FAR: Receivables Financing: Cheat Sheet
I: THE “STEP-BY-STEP” CASH PROCEEDS FORMULA
(Use this exact sequence when a problem asks: “How much cash did the entity receive?”)
| STEP | DEDUCTION COMPONENT | SOURCE RULE / TRAP TO MEMORIZE |
|---|---|---|
| 1 | Gross Accounts Receivable | Start here (e.g., ₱500,000 or ₱3,000,000). |
| 2 | (-) Sales Discount | Only deduct if credit terms are given (e.g., 2/10, n/30). Text: “Sales discount (2% x 500,000)”. |
| 3 | (-) Commission / Factoring Fee | Charged by factor (typically 5% to 20% of gross amount). Text: “5% commission based on the gross amount”. |
| 4 | (-) Factor’s Holdback | A predetermined % withheld as protection (e.g., 10% or 20%). Text: “classified as current asset (Receivable from factor)”. |
| 5 | (-) Interest | Deduct if factor charges interest on maturity. Text: “12% interest computed on a weighted-average time”. |
| 6 | = NET CASH PROCEEDS | The amount debited to Cash in the journal entry. |
II: LOSS ON FACTORING – WITH vs. WITHOUT RECOURSE
(Memorize this to avoid failing the conceptual/theoretical question)
| SCENARIO | RULE PER SOURCE TEXT | FORMULA FOR LOSS |
|---|---|---|
| Without Recourse (Casual) | Text: “gain or loss is recognized for the difference between the proceeds received and the net carrying amount.” | Cash Proceeds (-) Net Carrying Amount (AR less Allowance) = Loss (or Gain) |
| With Recourse (Initial) | Text: “recourse obligation is initially recorded as loss on factoring.” | Factoring Fee + Interest Expense + Fair Value of Recourse Obligation. (Source: 180,000 + 49,315 + 100,000 = 329,315) |
| With Recourse (Final) | Text: If accounts are fully collected by factor, reverse the liability. | Initial Loss (-) Recourse Obligation (reversed) = Final Net Loss. (Source: 329,315 – 100,000 = 229,315) |
III: THE RECOURSE LIABILITY “TRICK” (For Practical JE)
(This is the #1 confusing part in exams. Memorize these two opposite scenarios based on whether the factor collects)
| IF THE FACTOR… | SOURCE TEXT RULE | THE JOURNAL ENTRY TO MEMORIZE |
|---|---|---|
| Collects the accounts | Text: “To reverse the recourse liability assuming the accounts are fully collected by the factor” | Dr. Recourse Liability Cr. Loss on Recourse Obligation (This increases your net income/lowers your loss!) |
| Does NOT collect | Text: “To settle the recourse obligation to the factor” | Dr. Recourse Liability Cr. Cash (Then collect the holdback: Dr. Cash / Cr. Due from Factor) Compound trick: Dr. Cash 200,000; Dr. Recourse Liability 100,000 / Cr. Due from Factor 300,000 |
IV: THE “HIDDEN TRAPS” IN EXAM QUESTIONS
(Based exclusively on the fine print from your book)
| IF THE PROBLEM STATES… | THE HIDDEN TRAP | CORRECT TREATMENT (Per Source) |
|---|---|---|
| “Weighted-average time to maturity of 50 days” | Denominator for interest. | Text: “denominator is 365 days.” (Use 365/365, not 360!) |
| No mention of “weighted-average” or denominator | Default rule for simple interest. | Text: “simple interest is computed using 360 days as denominator.” |
| “Credit terms of 2/10, n/30” | Sales discount applies to the gross AR. | Text: Deduct 2% from the gross amount (e.g., 2% x 500,000 = 10,000). Trap: If a return happens later, deduct the discount on the returned amount too (2% x 50,000 = 1,000). |
