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What Is Journal Entry For Factoring Of Accounts Receivable?

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Since my post about Receivable Factoring Guide, many of you asked me a typical question; “what is journal entry for factoring of accounts receivable?” To sum-up the factoring mechanism; when factoring accounts receivable, the receivables are sold to a finance company. The factor buys the accounts receivable at a discount from face value, typically at a discount of 6 percent. Customers are usually notified. The factoring arrangement is usually without recourse, where the risk of un-collectibility of the customer’s account rests with the financing institution. Billing and collection is typically done by the factor. The factor charges a commission ranging from 3/4 percent to 11/2 percent of the net receivables acquired.

The Journal Entry is:

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[Debit]. Cash (proceeds)
[Debit]. Loss on sale of receivables
[Debit]. Due from factor (*)
[Credit]. Accounts receivable (face amount of receivables)

Note: (*) proceeds kept by factor to cover possible adjustments such as sales discounts, sales returns and allowances.

Factoring is usually a continual process. The seller of merchandise receives orders and transmits them to the factor for acceptance; if approved, the goods are shipped; the factor advances the money to the seller; the buyers pay the factor when payment is due, and the factor periodically remits any excess reserve to the seller of the goods. There is a continual circular flow of goods and money among the seller, the buyers, and the factor. Once the agreement is in effect, funds from this source are spontaneous

Factoring is usually a continual process. The seller of merchandise receives orders and transmits them to the factor for acceptance; if approved, the goods are shipped; the factor advances the money to the seller; the buyers pay the factor when payment is due, and the factor periodically remits any excess reserve to the seller of the goods. There is a continual circular flow of goods and money among the seller, the buyers, and the factor. Once the agreement is in effect, funds from this source are spontaneous.

Case Example:

Royal Bali Cemerlang factors $200,000 of accounts receivable. There is a 4 percent finance charge. The factor retains 6 percent of the accounts receivable. Appropriate journal entries are:

[Debit]. Cash = $180,000
[Debit]. Loss on sale of receivables (4% × $200,000) = $8,000
[Debit]. Due from factor (6% × $200,000) = $12,000
[Credit]. Accounts receivable = $200,000

 

Factors provide a dependable source of income for small manufacturers and service businesses.

One more case example:

You need $100,000 and are considering a factoring arrangement. The factor is willing to buy the accounts receivable and advance the invoice amount less a 4 percent factoring commission on the receivables purchased. Sales are on 30-day terms.A14 percent interest rate will be charged on the total invoice price and deducted in advance. With the factoring arrangement, the credit department will be eliminated, reducing monthly credit expenses by $1,500. Also, bad debt losses of 8 percent on the factored amount will be avoided. To net $100,000, the amount of accounts receivable to be factored is:

Account Receivable Factoring 

The effective interest rate on the factoring arrangement is:

0.14/0.82 = 17.07%

 

The annual total dollar factoring cost is:

 

Interest (0.14 × $121,951) = $17,073
Factoring (0.04 × $121,951) = 4,878
————————————————– (+)
Total cost = $21,951

 

Hope this post explains what journal entry for factoring of account receivable is.

8 Comments

8 Comments

  1. C. Blanche

    May 12, 2009 at 12:26 pm

    Why do you enter loss on receivables instead of factoring fee expense? Why don’t you show that the 4% is a fee for the service rather than a reduction of the receivable?

  2. Putra

    May 12, 2009 at 3:40 pm

    C. Blanche

    Because of you “sale [factor]” your accounts receivable. You may state it as “fee” or “expense” which decrease your profit [=increase your loss] on your income statement, and reduce your accounts receivable balance on your balance sheet, anyway.

  3. Nuchy

    Aug 12, 2009 at 4:59 pm

    Can you explanation in Taxation perspective ?
    1.Loss on sale of receivables (4% × $200,000) = $8,000 is tax decuctable ?
    2.IFRS notify factoring fee as fees+interest if so how is withholding tax related?
    3.How is written off bad debt?Is can be tax deductable ?

  4. Indraiti

    Oct 22, 2009 at 11:11 am

    1. Could you explain how to create journal from factor’s site (I mean the one who buy the Account Receivable ?
    2. Do factoring nedd Down Payment ? If yes, would you please give me journal entries from factors site ?)

    Thanks

  5. Ed lambert

    Feb 13, 2011 at 1:53 am

    The big question is from a Factor’s point fo view. What do you show on the income statment, using your example:
    Gross Income
    Accounts Invocied 100
    Less Accounts Purchased 90
    Excess Rserves Refunded to Seller 3
    Gross Fees 7
    OR just
    Gross Fees 7????

    And why??? I am searching everywhere,the FASB and everywhere and it doesn’t seem to be clear. The FASB seems to indicated, consistent with your view, that even though there is recourse, if control is relinquished to the Purchaser, the treatment should be as a sale. That seems to make sense. But what should the income Statement look like??? Just report the Fees or the amount Invoiced, Purchased and Refunded to the Seller to derive Fees?

  6. john

    Oct 8, 2011 at 12:57 pm

    how do you treat a credit memo , that is been used to settle if you are the company that is factoring with the bank, does this increased your collections or decreases same questions is for purchases, not sure if i’m clear.

  7. Deborah

    Jan 28, 2012 at 10:19 pm

    I understand the JE to post to factor transaction, but there is recourse and non recourse factoring. I factor, at 90% up front to me, 10% held in reserve by factor company. When the invoices are paid to the factor company they refund all but 1.65 to me. What is the JE for this.

  8. ADAMO

    Dec 11, 2012 at 6:53 am

    Hello my question is how to book factoring transactions when recourse and non recourse is possible in IFRS. Thanks.

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