Receivable Financing – Pledge, Assignment, Factoring, Credit Cards

I. FORMS OF RECEIVABLE FINANCING

FORM	DEFINITION	KEY DISTINCTION
Pledge	Accounts receivable used as collateral security for loan	General – ALL accounts serve as collateral
Assignment	Transfer of rights in SPECIFIC accounts to lender (assignee)	Specific – PARTICULAR accounts serve as collateral
Factoring	Sale of accounts receivable to bank/finance entity (factor)	Transfer of OWNERSHIP – Factor assumes collection/uncollectible risk
Credit Card	Customers obtain credit from card issuer; retailer receives payment minus service charge	Card issuer approves credit and collects – Retailer gets cash minus fee

II. PLEDGE OF ACCOUNTS RECEIVABLE

TOPIC	RULE/TREATMENT	EXAMPLE
Nature	Accounts receivable used as collateral security for loan payment	ABC Corp. borrows ₱1,000,000 from BPI, pledges ₱2,000,000 accounts receivable as security
Accounting for Loan	Debit Cash and Discount on Note Payable (if discounted); Credit Note Payable	Cash ₱880,000; Discount ₱120,000; Note Payable ₱1,000,000
Accounting for Pledged Accounts	NO ENTRY REQUIRED – Only disclosure in notes to financial statements	No journal entry for ₱2,000,000 pledged accounts
Presentation	Note Payable (current liability) less Discount on Note Payable = Carrying Amount	₱1,000,000 – ₱100,000 = ₱900,000 carrying amount

llustration:

On November 1, 2024:

• Borrowed ₱1,000,000
• Loan discounted at 12% (interest deducted in advance)
• Pledged ₱2,000,000 accounts receivable

Journal Entry:

Cash                        880,000
Discount on Note Payable    120,000
    Note Payable - Bank                1,000,000

December 31, 2024 Amortization:

Interest Expense             20,000
    Discount on Note Payable           20,000
(₱120,000 × 2/12)

Statement Presentation (Dec. 31, 2024):

Item	Amount
Note Payable – Bank	₱1,000,000
Less: Discount on Note Payable	(₱100,000)
Carrying Amount	₱900,000

Note disclosure: “The note payable to bank matures on November 1, 2025 and is secured by accounts receivable with face amount of ₱2,000,000.”

III: ASSIGNMENT OF ACCOUNTS RECEIVABLE

Part A: Key Differences

CRITERION	PLEDGE	ASSIGNMENT
Collateral	General – All accounts	Specific – Particular accounts
Formality	Less formal	More formal – Financing agreement + Promissory note
Customer Notification	Not applicable	Nonnotification OR Notification basis

Part B: Nonnotification Basis vs. Notification Basis

ASPECT	NONNOTIFICATION BASIS	NOTIFICATION BASIS
Customer Informed?	NO – Customers not told of assignment	YES – Customers told to pay directly to assignee
Who Collects?	Assignor collects from customers	Assignee (bank) collects directly from customers
Cash Flow	Assignor remits collections to assignee	Customers remit directly to assignee
Entry for Payment	Dr. Cash / Cr. Accounts Receivable-Assigned	Bank notifies; Dr. Note Payable-Bank / Cr. Accounts Receivable-Assigned

Part C: Assignment – Nonnotification Basis Illustration

Scenario:

• Assigned ₱700,000 accounts receivable to bank
• Bank advances 80% less ₱5,000 service charge
• Interest: 1% per month on unpaid loan balance

Step-by-Step Journal Entries:

DATE	TRANSACTION	JOURNAL ENTRY
April 1	Assignment & Loan	Dr. Accounts Receivable-Assigned 700,000 Cr. Accounts Receivable 700,000
		Dr. Cash 555,000 Dr. Service Charge 5,000 Cr. Note Payable-Bank 560,000
April	Sales Return	Dr. Sales Return 20,000 Cr. Accounts Receivable-Assigned 20,000
April	Collection (P300,000 less 2% discount)	Dr. Cash 294,000 Dr. Sales Discount 6,000 Cr. Accounts Receivable-Assigned 300,000
April	Remit to Bank + Interest	Dr. Note Payable-Bank 294,000 Dr. Interest Expense 5,600 (1% × ₱560,000) Cr. Cash 299,600
May	Worthless Accounts	Dr. Allowance for Doubtful Accounts 15,000 Cr. Accounts Receivable-Assigned 15,000
May	Collection (P300,000)	Dr. Cash 300,000 Cr. Accounts Receivable-Assigned 300,000
May	Remit Balance + Interest	Dr. Note Payable-Bank 266,000 Dr. Interest Expense 2,660 (1% × ₱266,000) Cr. Cash 268,660
May	Transfer Remaining Balance	Dr. Accounts Receivable 65,000 Cr. Accounts Receivable-Assigned 65,000

