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Assignment of Accounts Receivable

By Yuriy Smirnov Ph.D.

Definition

Assignment of accounts receivable is a written agreement between a lender and a borrower in which the borrower pledges accounts receivable as collateral. Depending on the terms of the agreement, the borrowing company records it as notes payable or a loan in its financial statement. In turn, the lending company gets the right to collect accounts receivable pledged as collateral if the borrowing company fails to repay the loan, interest, and related charges in time.

There are two types of assignment.

  1. General assignment. Under such an agreement, a portion or even all the accounts receivable of a borrowing company is pledged as collateral. If the borrower fails to repay the loan, the lending company is entitled to collect any accounts receivable pledged as collateral to redeem the loan.
  2. Specific assignment. The borrower pledges only specific accounts as collateral so lender and agreement entitles the lending company to collect only them.

Please note that accounts receivable are not transferred or sold to a lending company under an assignment of accounts receivable agreement!

Journal Entries

The assignment of accounts receivable should be reported in financial statements by recording all related transactions in the general journal.

The entry to recognize an assignment is recorded by debiting assigned accounts receivable and crediting accounts receivable for the amount of accounts pledged as collateral.

Assignment of accounts receivable journal entries

The cash advance less the initial fee charged by the lending company is recorded by debiting the Cash account for the amount of the loan less the initial fee, debiting the finance charge account for the amount of the initial fee, and crediting Notes payable by the amount of the loan, if the borrowing company issues a promissory note.

Assignment of accounts receivable journal entries

If the borrowing company signs a loan agreement instead of issuing a promissory note, the entry above should be changed as follows:

Assignment of accounts receivable journal entries

When assigned accounts receivable is collected, it should be recognized by debiting the Cash account and crediting accounts receivable.

Assignment of accounts receivable journal entries

Finally, the payment to the lending company is recognized by debiting Notes payable for the amount of the loan, debiting Interest expense for the amount of accrued interest, and crediting the Cash account for those amounts.

Assignment of accounts receivable journal entries

In case of a loan agreement , the journal entry should be as follows:

Assignment of accounts receivable journal entries

Example

On October 12, 20X8, RetailX LTD receives a $200,000 bank loan collateralized by $300,000 accounts receivable under the general assignment agreement. The principal amount is to be repaid in 45 days on November 25, 20X8, as well as interest at 10%. The bank also charges an initial fee of 1.5%.

RetailX LTD collected all the accounts receivable pledged as collateral by November 25, 20X8.

The journal entries required to record the transaction above are as follows:

Assignment of accounts receivable journal entries example

10/12/20X8

  1. The assignment of accounts receivable in the amount of $300,000 is recognized.
  2. Entry made to record getting the loan and charging the initial fee.

11/25/20X8

  1. Collection of assigned accounts receivable in the amount of $300,000 is recorded.
  2. The loan repayment in the amount of $200,000 and the interest charge of $2,465.75 are recognized.

The interest on loan is calculated as follows:

Interest = Principal × Interest Rate ×  Time Period
365
Interest = $200,000 × 10% ×  45  = $2,465.75
365