CHAPTER FIVE

CASH AND RECEIVABLE

Introduction
 Cash is a medium of exchange that a bank will accept for deposit and immediate
credit to the depositor’s account.
 Cash is the most liquid asset every business owns and uses.
 Most firms devote considerable effort to the management and control of cash.
 Because a firm’s creditors expect payment in cash, a sufficient amount of cash
must always be available to meet obligations as they become due.
 This necessitates careful scheduling of cash inflows and outflows.

Nature and Importance of Cash

Definition: Cash exists both in physical and book entry forms:
 physical in the form of coin and paper currency as well as other negotiable
instruments of various kinds, and
 Book entry in various forms such as checking account deposits and savings
deposits.
 In addition to coin and paper currency, other kinds of physical cash instruments
that are commonly reported as cash for financial accounting purposes include
certificates of deposit, bank checks, demand bills of exchange (in some cases),
travelers’ checks, post office or other money orders, bank drafts, cashiers’
checks, and letters of credit.
Control of Cash
As previously mentioned, because cash is so liquid and easily diverted, special care
must be exercised to ensure that it is properly recorded and safeguarded. Most
corporations follow several sound management practices that enhance their control
over cash. Employees who are permitted access to cash, for example, should not
also have access to the accounting records for cash. Access to both cash and the
accounting records might enable an employee to misappropriate cash and to
conceal the theft by altering the records.
For example, retail clerks (who have ready access to cash) should not “read” the
cash register. That is, they should not have the responsibility of ascertaining the
daily sales total from the register’s internal record and recording this amount in the
accounting records.
Checking accounts with banks provide firms with several cash control advantages.
First, cash receipts can be deposited daily. Limiting the amount of time that cash is
on the firm’s premises reduces the possibility that it will be misappropriated.
Second, checks provide a written record of a firm’s disbursements. Such a record
would not necessarily exist if disbursements were made in currency. Moreover,
most firms require that checks be supported by underlying documentation such as

Cash and Receivable Page 1

purchase orders, invoices, and receiving reports. This helps ensure that only valid
expenditures are made and provides the basis for an analysis of costs and expenses.
Third, by limiting the number of people authorized to sign checks, firms restrict
access to cash and reduce the possibility that cash will be used for unintended
purposes.
Finally, bank statements provide a monthly listing of deposits and withdrawals. So,
not only the firm keeps track of its cash flows, but also the bank does. Thus, the
bank statement can be used to verify the firm’s cash records.
This verification process is accomplished via bank reconciliation, which is a
detailed comparison of the firm’s records and the bank statement. Because the
bank reconciliation may uncover errors related to cash, it should be prepared by an
employee who has no other cash-related responsibilities. The preparation of bank
reconciliation is illustrated in the following section of this unit.
Controlling Cash Receipts and Cash Payments
Cash control Systems and procedures should be adopted to safeguard an
organization's funds. Internal control for cash is based on the general control
features which include; access to cash should be limited to a few authorized
personnel, incompatible duties should be separated, and accountability features
should be developed.
 The control of receipts from cash sales should begin at the point of sale and
continue through to deposit at the bank. Specifically, cash registers (or other
point-of-sale terminals) should be used, actual cash on hand at the end of the
day should be compared to register tapes, and daily bank deposits should be
made. Any cash shortages or excesses should be identified and recorded in a
Cash short & over account.
 Control of receipts from customers on account begins when payments are
received (in the mail or otherwise). The person opening the mail should prepare
a listing of checks received and forward the list to the accounting department.
The checks are forwarded to a cashier who prepares a daily bank deposit. The
accounting department enters the information from the listing of checks into the
accounting records and compares the listing to a copy of the deposit slip
prepared by the cashier.
 The controls over cash disbursements include procedures that allow only
authorized payments for actual expenditures and maintenance of proper
separation of duties. Control features include requiring that significant
disbursements be made by check, performance of periodic bank reconciliations,
proper utilization of petty cash systems, and verification of supporting
documentation before disbursing funds.
 The bank reconciliation and petty cash systems referred to above have specific
accounting implications to consider, and are the subject of the following
sections of this unit.