Reconciliation of Assigned Accounts:

Item	Amount
Accounts Receivable-Assigned	₱700,000
Less: Collections	(₱594,000)
Less: Sales Discount	(₱6,000)
Less: Sales Return	(₱20,000)
Less: Worthless Accounts	(₱15,000)
Balance	₱65,000

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Part D: Assignment – Notification Basis Illustration

Scenario:

• Assigned ₱1,000,000 accounts receivable
• Bank advances 80% less 4% service charge on gross amount assigned
• Interest: 1% per month on unpaid loan balance

Computation:

Item	Amount
Face Amount	₱1,000,000
Loan (80% × ₱1,000,000)	₱800,000
Service Charge (4% × ₱1,000,000)	₱40,000
Cash Received	₱760,000

Journal Entries:

DATE	TRANSACTION	JOURNAL ENTRY
July 1	Assignment	Dr. Accounts Receivable-Assigned 1,000,000 Cr. Accounts Receivable 1,000,000
		Dr. Cash 760,000 Dr. Service Charge 40,000 Cr. Note Payable-Bank 800,000
July 31	Bank collected ₱600,000 less 2% discount	Dr. Note Payable-Bank 588,000 Dr. Sales Discount 12,000 Cr. Accounts Receivable-Assigned 600,000
		Dr. Interest Expense 8,000 (1% × ₱800,000) Cr. Cash 8,000
August 31	Bank collected ₱300,000; excess remitted	Dr. Cash 85,880 Dr. Interest Expense 2,120 (1% × ₱212,000) Dr. Note Payable-Bank 212,000 Cr. Accounts Receivable-Assigned 300,000
	Transfer uncollected accounts	Dr. Accounts Receivable 100,000 Cr. Accounts Receivable-Assigned 100,000

Computation:

Item	Amount
Loan from bank	₱800,000
Less: July collection by bank	(₱588,000)
Balance due the bank	₱212,000
August collection by bank	₱300,000
Less: Loan balance	(₱212,000)
Excess collection	₱88,000
Less: Interest (1% × ₱212,000)	(₱2,120)
Remittance from bank	₱85,880

IV: ASSIGNMENT – STATEMENT PRESENTATION

ITEM	AMOUNT
Accounts Receivable – Unassigned	₱4,000,000
Accounts Receivable – Assigned	₱1,000,000
Total Accounts Receivable	₱5,000,000
Less: Allowance for Doubtful Accounts	(₱100,000)
Net Realizable Value	₱4,900,000

EQUITY IN ASSIGNED ACCOUNTS:

Accounts Receivable - Assigned        ₱1,000,000
Less: Note Payable - Bank             (₱400,000)
Equity in Assigned Accounts            ₱600,000

V: FACTORING OF ACCOUNTS RECEIVABLE

Part A: Factoring vs. Assignment

CRITERION	ASSIGNMENT	FACTORING
Nature	Borrowing arrangement	SALE of receivables
Ownership	Retained by assignor	Transferred to factor (bank/finance entity)
Uncollectible Risk	Assumed by assignor (unless without recourse)	Assumed by factor
Customer Notification	May be nonnotification or notification	Always NOTIFICATION – Customers pay directly to factor
Gain/Loss	Not applicable (loan transaction)	Gain or Loss recognized on sale
Customer Notification	Nonnotification OR Notification	ALWAYS Notification

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Part B: Casual Factoring

Characteristics:

• One-time transaction when entity has critical cash position
• Receivables sold at substantial discount to bank

Example:
Factored ₱100,000 accounts receivable (with ₱5,000 allowance) for ₱80,000.

Journal Entry:

Cash                         80,000
Allowance for Doubtful Accts  5,000
Loss on Factoring            15,000
    Accounts Receivable                 100,000

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Part C: Factoring as Continuing Agreement

Characteristics:

• Ongoing arrangement
• Factor approves credit before shipment
• Factor assumes credit and collection functions
• Factor charges commission (5%-20%)
• Factor withholds “holdback” for returns/allowances

Components of Cash Received:

Item	Treatment
Commission/Factoring Fee	Deducted from proceeds
Sales Discount	Deducted if customer takes discount
Factor’s Holdback	Withheld as current asset (Receivable from Factor)
Cash Received	Net amount

Illustration:
Factored ₱500,000 accounts receivable with terms 2/10, n/30.

