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Receivable Financing Essentials

This document discusses two types of receivable financing: factoring of accounts receivable and discounting of notes receivable. For factoring, an entity sells its accounts receivable to a third party called a factor, transferring ownership. For discounting, an entity obtains cash from a bank before a note's maturity by endorsing the note over to the bank without recourse, avoiding future liability if the maker does not pay. The document defines key terms related to both types of receivable financing such as factoring holdbacks, credit card transactions, and discounting calculations.

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Jonathan Navallo
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146 views2 pages

Receivable Financing Essentials

This document discusses two types of receivable financing: factoring of accounts receivable and discounting of notes receivable. For factoring, an entity sells its accounts receivable to a third party called a factor, transferring ownership. For discounting, an entity obtains cash from a bank before a note's maturity by endorsing the note over to the bank without recourse, avoiding future liability if the maker does not pay. The document defines key terms related to both types of receivable financing such as factoring holdbacks, credit card transactions, and discounting calculations.

Uploaded by

Jonathan Navallo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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To record the payment:

CHAPTER 14:
RECEIVABLE FINANCING Cash xx
Credit Card Service Charge xx
3. FACTORING OF ACCOUNTS Accounts Receivable xx

RECEIVABLE
4. DISCOUNTING OF NOTES
 Sale of accounts receivable on a without
recourse, notification basis. RECEIVABLE
 An entity sells accounts receivable to a  Payee may obtain cash before maturity
bank or finance entity called a factor. by discounting note at a bank/financing
 The entity transfers ownership of the company
accounts receivable to the factor. Thus,  Payee must endorse it
the factor assumes responsibility for
uncollectible factored accounts. Endorser – payee
Endorsee – bank

FORMS OF FACTORING:
ENDORSEMENT MAY BE:
a) Casual Factoring
I. With recourse – assumed if silent
Ordinary sale of asset wherein difference
between sales price and book value of the Endorser shall pay endorsee if the maker
asset sold represents gain/loss. dishonors note; the contingent/secondary
liability of endorser
b) Factoring as a Continuing Agreement
a) Conditional Sale – N/R discounted is
Involves a continuing arrangement wherein deducted from total N/R with disclosure
finance entity purchases all of the accounts of the contingent liability
receivable of a certain entity. b) Secured Borrowing - N/R is NOT
DERECOGNIZED but liability is recoded at
an amount equal to the face amount of
Factor’s Holdback – predetermined amount the N/R discounted
withheld as a protection against customer
returns and allowances, and other special
adjustments. II. Without recourse

 A receivable from factor classified as Endorser avoids future liability even if maker
current asset. refuses to pay endorsee on date of maturity;
absolute = no contingent liability

Credit Card – enables holder to obtain credit


up to a predetermined limit from the issuer of TERMS RELATED TO DISCOUNTING OF
the card for the purchase of goods and NOTE
services.
Net proceeds – discounted value received by
To record the credit card sales:
endorser
Accounts Receivable xx
 Net Proceeds = Maturity Value (-)
Discount
Sales xx
Maturity value – amount due on note at
Or
maturity date
Cash xx  Maturity Value = Principal (+) Interest
Credit Card Service Charge xx
Sales xx Principal (Face Value) – amount appearing
on face of note
Interest – amount of interest for the full term
of the note
 Interest = Principal * Rate * Time
Time – period from date of note to maturity;
“full term”
Discount – interest deducted by the bank IN
ADVANCE
 Discount = Maturity Value * Disc. Rate *
Disc. Period
Discount Rate – if not given, it is assumed to
be interest rate
Discount Period – period from discounting
date to maturity; “unexpired term”
 Discount Period = Term of note – Expired
Portion
AN ENTITY SHALL DERECOGNIZE A
FINANCIAL ASSET WHEN:
a) Contractual right to cash flows of the
financial asset have expired
 When N/R is fully collected

b) Financial asset has been transferred


 Transfer of risks/rewards
 If entity has lost control of the
asset

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