Cash and Receivable Page 2

 Bank Reconciliation
Bank Balance and Depositor’s Balance Reconciled to Correct Balance

 One of the most common cash control procedures, and one which you may
already be performing on your own checking account, is the bank reconciliation.
 In business, every bank statement should be promptly reconciled by a person not
otherwise involved in the cash receipts and disbursements functions.
 The reconciliation is needed to identify errors, irregularities, and adjustments for
the Cash account.
 There are many different formats for the reconciliation process, but they all
accomplish the same objective.
 The reconciliation compares the amount of cash shown on the monthly bank
statement (the document received from a bank which summarizes deposits and
other credits, and checks and other debits) with the amount of cash reported in
the general ledger. These two balances will frequently differ.
 Differences are caused by items reflected on company records but not yet
recorded by the bank; examples include deposits in transit (a receipt entered on
company records but not processed by the bank) and outstanding checks (checks
written which have not cleared the bank).
 Other differences relate to items noted on the bank statement but not recorded by
the company; examples include nonsufficient funds (NSF) checks ("hot" checks
previously deposited but which have been returned for nonpayment), bank
service charges, notes receivable (will be discussed somewhat in detail in the
next unit) collected by the bank on behalf of a company, and interest earnings.

The following format is typical of one used in the reconciliation process. Note that
the balance per the bank statement is reconciled to the "correct" amount of cash;
likewise, the balance per company records is reconciled to the "correct" amount.
These amounts must agree. Once the correct adjusted cash balance is satisfactorily
calculated, journal entries must be prepared for all items identified in the
reconciliation of the ending balance per company records to the correct cash
balance. These entries serve to record the transactions and events which impact
cash but have not been previously journalized (e.g., NSF checks, bank service
charges, interest income, and so on).

Note That:

 Both sections end with the correct cash balance, which is the amount that
should be reported on the balance sheet.
 Every reconciling item that appears in the "balance per books" section
requires an adjusting entry to bring the books to the correct cash balance.

Balance per Bank Statement Br. XXX

Cash and Receivable Page 3
 Add: Deposits recorded by business but not by bank
XXX
(Example: Deposits in transit)
Bank Errors, if any XXX
Deduct: Charges recorded by business but not by bank
(XXX)
(Example: Outstanding checks)
Bank Errors, if any
(XXX)
Corrected balance Br. XXX
Balance per Books (Cash account in the General Ledger) Br. XXX
Add: Deposits recorded by bank but not by business
XXX
(Example: Note collection)
Book Errors, if any XXX
Deduct: Charges recorded by bank but not by business
(XXX)
(Examples: Service charges, NSF checks)
Book Errors, if any (XXX)
Corrected balance Br. XXX

Deposit In transit (Outstanding Deposit) these are additions to cash in the bank
the depositor has recorded but that do not appear on the bank statement.
For example, on the last day of the month, the depositor may place the day’s cash
receipts in the bank’s night depository for the bank to record on the next business
day. These receipts should appear on the next month’s bank statement.
Outstanding checks: checks that the depositor has issued and recorded but have
not yet cleared the bank will be deducted on the bank statement.
Bank collections: Promissory notes are often made payable at the payee’s bank.
The bank may therefore collect a note for the depositor and credit the proceeds to
the depositor’s account. Such collections made near the end of a month and appear
on the bank statement but not on the depositor’s books because the depositor is not
yet aware of the collection.
Bank charges: The bank often makes various charges that are not yet recorded on
the depositor’s books, such as charges for bank services, checkbooks, NSF checks,
and repayment of depositor loans.
Bank Errors: Occasionally, a bank error might affect the depositor’s account. For
example, the bank might erroneously charge one company’s check to another
company’s account. The depositor should instruct the bank to correct such errors.