| “Allowance for doubtful accounts” exists | Loss calculation changes. | Text (Casual factoring): Cash 80,000 + Allowance 5,000 = 85,000. Loss = 100,000 – 85,000 = 15,000. (You credit the Allowance to offset the loss!) |
| “Notification basis” | Who collects? | Text: “customers are notified to make their payments directly to the assignee/factor.” (You do NOT record Cash from customers; the factor handles it). |
V: QUICK “PLUG & PLAY” JOURNAL ENTRY TEMPLATE
(When solving, just plug the computed amounts into this exact template from your source)
| ACCOUNT TO DEBIT | ACCOUNT TO CREDIT | SOURCE VERIFICATION |
|---|---|---|
| Cash (Net Proceeds) | Accounts Receivable (Gross face amount) | Text: Dr. Cash 2,470,685 / Cr. AR 3,000,000 |
| Due from Factor (Holdback amount) | Recourse Liability (if with recourse) | Text: Cr. Recourse Liability 100,000 |
| Factoring Fee (Commission) | Text: Dr. Factoring fee 180,000 (or 180,900 per entry) | |
| Interest Expense (Factor’s charge) | Text: Dr. Interest expense 49,315 | |
| Loss on Recourse Obligation (FV of recourse) | Text: Dr. Loss on recourse obligation 100,000 | |
| (If casual) Allowance for DA | Text: Dr. Allowance 5,000 / Cr. AR 100,000 |
VI. THE “INITIAL ENTRY” CHEAT SHEET (Receivable Financing)
| TYPE OF FINANCING | THE INITIAL JOURNAL ENTRY (Debits & Credits) | THE “GOLDEN RULE” (Trap to Memorize) |
|---|---|---|
| 1. PLEDGE | Dr. Cash Dr. Discount on Note Payable (if discounted) Cr. Note Payable (face value) (NO entry for Accounts Receivable) | LOAN, NOT SALE. You do NOT remove AR from books. You do NOT segregate AR. Just disclose it in the notes. |
| 2. ASSIGNMENT | Step A: Dr. Accounts Receivable – Assigned Cr. Accounts Receivable (to segregate) Step B (Loan): Dr. Cash (advance – service charge) Dr. Service Charge Cr. Note Payable – Bank (advance amount only) | ADVANCE, NOT GROSS. The Note Payable is only for the advance percentage (e.g., 80%), NOT the total AR assigned. You record a liability, not a loss. |
| 3. FACTORING (CASUAL) | Dr. Cash Dr. Allowance for Doubtful Accounts (if any) Dr. Loss on Factoring (plug) Cr. Accounts Receivable (full gross) | SALE WITH ALLOWANCE. Write-off the related allowance against the AR. Recognize the difference between cash and Net Carrying Amount (AR – Allowance) as Loss. |
| 4. FACTORING (CONTINUING) | Dr. Cash (net proceeds) Dr. Receivable from Factor (holdback %) Dr. Sales Discount (if terms taken) Dr. Commission Expense Cr. Accounts Receivable (full gross) | SALE WITH HOLDBACK. Remove the FULL AR. The holdback is an ASSET (Due from Factor). Deduct Commission AND Sales Discount (if taken) from cash. |
| 5. FACTORING (WITH RECOURSE) | Dr. Cash Dr. Due from Factor (holdback) Dr. Factoring Fee Dr. Interest Expense (if charged) Dr. Loss on Recourse Obligation (FV of recourse) Cr. Accounts Receivable (full gross) Cr. Recourse Liability (FV of recourse) | SALE + RECOURSE LIABILITY. Remove FULL AR. Recognize a liability (Recourse) and a matching loss (Loss on Recourse) for the fair value. If customers pay later, reverse the liability to reduce the loss. |
⚠️ BONUS: THE “DENOMINATOR” TRAP (From your book’s footnotes)
| IF THE PROBLEM SAYS… | USE THIS DENOMINATOR | EXAMPLE (₱1M × 12% × 60 days) |
|---|---|---|
| “Weighted-average time to maturity” | 365 days | ₱1,000,000 × 12% × 60/365 = ₱19,726 |
| “Simple interest” (default / no qualification) | 360 days | ₱1,000,000 × 12% × 60/360 = ₱20,000 |
A Quick Note
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