How to Keep Your Books Clean and Simple When Working with a Factoring Company

When a business starts using invoice factoring, one of the common questions that comes up is: “What journal entries do I need to make?”

The good news? It’s actually very simple. Below is a straightforward example to help guide your routine accounting entries. By using your factoring company’s reports and making entries consistently, you can ensure your books stay accurate and compliant.

Sample Scenario:

You sell a $100,000 invoice to a factoring company with the following terms:

• Invoice Amount: $100,000
• Advance Rate: 80%
• Factoring Fee: $1,000

Recommended Accounts Setup:

To track your factoring transactions accurately, you’ll want to create the following accounts in your accounting system:

1. Invoices Factored (IF) – a contra asset account
2. Reserve Account (RA) – an asset account
3. Factor Fee (FF) – an expense account (appears on your P&L)

Initial Entry – When You Receive the Advance:

The factoring company advances 80% of the invoice amount ($80,000). Make the following entry:

• Debit: Cash – $80,000
• Credit: Reserve Account – $80,000

*This reflects the cash you’ve received while holding the remaining balance in reserve. *

Final Entry – When the Invoice Is Paid in Full:

When your customer pays the full invoice, you’ll update your books using the collection/reserve report:

• Debit: Cash – $19,000
• Debit: Factoring Fee – $1,000
• Debit: Reserve Account – $80,000
• Credit: Accounts Receivable – $100,000

Final Outcome:

After both entries:

• Your cash increased by $99,000
• Your cost of factoring was $1,000
• Both the Accounts Receivable and Reserve Accounts are cleared

Final Tips:

• Make entries daily when an activity occurs.
• Always reconcile your entries with your factoring company’s reports.
• Keeping clean records makes it easier to track cash flow and reduces stress at tax time.