Journal Entries For Factoring Receivables

See Also:
Factoring
Another Way To Look At Factoring
Accounting for Factored 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
The What, When, and Where about Factoring
Journal Entries (JEs)

Journal Entries for Factoring Receivables

The following scenario will provide a clear, simple and effective way to record journal entries for factored receivables. In the spirit of simplicity and efficiency, remember that your journal entries ought to be booked only once per day on a daily summary basis (i.e. ‘ONE BIG JE ONCE PER DAY‘). You should then use the lender’s reports as the source document for these journal entries. But make sure you double-check your journal entries by auditing the report(s) sent by the factoring lender.

Case 1- Selling Receivables

Assumptions:

1. Factored Receivable: $ 100,000
2. Advance Rate: 80%
3. Factored Fee Expense (FFE): $ 1,000

There are three accounts which need to be created to account for a factoring relationship based on With Recourse Conditions, including the following:

• FIZ – Factored Invoices Sold: a contra asset account
• FIR – Factored Invoice Reserve: an asset account
• FFE – Factored Fees Expense: an expense account

Step 1- Initial Funding by Lender

To account for the initial funding (when the lender selects the invoices from the Schedule A form to advance funds), make the following entry:
Assuming a $100,000 receivable with an 80% advance rate:

Dr. Cash 80,000
Cr. FIS 80,000

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Step 2- Receipt of Customer Payment

Accounting for customer payments will require the use of the Collections Report, which is produced daily by the lender. As you identify each invoice and the net reserve (i.e. the extra $ 20,000) is remitted by the lender, apply the payment to the invoice in the accounts receivable journal by debiting the FIS account.
Assuming a $100,000 payment in full by customer:

Dr. Cash 19,000
Dr. FFE 1,000
Dr. FIS 80,000
Cr. A/R 100,000

In booking the journal entries in this manner, your cash balance will increase by $99,000 at the end of the transaction cycle. And the other $ 1,000 will show up as a fee expense on the P&L statement. Upon full payment, “zero out” both the A/R (asset account) and the FIS (contra asset account).

Step 3- Partial Payment of Invoice(s) by Customer

If a customer short pays, then only apply the amount paid to the invoice in the journal in the manner above. For payments on non-factored invoices, apply against the FIR account.

Case 2- Handling Invoice Buybacks (When the Customer Doesn’t Pay You)

To handle the buyback of an invoice, make the following entry:

Dr. FIS 80,000
Dr. FFE 1,000
Cr. FIR 81,000

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