Pledged asset

accounting

A pledged asset is an asset transferred to support a payment obligation. It is used by both companies and households and allows them to increase their assets at a higher rate. This asset can be shares, houses or machinery, among many others.

Pledging means making use of an asset to guarantee and support the payment of a certain obligation. When an asset is pledged, said asset will become the property of the borrower, preventing the lender from making use of it.

For this reason, when an asset is pledged, it is because the borrower does not give the certainty of being able to meet the payment of the loan received. In this sense, all financing channels must be exhausted before pledging an asset. That is why it is better to obtain a loan without the need to carry out a pledge.

In the field of accounting, it is defined as follows: Asset item that is deposited in a trust or a mortgage in order to guarantee the fulfillment of an obligation or contract. It must be included in the balance sheet with a normal caption and specifying if it is current assets, its amount and the reason for which it is pledged.

Example of pledged asset

Suppose we are on the board of directors of a multinational that manufactures computer keyboards. With the volume of orders we receive, we are beginning to be limited by our facilities.

If we continue at this rate, in approximately six months we will not be able to meet the demand that we will have because we will be producing 24 hours a day and using 100% of the machinery. On the board of directors, we decided to apply for funding of $ 8 million to build a new plant for the assembly of our keyboards.

Despite having experienced great growth in recent years, our financial institution tells us that it cannot grant us credit. This is because we do not offer sufficient guarantees that we will be able to pay the debt in the future. To solve this problem, we decided to pledge a building of our property that we have rented as offices for a value of 5 million dollars.

After this pledge, the bank decides to grant us the loan to be able to start the works of the new assembly plant and to be able to continue supporting the growth rate that we have enjoyed so far.

In conclusion, a pledged asset is an asset delivered to a lender with the objective of guaranteeing the payment of the delivered loan. Said asset becomes the property of the lender and prevents the initial owner from making use of it.

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