Cash and Receivable Page 4

Depositor errors: Sometimes an error is made in the depositor’s accounting
records (commonly called a book error). For example, the depositor may have
written a check for one amount but recorded it at a different amount. The depositor
should promptly correct their accounting records.

Illustration: The December bank statement of DESSE COMPANY indicates a

balance on December 31 of Br. 15,907.45. On that date, the balance of cash per
book is Br. 11,589.45. From the foregoing steps, the following reconciling items
are determined:
Facts:
1) Deposit in transit: November deposits (received by bank on December 31)
Br. 2,201.40
2) Outstanding checks: Check # 835, Br. 3,000.00;
Check # 843, Br. 1,401.30;
Check # 860, Br. 1,502.70
3) Errors: Check No. 828 was correctly written by DESSE Company for Br.
1,226.00 and was correctly paid by the bank to the creditor; but recorded for
Br. 1,262.00 by DESSE Company.
4) Bank memoranda:
- Debit-NSF check from IYETI for Br. 425.60
- Debit- Printing company checks charge, Br. 30
- Credit- Collection of notes receivable for Br. 1,000 interest earned Br.
50, less bank collection fee Br. 15.

Required: 1. Prepare the bank reconciliation for DESSE Company for the month
of December 31, 2016
2. Record the necessary journal entries 0n December 31, 2016

DESSE COMPANY
BANK RECONCILIATION
For the Month Ended December 31, 2016

Cash and Receivable Page 5

Cash balance per bank statement 15,907.45
Add: Deposits in Transit 2,201.40
Less: Outstanding Checks:
Check # 835 3,000.00
Check # 843 1,401.30
Check # 860 1,502.70 (5,904.00)
Adjusted Cash Balance per Bank 12,204.85
Cash Balance Per Books 11,589.45
Add: Collection of note receivable for Br.
1,000 plus interest earned Br. 50, less
collection fee Br. 15 1,035.00
Error in recording check No. 828 36.00 1,071.00
Less: Bank service charge 30.00
NSF Check 425.60 455.60
Adjusted Cash Balance per Books 12,204.85

Entries from Bank Reconciliation:

Note that each reconciling item used in determining adjusted cash balance per
book should be recorded by the depositor. If these items are not journalized and
posted, the cash account will not show the correct balance. Depending on the
above reconciling items, we can pass the following four necessary journal entries:

1) To record collection of note receivable by bank

December Cash 1,035

31, 2016 Miscellaneous expense 15
Notes receivables 1,000
Interest Revenue 50

2) To correct error in recording check No. 828

Cash and Receivable Page 6

 December Cash 36
31, 2016
Accounts Payable 36

3) To record NSF checks

December Accounts Receivables-W/ro IYETI 425.6

31, 2016
0
Cash 425.60

4) To record charge for printing company checks

December Miscellaneous Expense 30

31, 2016
Cash 30

Even this fairly simple bank reconciliation demonstrates the pressing need for
monthly reconciliations. Without reconciliation, company records would soon
become unreliable as the process draws attention to various needed adjustments.

Note that the amount of cash to be shown on the balance sheet at the end of each
year should be the adjusted figure after adding and deducting the aforementioned
data as the case may be.

Bank Balance Reconciled to Balance in Depositor’s Records

The second type of bank reconciliation takes the balance per bank statement to the
balance per depositor’s records and is a format favored by practicing accountants.
In this format, it is assumed that the depositor’s actions are correct and the bank
will act in accordance with the depositor. If after treating all reconciling items
according to the depositor, the bank may arrive at the depositor’s balance, then the
cash accounts are said to be reconciled.

If the balance per bank statement cannot be taken to the depositor’s balance in the
above manner, that is an indication of some sort of misappropriation and it must be
discovered.

Illustration: prepare the bank reconciliation for DESSE COMPANY as of

December 31, 2016 (using the above data).

