way to remember the difference: A/R is for “received” payment and A/P is for “paying others.” Receivables are classified as short-term assets, while payables are short term liabilities.

Accounts Receivable vs. Revenue

When looking at accounts receivable vs. revenue, it can help to consider how they fit into the whole accounting picture:

• A/R refers to the amount of money that customers owe to a company for the sale of goods or services. It appears as a line item under current assets on a company’s balance sheet.
• Revenue refers to all of the sales of a company. The revenue figure may include accounts receivable, but it will also include paid invoices, too. Revenue appears on the income statement.

Cash Basis Accounting vs. Accounts Receivable

Cash basis accounting does not recognize accounts receivable or payable. Instead, sales are recognized when they are made and paid, and the business pays for supplies immediately upon purchase and receipt.

Consider a small business owner who sells crafts at fairs and flea markets. He may pay in cash for his materials (e.g. paint, glue) and insists on cash payments. Cash basis accounting offers the simplest method for such a business owner to track sales and expenses.

Bad Debt vs. Accounts Receivable

Bad debt refers to accounts receivable that are unlikely to be collected. These occur when companies deliver goods on credit (net terms) and fail to collect payment.

Bad debt is expensed as a cost of doing business. It is frequently categorized under SG & A (sales and general administrative expenses) and leads to an offsetting reduction against accounts receivable on the balance sheet.

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Receivables Finance And The Assignment Of Receivables

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A receivable represents money that is owed to a company and is expected to be paid in the future. Receivables finance, also known as accounts receivable financing, is a form of asset-based financing where a company leverages its outstanding receivables as collateral to secure short-term loans and obtain financing.

In case of default, the lender has a right to collect associated receivables from the company’s debtors. In brief, it is the process by which a company raises cash against its own book’s debts.

The company actually receives an amount equal to a reduced value of the pledged receivables, the age of the receivables impacting the amount of financing received. The company can get up to 90% of the amount of its receivables advanced.

This form of financing assists companies in unlocking funds that would otherwise remain tied up in accounts receivable, providing them with access to capital that is not immediately realised from outstanding debts.

FIG. 1: Accounts receivable financing operates by leveraging a company’s receivables to obtain financing.  Source: https://fhcadvisory.com/images/account-receivable-financing.jpg

Restrictions on the assignment of receivables – New legislation

Invoice  discounting  products under which a company assigns its receivables have been used by small and medium enterprises (SMEs) to raise capital. However, such products depend on the related receivables to be assignable at first.

Businesses have faced provisions that ban or restrict the assignment of receivables in commercial contracts by imposing a condition or other restrictions, which prevents them from being able to use their receivables to raise funds.

In 2015, the UK Government enacted the Small Business, Enterprise and Employment Act (SBEEA) by which raising finance on receivables is facilitated. Pursuant to this Act, regulations can be made to invalidate restrictions on the assignment of receivables in certain types of contract.

In other words, in certain circumstances, clauses which prevent assignment of a receivable in a contract between businesses is unenforceable. Especially, in its section 1(1), the Act provides that the authorised authority can, by regulations “make provision for the purpose of securing that any non-assignment of receivables term of a relevant contract:

• has no effect;
• has no effect in relation to persons of a prescribed description;
• has effect in relation to persons of a prescribed description only for such purposes as may be prescribed.”

The underlying aim is to enable SMEs to use their receivables as financing to raise capital, through the possibility of assigning such receivables to another entity.

The aforementioned regulations, which allow invalidations of such restrictions on the assignment of receivables, are contained in the Business Contract Terms (Assignment of Receivables) Regulations 2018, which will apply to any term in a contract entered into force on or after 31 December 2018.

By virtue of its section 2(1) “Subject to regulations 3 and 4, a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.”

Such regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. However, there are several exclusions to this rule.

In section 3, an exception exists where the supplier is a large enterprise or a special purpose vehicle (SPV). In section 4, there are listed exclusions for various contracts such as “for, or entered into in connection with, prescribed financial services”, contracts “where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession” or contracts “where none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom”. Also, specific exclusions relate to contracts in energy, land, share purchase and business purchase.

Effects of the 2018 Regulations

As mentioned above, any contract terms that prevent, set conditions for, or place restrictions on transferring a receivable are considered invalid and cannot be legally enforced.

In light of this, the assignment of the right to be paid under a contract for the supply of goods (receivables) cannot be restricted or prohibited. However, parties are not prevented from restricting other contracts rights.

Non-assignment clauses can have varying forms. Such clauses are covered by the regulations when terms prevent the assignee from determining the validity or value of the receivable or their ability to enforce it.

Overall, these legislations have had an important impact for businesses involved in the financing of receivables, by facilitating such processes for SMEs.

Digital platforms and fintech solutions: The assignment of receivables has been significantly impacted by the digitisation of financial services. Fintech platforms and online marketplaces have been developed to make the financing and assignment of receivables easier.

These platforms employ tech to assess debtor creditworthiness and provide efficient investor and seller matching, including data analytics and artificial intelligence. They provide businesses more autonomy, transparency, and access to a wider range of possible investors.

Securitisation is an essential part of receivables financing. Asset-backed securities (ABS), a type of financial instrument made up of receivables, are then sold to investors.

Businesses are able to turn their receivables into fast cash by transferring the credit risk and cash flow rights to investors. Investors gain from diversification and potentially greater yields through securitisation, while businesses profit from increased liquidity and risk-reduction capabilities.

References:

https://www.tradefinanceglobal.com/finance-products/accounts-receivables-finance/  – 28/10/2018

https://www.legislation.gov.uk/ukpga/2015/26/section/1/enacted  – 28/10/2018

https://www.legislation.gov.uk/ukdsi/2018/9780111171080  – 28/10/2018

https://www.bis.org/publ/bppdf/bispap117.pdf  – Accessed 14/06/2023

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Account Receivables

• First Online: 04 November 2018

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• Felix I. Lessambo 2  

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Receivable is a general term which refers to all monetary obligations owed to the business by its customers or debtors. As long as a business expects to recover the money from the debtors, it records its receivables as assets in its balance sheet because it expects to derive future benefits from them. It does not matter whether they are due in the current period or not.

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Felix I. Lessambo

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Lessambo, F.I. (2018). Account Receivables. In: Financial Statements. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-99984-5_4

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assigned accounts receivable definition

Accounts receivable that serve as the collateral for a loan.

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