The financial accounting term disposition of accounts receivable is used to describe several approaches companies can take to accelerate the receipt of cash from receivables. The two most common methods include factoring and assignment; whereby the company transfers receivables to another party in exchange for cash.
In the normal course of business, customers are constantly making purchases on credit and remitting payments. Over time, the relative size of accounts receivable may reach a point where the company has significant resources dedicated to managing this process.
By transferring receivables to another party, the company reduces the sales to cash revenue cycle time. Also known as disposition and transfers of accounts receivable, this process provides additional cash to the business, which can be used in operations or to purchase additional assets. Disposing of accounts receivable also relieves companies of the burden of creating and staffing additional resources in their billing and collections department.
Generally, there are two ways a company can dispose of, or transfer, receivables:
- Assignment: the owner of the receivable borrows cash from a lender, using accounts receivable as collateral on the loan.
- Factoring: the owner of the receivable sells it to a factor, which then assumes responsibility for collecting money owed directly from customers.
What is a Disposition of Property?
A disposition of property includes the following transactions.
- You sell property for cash or other property.
- You exchange property for other property.
- You receive money as a tenant for the cancellation of a lease.
- You receive money for granting the exclusive use of a copyright throughout its life in a particular medium.
- You transfer property to satisfy a debt.
- You abandon property.
- Your bank or other financial institution forecloses on your mortgage or repossesses your property.
- Your property is damaged, destroyed, or stolen, and you receive property or money in payment.
- Your property is condemned, or disposed of under the threat of condemnation, and you receive property or money in payment