DESSE COMPANY
BANK RECONCILIATION

Cash and Receivable Page 7

 For the Month Ended December 31, 2016
Cash balance per bank statement 15,907.45
Add: Deposits in Transit 2,201.40
Less: Outstanding Checks:
Check # 835 3,000.0
0
Check # 843 1,401.3
0
Check # 860 1,502.7 (5,904.00)
0
Collection of note receivable for Br. 1,000 plus 1,035.0
interest earned Br. 50, less collection fee Br. 15 0
Error in recording check No. 443 (1,071.00)
36.00
Add: Bank service charge
30.00
NSF Check 455.60 (4,318.00)
425.60
Cash Balance per Books 11,589.45
Petty Cash Fund

PETTY CASH: Petty cash, also known as imp rest cash, is a fund established for
making small payments that are impractical to pay by check. Examples include
postage due, reimbursement to employees for small purchases of office supplies,
and numerous similar items.

The operation of petty cash involves three steps:

1. Establishing the Fund

The establishment of a petty cash system involves two major steps which begins by
making out a check to cash, cashing it, and placing the cash in a petty cash box and
a petty cash custodian (also called petty cash cashier) should be designated to have
responsibility for safeguarding and making payments from this fund.
At the time the fund is established, the following journal entry is needed. This
journal entry, in essence, subdivides the petty cash portion of available funds into a
separate account.
Petty Cash XXX
Cash in bank XXX
To establish a petty cash fund

Cash and Receivable Page 8

 2. Making Payments from the Fund
Policies should be established regarding appropriate expenditures (type and
amount) that can be paid from petty cash. The custodian of the petty cash fund has
the authority to make payments from the fund that conforms to prescribed
management policies. When a disbursement is made from the fund by the
custodian, a receipt should always be placed in the petty cash box. The receipt
should clearly set forth the amount and nature of expenditure. The receipts are
sometimes known as petty cash vouchers. Therefore, at any point in time, the
receipts plus the remaining cash should equal the balance of the petty cash fund
(i.e., the amount of cash originally placed in the fund and recorded by the entry
above). No accounting entry is made to record a payment at the time it is taken
from petty cash. Instead, the account effects of each payment are recognized when
the fund is replenished.

3. Replenishing the Fund

As expenditures occur, cash in the box will be depleted. Eventually the fund will
require replenishment back to its original level. To replenish the fund, a check for
cash is prepared in an amount to bring the fund back up to the desired balance.
The individual prepares a schedule (or summary) of the payments that have been
made and sends the schedule, supported by petty cash receipts and other
documentation, to the treasurer’s office who then approves the request and a check
is prepared to restore the fund to its established amount. The check is cashed and
the proceeds are placed in the petty cash box. At the same time, receipts are
removed from the petty cash box are formally recorded as expenses.

The journal entry for this action involves debits to appropriate expense accounts as
represented by the receipts, and a credit to Cash for the amount of the
replenishment. Notice that the Petty Cash account is not impacted -- it was
originally established as a base amount and its balance has not been changed by
virtue of this activity.

Illustration: Assume that TITIKO COMPANY has established petty cash fund
of Br. 500 on September 30, year 3, and place it in the custody of the main
secretary.

Required: Pass the journal entry to establish the petty cash fund.

September 30, Petty Cash 500

Cash 500
Year 3 (To establish petty cash fund)

Cash and Receivable Page 9

Assume that as of October 16, year 3, the balance of cash in the fund become
below the minimum threshold of Br. 50. And the followings are expense items paid
form the fund:

Supplies expense 163

Fuel expense 136
Postage expense 85
Miscellaneous expenses 68
Required: Record entry to replenish the petty cash to its original balance.

