Accounting Treatment of Factoring Receivables

In this world, if you have the asset, it can be sold. Yesterday, my sold sofaset through OLX in his city. If you are selling your products to your customers on credit, then you have to take money from your customer. So, this amount is your asset and you can sell it on discount to debt collection company. As per accounting, it is called factoring of account receivables.


There are two main reasons of factoring. First, you need not wait your money from debtors. For example, you have contract of two months, it means, your customer will pay within two months. But when you sell your debtor to other company, you will get all money in advance by deducting some discount. Second, there is not any risk of default. Factoring company, will not pay you all in advance, it will give your 80% or 90% of your total given debt. It will also deduct fees. So, due to two reasons, businessmen sell account receivables asset.

Now, when will enter in the contract of factoring, we have to do its accounting treatment. Here, we will teach, how can you do the accounting treatment of factoring transaction.



1st Step : Pass the Journal Entry of Selling of Account Receivables


When you sell your account receivables, cash will come in your pocket. You have to give the fees to debt collection company. This is your loss. So, every loss will be debit. To whom we sell the account receivable will not pay us whole the amount of account receivable. So, we have to take balance which we will get when customer will pay to debt collection company

For example, we sell Rs. 1,00,000's account receivable to discounting company and discounting company will pay its 90% on the basis of its estimation. Discounting company will also get 5% fees. Its journal entry will be

Cash/Bank Account Debit 90,000

Amount Receivable from Discounting Company Account Debit 5000

Loss on Sale through Factoring Debit 5000

Account Receivable Account Credit 1,00,000

2nd Step (A) : Pass the Journal Entry When Discounting or Factoring Company Receives money from our Customers




At that time, we have received some amount which is receivable from discounting or factoring company. So, we will pass this entry for recording this.In above example, we have to receive Rs. 5000 from discounting company which is just 5% of total debt.

Cash / Bank Account Debit 5000

Amount Receivable from Discounting company Account Credit 5000

Or 

2nd Step (B) : Pass the Journal Entry When Discounting or Factoring Company does not receive money from our Customers




When factoring or discounting company does not receive the money from our debtors, at that time, it will not pay our pending amount which is due from factoring company. So, it is also our loss. At that time, step 2nd's (A) entry will not pass but 2nd step (B) entry will pass for recording this loss.

Loss on Sale of Account Receivable Debit 5000

Amount Receivable from Discounting Company Account Credit 5000


Related Resources 

» How to Treat Preliminary Expenses
»  How to Treat Normal and Abnormal Loss
» How to Treat Foreign Exchange Rate Difference

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Accounting Education: Accounting Treatment of Factoring Receivables
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