Assignment of Accounts Receivable

Definition

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.

Example

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.

  Debit Credit
Cash   $100,000
Notes Payable $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.

  Debit Credit
Cash   $100,000
Assigned Accounts Receivable   $200,000
Notes Payable $100,000  
Accounts Receivable $200,000  

Related Terms

balance sheet, current assets, factoring, disposition of accounts receivable, allowance for doubtful accounts, special allowance accounts