Journal entries in the books of Noor company: Required: Make journal entries in the books of Noor company and Moto Finance to record the above information. It also retains an amount equal to 10% of the accounts receivable for probable adjustments against discounts, returns and allowances etc. The Moto Finance assesses the quality of accounts receivable and charges a fee of 5%. To meet its short-term cash needs, the Noor company factors $375,000 of accounts receivable with Moto Finance on a without recourse basis. The buying institution records the following journal entry: Example 1: Under non-recourse factoring the seller makes the following journal entry: For example, if a receivable whose account has been factored becomes bankrupt and the amount due from him cannot be collected, the factor will have to bear the loss. When accounts receivable are factored without recourse, the factor (purchasing institution) bears the loss resulting from bad debts. These two conditions are breifly discussed below. Factoring receivables with or without recourseĪccounts receivable are factored either without recourse or with recourse. The amount deducted in respect of such adjustments is usually refundable to the seller in case no event requiring such deductions arises. In addition to this fee, the factor may also retain a small percentage of receivables for probable events like adjustments for discounts, returns and allowances. The factor then takes over receivables along with all relevant records and pays the cash to the seller after deducting the agreed fee. In a factoring transaction, the receivables are evaluated regarding their recoverability and a fee is agreed upon between the factor and the seller. The difference between the cash collected from receivables and the cash paid to the seller company forms the profit of the factor. Rather than waiting for the due date, a company may quickly convert its receivables into cash by selling them to a factor for a fee, which is usually a small percentage of the total value of receivables being factored. As the due date approaches, factor meets receivables and collects full amount of cash. Someone might think, why do companies sell their receivables? The answer is simple – to meet their immediate cash needs. The institution to whom receivables are sold is known as factor. Factoring is a common practice among small companies. Factoring accounts receivable means selling receivables (both accounts receivable and notes receivable) to a financial institution at a discount.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |