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