Supplies Expense 163

October 16, Fuel Expense 136
Year 3 Postage Expense 85
Miscellaneous Expense 68
Cash in Bank 452
To replenish petty cash; receipts on hand of Br. 452 -- office supplies (Br. 163),
gasoline (Br. 136), postage (Br. 85), coffee and drinks (Br.68). Remaining cash
in the fund was Br. 48, bringing the total to Br. 500 (Br.452 + Br. 48).
Cash Short and Over
 Occasionally, errors will occur, and the petty cash fund will be out of balance.
 In other words, the sum of the cash and receipts differs from the correct Petty
Cash balance.
 This might be the result of simple mistakes, such as mathematical errors in
making change, or perhaps someone failed to provide a receipt for an
appropriate expenditure.
 Whatever the cause, the available cash must be brought back to the appropriate
level.
 The journal entry to record full replenishment may require an additional debit
(for shortages) or credit (for overages) to Cash Short (Over). In the following
entry, Br. 455 is placed back into the fund, even though receipts amount to only
Br. 452.
 The difference is debited to Cash Short and over:

Supplies Expense 163

October 16, Fuel Expense 136
Year 3 Postage Expense 85
Miscellaneous Expense 68
Cash Short and Over 3
Cash in Bank 455
To replenish petty cash; receipts on hand of Br. 452 -- office supplies
(Br. 163), gasoline (Br. 136), postage (Br. 85), coffee and drinks

Cash and Receivable Page 10

 (Br.68). Remaining cash in the fund was Br. 45, bringing the total to
Br.497 (Br.452 + Br. 45; a Br. 3 shortage is noted and replenished).

 The Cash Short (Over) account is an income statement type account.

 It is also applicable to situations other than petty cash.
 For example, a retailer will compare daily cash sales to the actual cash found in
the cash register drawers.
 If a surplus or shortage is discovered, the difference will be recorded in Cash
Short (Over);

 a debit balance indicates a shortage (expense),

 While a credit represents an overage (revenue).
 As a means of enforcing accountability, some companies may
pressure employees to reimburse cash shortages.

Increasing or Decreasing the Base Fund

 As a company grows, it may find a need to increase the base size of its petty
cash fund.
 The entry to increase the fund would be identical to the first entry illustrated
above; that is, the amount added to the base amount of the fund would be
debited to Petty Cash and credited to Cash.
 The opposite is true if the fund base balance is decreased from the original
balance. Otherwise, take note that the only entry to the Petty Cash account
occurred when the fund was established -subsequent reimbursements of the fund
did not change the Petty Cash account balance.

Receivables are claims against customers and others for money,

goods or services.
Examples:
 Sales of merchandises or services on credit
 Advances to officers and employees
 Advances to subsidiaries
 Dividends and interest receivables
 Etc.
Trade accounts receivable
Recording:
Factors affecting the measurement of exchange price are:
 The availability of discounts ( trade and cash discounts)
 The length of between the sale and the due date

Cash and Receivable Page 11

Hence trade accounts are recorded net of trade discount at the
time of the transaction. However, cash discounts are recognized
in the accounts only when payment is received within the
discount period.
Valuation of accounts receivable:
Short term receivables are valued and reported at net realizable
value which is not necessarily the amount legally receivable.
Net realizable value= Accounts receivable less allowance for
uncollectible accounts & any returns and allowances to be
granted.
Methods of recording uncollectible accounts receivable
1. Direct Write-Off method: No entry is made until a specific
account has definitely been established as uncollectible. The
loss is recognized in the period in which it is written-off as
follows:
Doubtful accounts expense ……….. XX
Accounts receivable ………………… XX
No estimation is involved. It violates the matching
principle.
2. The allowance method:
Uncollectible expenses are matched against sales. At the time
of sale management cannot identify which customers will not
pay. To observe the matching rule, losses from uncollectible
accounts must be estimated. The estimate becomes an
expense in the fiscal year in which the sales are made.
Doubtful accounts expense ……….. XX
Allowance for doubtful accounts ……… XX

Estimates of uncollectible are made either on

 The basis of percentage of sales, or
 The basis of outstanding receivables
Percentage of net sale (Income statement) approach
"How much of this year's net sales will not be collected?"
If there is a fairly stable relationship between previous years'
credit sales and bad debts, the current year's bad debts expense
can be determined based on percentage of sales.

