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Assignment Of Accounts Receivable Language

Assignment of accounts receivable is an agreement between a lending company and a borrowing company in which the later assigns its accounts receivable to the former in return for a loan. By assignment of accounts receivable, the lender gets a right to collect the receivables of the borrowing company if it fails to repay the loan in time. The lender also receives finance charges and service charges.

It is important to note that the receivables are not sold/transferred under an assignment agreement. If the receivables have been transferred, the agreement would be of sale/factoring of accounts receivable. Usually, the borrowing company would itself collect the assigned receivables and remit the loan amount as per agreement. It is only when the borrower fails to pay as per agreement, that the lender gets a right to collect the assigned receivables on its own.

The assignment of accounts receivable may be general or specific. A general assignment of accounts receivable entitles the lender to proceed to collect any accounts receivable of the borrowing company whereas in case of specific assignment of accounts receivable, the lender is entitled only to collect the accounts receivable specifically assigned to the lender.

The following example shows how to record transactions related to assignment of accounts receivable via journal entries:

Example

On March 1, 20X6, Company A borrowed $50,000 from a bank and signed a 12% one month note payable. The bank charged 1% initial fee. Company A assigned $73,000 of its accounts receivable to the bank as a security. During March 20X6, the company collected $70,000 of the assigned accounts receivable and paid the principle and interest on note payable to the bank on April 1. $3,000 of the sales were returned by the customers.

Record the necessary journal entries by Company A.

Solution

Journal Entries on March 1:

Cash49,500
Finance Charge500
Notes Payable50,000
Accounts Receivable Assigned73,000
Accounts Receivable73,000

Journal Entries on April 1:

Cash70,000
Sales Returns3,000
Accounts Receivable Assigned73,000
Notes Payable50,000
Interest Expense500
Cash50,500

Written by Irfanullah Jan

What is 'Assignment Of Accounts Receivable'

Assignment of accounts receivable is a lending agreement whereby the borrower assigns accounts receivable to the lending institution. In exchange for this assignment of accounts receivable, the borrower receives a loan for a percentage of the accounts receivable. This percentage may be as high as 100%. The borrower pays interest and a service charge on the loan, and the assigned receivables serve as collateral. That is, if the borrower fails to repay the loan, the agreement allows the lender to collect the assigned receivables.

BREAKING DOWN 'Assignment Of Accounts Receivable'

With an assignment of accounts receivable, the borrower retains ownership of the assigned receivables and therefore retains the risk that some accounts receivable will not be repaid. In this case, the lending institution may demand payment directly from the borrower. This arrangement is called assignment of accounts receivable with recourse. Assignment of accounts receivable should not be confused with pledging or with accounts receivable financing.

An assignment of accounts receivable is typically more expensive than other forms of borrowing. Companies that use it often are unable to obtain less expensive options. Sometimes it is used by companies that are growing rapidly or otherwise have too little cash on hand to fund their operations.