Easy Journal Entries for Invoice Factoring
catamountfundi2025-07-17T17:53:23+00:00How 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:
- Invoices Factored (IF) – a contra asset account
- Reserve Account (RA) – an asset account
- 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.