Cash and Receivable Page 12

Minim Co. estimates from past experiences that about 1.5% of
credit become uncollectible. If Minim has credit sales of $500,000
in 2002, and the allowance account before adjustment had a
credit balance of $800; the following adjusting entry is required at
the end of the period (2002).
Doubtful accounts expense= % sales X charge
sales (or net sales)
Doubtful accounts expense ……….. 7500
Allowance for doubtful accounts ……… 7500
Note: the allowance account balance before adjustment is
disregarded to recognize uncollectible expense for the period. The
allowance account balance after posting will be $8,300 (800
+7,500).
Percentage of receivables (Balance sheet) approach
"How much of the year-end balance of A/R will not be collected?"
The difference b/n the amount determined to be uncollectible and
the actual balance of allowance for doubtful accounts is the
expense for the year.
Using past experience a company can estimate the percentage of
its outstanding receivables that will become uncollectible. The
emphasis is to measure accounts receivable at net realizable
value at the balance sheet date.
E.g. My Co. has outstanding receivables of $150,000 as of
December 31, 2016. Based on aging analysis, the company
estimates that 4% of accounts are considered uncollectible.
Prepare adjusting entries under the following two independent
assumptions:
I. The balance in the allowance account before adjustment had a credit
balance of $1,000.
II. The balance in the allowance account before adjustment had a debit
balance of $1,000
Solution:
I.
Doubtful accounts expense ……….. 5000
Allowance for doubtful accounts ……… 500
II. Doubtful accounts expense ……….. 7000
Allowance for doubtful accounts ……… 7000

Cash and Receivable Page 13

 Note: the allowance account balance before adjustment is
considered to recognize uncollectible expense for the period. The
allowance account balance after posting will be $6000
(5000+1000) in Sol. I above. The allowance account balance after
posting will be $6000 (7000-1000) in Sol. II above.
 When an account is determined to be uncollectible, the
balance is removed from the accounting records by
(allowance method):
Allowance for DA ………….XX
Accounts Receivable………….XX
 When an account that has been written-off is collected later,
two entries are required:
Accounts Receivable…..XX
Allowance for DA……….XX
Cash……………..XX
Accounts Receivable……XX
Special allowance accounts
Sometimes additional allowance accounts may be required in
order to match expenses to revenues. If such accounts are used,
they are reported as contra accounts to accounts receivable to
measure their net realizable value.
The two most common allowances are:
 Allowance for sales returns and allowances
 Allowance for collection expenses
Notes Receivable
A note receivable is supported by a formal promissory note. Such
a note a negotiable instrument that is signed by a maker in favour
of a designated payee who may legally and readily sell or
otherwise transfer the note to others.
Notes receivables are frequently accepted from customers who
need to extend the payment period of outstanding receivables.

Recognition:
Short term notes receivables are generally recognized at face
value because the interest implicitly on maturity value is
immaterial.
Cash and Receivable Page 14
Generally notes maturing 3 months or less are not subject to
premium or discount amortization.
Note issued at face value
Mondale Co. lends money $10,000 in an exchange for a 3 year
note bearing interest at 10% annually. The market rate of interest
is 10%.
Face value of the note………………………… $10,000
Present value of the principal
=10,000(1.1)-3= $7,513
Add: PV of interest
=1000(1-(1.1)-3) = 2,487
PV of the note 10,000
Discount $0
Recording:
N/R …….10, 000
Cash ……………10,000
Recognition of interest:
Cash/Interest Receivable…… 1000
Interest revenue ………………….1000
Note issued at Discount
Mondale Co. receives a 3 year, $100,000 non-interest bearing
note. The market rate of interest is 9%.
PV of the note………………………… $100,000 (1.09)-3 = $77,218
N/R ………………………………… 100,000
Discount on N/R …………….22, 782
Cash …………………………77,218
Discount on notes receivable is a valuation account, and the
unamortized portion is reported on the balance sheet.
The discount is amortized and interest is recognized periodically
using the effective interest method.
Interest revenue period = CA of the note at the beginning of the
period X effective rate per period. (Note: CA = FV of the note less
unamortized discount)