• Factor charged 5% commission on gross amount
• Factor withheld 20% for returns/allowances

Computation:

Item	Amount
Gross Amount	₱500,000
Less: Sales Discount (2% × ₱500,000)	(₱10,000)
Less: Commission (5% × ₱500,000)	(₱25,000)
Less: Factor’s Holdback (20% × ₱500,000)	(₱100,000)
Cash Received	₱365,000

Journal Entry:

Cash                         365,000
Sales Discount                10,000
Commission                    25,000
Receivable from Factor       100,000
    Accounts Receivable                 500,000

Subsequent Events:

Event	Journal Entry
Customer allowed ₱50,000 credit	Dr. Sales Return & Allowance 50,000 Dr. Sales Discount 1,000 Cr. Receivable from Factor 49,000
Final settlement of holdback	Dr. Cash 51,000 Cr. Receivable from Factor 51,000

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VI: FACTORING WITH RECOURSE FOR NONPAYMENT

ITEM	COMPUTATION
Accounts Receivable	₱3,000,000
Factor’s Holdback (10%)	₱300,000
Factoring Fee (6%)	₱180,000
Interest (₱3,000,000 × 12% × 50/365)	₱49,315
Cash Initially Received	₱2,470,685

Total Loss on Factoring Initially Recognized:

Item	Amount
Factoring Fee	₱180,000
Interest Expense	₱49,315
Recourse Obligation	₱100,000
Total Loss	₱329,315

Journal Entry for Factoring:

Cash                        2,470,685
Due from Factor               300,000
Factoring Fee                 180,000
Interest Expense               49,315
Loss on Recourse Obligation   100,000
    Accounts Receivable                 3,000,000
    Recourse Liability                    100,000

Scenario 1: Accounts FULLY COLLECTED by factor:

Recourse Liability           100,000
    Loss on Recourse Obligation          100,000

Net Loss: ₱329,315 – ₱100,000 = ₱229,315

Scenario 2: Accounts NOT collected (settle recourse obligation):

Recourse Liability           100,000
    Cash                                 100,000

Cash                         300,000
    Due from Factor                      300,000

OR Compound Entry:
Cash                         200,000
Recourse Liability           100,000
    Due from Factor                      300,000

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VII: CREDIT CARD TRANSACTIONS

TOPIC	RULE/TREATMENT	EXAMPLE
Definition	Plastic card enabling holder to obtain credit up to predetermined limit	Security Bank Card, BDO Card, Metrobank Card, BPI Express Credit, Diners Club, American Express, VISA, MasterCard
Responsibility	Card issuer approves credit AND collects accounts receivable	Bank handles everything
Service Charge	Card issuer charges 1% to 5% of credit card sales	3% service charge
Entries	TWO entries: (1) At sale, (2) When payment received from card issuer	See below

Illustration:

Credit card sales using MasterCard: ₱200,000
Service charge: 3%

Entry 1 – To record credit card sales:

Accounts Receivable - MasterCard    200,000
    Sales                                      200,000

Entry 2 – To record payment from MasterCard:

Cash                                   194,000
Credit Card Service Charge (3%)         6,000
    Accounts Receivable - MasterCard            200,000

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VIII: KEY DISTINCTIONS – MEMORIZATION REFERENCE

COMPARISON	PLEDGE	ASSIGNMENT	FACTORING	CREDIT CARD
Legal Nature	Collateral	Specific collateral	Sale of receivables	Third-party credit
Risk of Uncollectible	Borrower	Borrower	Factor	Card issuer
Customer Knows?	No	Maybe (nonnotification or notification)	Yes (always notification)	Yes
Entry for Receivable	No entry required	Separate assigned accounts	Remove from AR	Record AR from card issuer
Gain/Loss Recognition	No	No	Yes	No
Disclosure Required?	Yes (notes)	Yes (equity in assigned accounts)	Yes	Yes

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IX: DISCOUNT ON NOTE PAYABLE – PLEDGE EXAMPLE

DATE	COMPUTATION	AMOUNT
Nov. 1, 2024	Face Amount	₱1,000,000
	Interest (12% × ₱1,000,000)	(₱120,000)
	Cash Proceeds	₱880,000
Dec. 31, 2024	Amortization (₱120,000 × 2/12)	₱20,000
	Unamortized Discount	₱100,000

Statement Presentation (Dec. 31, 2024):

Note Payable - Bank                 ₱1,000,000
Less: Discount on Note Payable       (₱100,000)
Carrying Amount                      ₱900,000

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X: COMMON PITFALLS TO AVOID

MISTAKE	CORRECT APPROACH
Recording entry for pledged accounts	NO ENTRY – Disclosure only
Recording assignment as sale	Assignment is a LOAN, not a sale
Recording factoring as loan	Factoring is a SALE, not a loan
Forgetting factor’s holdback	Holdback is a current asset (Receivable from Factor)
Ignoring recourse obligation	Record Recourse Liability AND Loss on Recourse Obligation
Using 360 days instead of 365	365 days for weighted-average time; 360 days if not specified
Forgetting sales discount in factoring	Deduct sales discount if customer takes it
Not separating assigned accounts	Accounts Receivable – Assigned vs. Accounts Receivable – Unassigned

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