Factoring Accounts Receivable Journal Entries

The factoring accounts receivable journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting of accounts receivable factoring.

In each case the factoring accounts receivable journal entries show the debit and credit account together with a brief narrative. For a fuller explanation of journal entries, view our examples section, and our tutorial on receivables financing.

No Recourse Factoring Accounts Receivable Journal Entries

The factoring accounts receivable journal entries are based on the following information:

  1. No recourse
  2. Accounts receivable 50,000 on 45 days terms
  3. Factoring fee of 5% (2,500)
  4. Initial advance of 80% (40,000)
  5. Interest on advances at 9%, assuming outstanding on average for 40 days (40,000 x 9% x 40 / 365 = 395)
  6. Bad debt allowance already recorded in the accounting records of the business of 2% (1,000)
  7. Sales returns and allowances 2,000

Journals

Customer invoice creation journal
Account Debit Credit
Accounts receivable 50,000
Revenue 50,000

To reverse the bad debt allowance journal
Account Debit Credit
Bad debt allowance 1,000
Bad debt expense 1,000

Accounts receivables sold to a factoring company
Account Debit Credit
Accounts receivable 50,000
Cash (advance) 40,000
Loss sale of receivables (fees) 2,500
Retention due from factoring company 7,500

To account for sales returns and allowances journal
Account Debit Credit
Sales returns and allowances 2,000
Retention due from factoring company 2,000

Monthly interest on the cash advance balance
Account Debit Credit
Loss sale of receivables (interest) 395
Retention due from factoring company 395

Remaining balance (retention) received from the factoring company
Account Debit Credit
Cash 5,105
Retention due from factoring company 5,105

With Recourse Accounts Receivable Factoring

In the event that the accounts receivables are factored with recourse (meaning that the business accepts the risk of bad debts not the factoring company, additional factoring of accounts receivable journal entries are required.

Supppose the business decides that the estimated bad debts are 2% (1,000), then a recourse liability is established.

Recourse liability established for potential bad debts
Account Debit Credit
Loss sale of receivables (bad debts) 1,000
Recourse liability account 1,000

If subsequently the accounts are not collected from the customers, under a with recourse factoring arrangement the business buys the accounts back from the factoring company. In the above example, the factoring company owed the business the retention balance of 5,105, the with recourse liability of 1,000 is deducted from this and the balance of 4,105 paid over.

Remaining balance (retention) received from the factoring company
Account Debit Credit
Cash 4,105
Recourse liability 1,000
Retention due from factoring company 5,105

Last modified July 16th, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

You May Also Like