Example. For the end of

Year 1
Interest revenue = 77,218 x 9% = $6,950
Cash and Receivable Page 15
 Discount on N/R ……. 6,950
Interest revenue………6,950
Year 2
Interest revenue = (77,218 +6950) x 9% = $7,575
Discount on N/R ……. 7575
Interest revenue………7575
Year 3
Interest revenue = (77,218 +6950 + 7575) x 9% = $8257
Discount on N/R ……. 8257
Interest revenue………8257
Receipt of the Principal:
Cash ………..100,000
N/R……………100,000
Notes received for cash and other rights
If the lenders accept a note in an exchange for cash and other
rights and privileges, the acceptance of the note is recorded and
the present value of the note is computed
N/R ………………..XX
Prepaid purchases … xx
Discount on N/R ……….xx
Cash ……………………XX
The discount on N/R represents implicit interest and is amortized
to interest revenue over the term of the note.
The excess of N/R over the PV represents an asset, prepaid
purchases. It is allocated to purchases or inventory in proportion
to the quantity purchased each year relative to the total quantity
for which a bargain is available.
The valuation of short term receivables is just like accounts
receivable. They are valued at net realizable value and recorded
at face value.
Long term notes receivables are recorded at the present value of
the cash expected to be collected.
Use of receivables as a source of cash
Receivables are financial assets that can be sold, put in to trust,
or used as collateral for loan.

Cash and Receivable Page 16

Pledging: uses of receivables as security or collateral for loan.
In case of default, the lender has the legal right to the receivables
in satisfaction of the debt.
Assignment of receivables: the assignor (the borrower) agrees
that the proceeds from the collection of the assigned receivables
will be used to pay back the loan.
It gives the assignee (the lender) the right to collect the
receivables. In the loan agreement, the assignee usually lends
less than the face amount of the receivables (finance fee or
service charge plus interest on the unpaid balance).
The assignor's equity is determined by subtracting the unpaid
loan balance from the assigned receivable balance.
E.g. On march 1, 1998, ABC Co. assigns $300,000 of its accounts
receivable to Local Bank as collateral for a $250,000 note. ABC
Co. will continue to collect the accounts receivable; the customers
are not notified of the arrangement. Local Bank assesses a
finance charge of 1% of the accounts receivable and interest on
the note of 10%. Settlement by ABC Co. to the bank is made
monthly for all cash collected on the receivables.

ABC Co.
Local Bank
*March 1
Assigned A/R…..300,000 No entry
A/R ……. 300,000

Cash ….. 247,000 N/R…..250,000

Finance Charge... 3000 Finance Revenue…
3000
N/P …………….250, 000 Cash……………247,000
*Collection of $188,000 of receivables net of discount of $2,800 on March 31
Cash …..185,200 No entry
Sales D. 2,800
Ass. A/R ……. 188,000
Remitted march collection
Interest expense… 2,083 Cash……185,200
Cash and Receivable Page 17
N/P …………….183, 117 Interest Revenue..
2,083
Cash ………………185,200 N/R ……………. 183, 117

* Collected $80,000 on April 30, and remitted the balance due

Cash …..80,000 No entry
Ass. A/R ……. 80,000
Interest expense… 669 Cash……67,552
N/P …………….66, 883 Interest Revenue..
669
Cash ………………67,552 N/R ……………. 66,883
A/R ……. 32,000
Ass. A/R…..32,000 No entry
Sale of receivables (Factoring):
Factors are finance companies or banks that buy receivables from
businesses for a fee and then collect remittances directly from the
customers.
Factoring can be made with or without recourse.

Without recourse:
 The factor bears any losses from uncollectible accounts
 A company's acceptance of credit cards is an example of factoring
 The factor charges a higher fee than with recourse
With recourse:
 The seller of the receivable is liable to the purchaser if the receivable is
not collected
 The factor charges a lower fee than without recourse
 The seller of the receivables has a contingent liability

Cash and Receivable Page 18