Assigning Accounts Receivable

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.

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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.

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.

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.

In the example below, Company A records the receipt of a 0,000 loan collateralized using accounts receivable, and the creation of notes payable for 0,000.

In specific assignments, the entries are more complex since the receivable includes accounts that are explicitly identified.

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