Accounting For Factored Receivables

See Also:
Factoring
Another Way To Look At Factoring
Journal Entries For Factoring Receivables
Can Factoring Be Better Than a Bank Loan?
Factoring is Not for My Company
History of Factoring
How Factoring Can Make or Save Money
What is Factoring Receivables
The What, When, and Where about Factoring

Accounting for Factored Receivables Explanation

Accounting for factored receivables is one of the more troublesome issues for controllers of entrepreneurial and middle-market companies. This is often due to unfamiliarity with the factoring process and the reports provided by lenders. The accounting treatment of factored receivables by first-timers while technically correct may ultimately be self-defeating. By being “correct”, the controller will have actually increased the vulnerability to their accounting process and system. This is mainly due to a series of possible mistakes their direct reports may make. Here are some common mistakes that occur when first-timers account for factored receivables.

Common Mistakes When Accounting for Factored Receivables

Most accountants attempt to record the 80% of Sold Transactions in the accounts receivable sub ledger. In other words, they will account for the 80% sold of each invoice for each customer. So what? Technically, this is correct. However, in the real world this could lead to a series of errors when entering in each transaction. Why? First, this strategy effectively doubles the workload FOR THE SAME TRANSACTION for the person responsible for keying in the information. Second, this means that the system is now open to twice as many data entry errors. Third, and most importantly, you are now unable to obtain an accurate A/R Aging Report and Customer Statement. The reason for this is because you have effectively netted out the factoring advances against the total invoice amount. In other words, your customer reports will now only show what your factoring partner “hasn’t paid for” (i.e. the net amount).

How to Account for Factored Receivables

Okay, fine. So how does one treat factored receivables? The answer is to set up a contra asset account as a control account in the current asset section of your chart of accounts. Gross advances by the factoring lender should be recorded as a single line item once a day as opposed to the sum total of individual invoices (i.e. Total Daily Gross Advance(s) = Sum of 80% of All Daily Invoices). When your reserve receivables come in (net of fees), record them as you would a daily deposit. Afterwards, make sure you follow-up and review the factoring lender’s reports to double-check for mistakes. In this manner you can tie their reports to the journal entries booked into your accounting system.
For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.