Easy Journal Entries For Invoice Factoring

When a business owner decides to enter into a factoring relationship, one of the last questions that arise is “What are the Accounting Entries I need to make?” First of all, it is really simple and the following scenario will provide a guideline for you to make routine daily journal entries. You should use the factoring company’s reports and discipline yourself to make the entries everyday you experience activity to your account. Don’t forget to double check your work.

Example– Selling Your Receivables with the following assumptions:

• 1. Factored Invoice amount: $100,000
• 2. Your advance rate = 80%
• 3. Your factor fee = $1,000

Setting up the accounts in the proper way is the key to successful accounting. You should use these three accounts:

• 1. Invoices Factored (IF) = a contra asset account
• 2. Reserve Account (RA) = an asset account
• 3. Factor Fee (FF) = an expense account on the p&l

When a factoring transaction occurs and the factoring company sends you the advance, make the following entry:

• 1. Debit Cash (amount you received) = $80,000
• 2. Credit Reserve Account = $80,000

When the invoice is paid in full, your collection report and/or reserve report will reflect the need to make the following entries:

• 1. Debit Cash = $19,000
• 2. Debit Factoring Fee = $1,000
• 3. Debit Reserve Account = $80,000
• 4. Credit Accounts Receivable = $100,000

Properly accounting for this transaction will keep your books and records in order. This example shows that, at the end of this transaction, your cash balance will increase by $99,000 and your associated cost was $1,000 in discount fees incurred for the benefit of the accelerated cash flow. The Accounts Receivable Account and the Reserve Account will both become zero.