Accounting for factoring can be a challenge. Accounts receivable factoring, also known as invoice factoring, or just factoring, is an alternative form of commercial financing whereby a business sells its B2B or B2G receivables to a factoring company in exchange for same day cash. This form of financing, while conceptually simple (selling a financial asset) is rather unfamiliar to many business owners in the United States. Because of the unfamiliarity, it can be a challenge to ensure proper accounting for invoice factoring.
Failing to properly account for receivables factoring can lead to financial misstatements, and even tax and legal risks.
Learn more about factoring in general: What is Factoring? The Ultimate Guide to Business Invoice Financing
Disclaimer: We are not Accountants
This article is not intending to offer tax or accounting advice and each business should consult its own accountant to see how the sale of A/R may impact their balance sheet and the tax treatment of their income. Some of the above information has been presented after a review of SFAS No. 125, which may be helpful for the accountants when deciding which approach to take regarding accounting and tax treatment. SFAS No. 125 addresses the issues surrounding a sale with recourse, and would be a natural reference point for both the client and the CPA.
Accrual-Basis Taxpayers
For accrual-basis taxpayers, the sale of accounts receivable will result in a reduction in accounts receivable on the balance sheet and an increase in cash. Since the business has already recognized the income when the receivable was created, the sale of the accounts receivable to the bank typically does not result in additional taxable income for the business. Additionally, the obligation of the business to repurchase accounts receivable after a stated period of time will normally be shown as a contingent liability in the notes to the financial statements of the business.
Cash-Basis Taxpayers
Since cash-basis taxpayers recognize income when they receive cash rather than when they actually sell goods or services, the balance sheet for cash-basis taxpayers will not show accounts receivable as an asset.
Regardless of whether you are operating on an accrual or a cash basis, we recommend that you track the accounts receivable off of your accounting system (example: just have an excel spreadsheet you keep) after the sale to Flexent. Doing so allows you the flexibility in responding to customer inquiry and also helps to facilitate a balancing of accounts.
The following offers some examples, depending on your accounting status and the decision regarding A/R tracking, of accounting for the sale of receivables to Flexent.
Scenario A: Accounting for Factoring & Tracking AR
For clients who choose to track A/R until payment is made by the customer/account debtor (Recommended)
The initial sale to account debtor – before selling invoices to Flexent
ABC Company sells $100,000 in products or services to its customer.
| Debits | Credits | |
| Accounts Receivable | $100,000 | |
| Sales | $100,000 |
The sale of accounts receivable to Flexent
ABC Company sells $100,000 in A/R to Flexent with a 10% reserve.
| Debits | Credits | |
| Accounts Receivable | $90,000 | |
| *Reserve Account | $10,000 | |
| **Flexent – AR Sold with Recourse | $100,000 |
Flexent reports that a $10,000 payment has been received and posted
| Debits | Credits | |
| Flexent – AR Sold with Recourse | $10,000 | |
| Accounts Receivable | $10,000 | |
| Operating Expenses – fees | $252 | |
| Cash – Reserve Release | $748 | |
| Reserves | $1,000 |
Repurchase of a delinquent account:
A $500 invoice ages beyond the date of required repurchase (typically 90 days from due date), and the client repurchases the item from Flexent using its reserve funds.
| Debits | Credits | |
| Flexent – AR Sold with Recourse | $500 | |
| Reserves | $500 |
Later, if the account is charged off:
| Debits | Credits | |
| Bad Debt Expense | $500 | |
| Accounts Receivable | $500 |
Scenario B: Accounting for Factoring & Not Tracking AR
Accrual Basis taxpayer who does not continue to track A/R after sale to Flexent
The initial sale to account debtor – before selling invoices to Flexent:
ABC Company sells $100,000 in products or services to its customer.
| Debits | Credits | |
| Accounts Receivable | $100,000 | |
| Sales | $100,000 |
The sale of accounts receivable:
ABC Company sells $100,000 in A/R to the bank with a 10% reserve.
| Debits | Credits | |
| Cash | $90,000 | |
| Reserve Account | $10,000 | |
| *Accounts Receivable | $100,000 |
* Posted to specific customer account on client’s system. Client then shows off balance sheet contingent liability for total A/R Sold with Recourse at any given point in time.
Posting payments:
Flexent reports that a $10,000 payment has been received and posted.
| Debits | Credits | |
| No Entry Necessary – was posted as paid when sold to Flexent. |
Credit memo:
The merchant issues a $200 credit on a sale previously posted.
| Debits | Credits | |
| Sales | $200 | |
| Credit Allowed on Sales | $200 |
Repurchase of a delinquent account:
A $500 invoice ages beyond the date of required repurchase (typically 90 days from due date), and the merchant repurchases the item using reserve funds.
| Debits | Credits | |
| Accounts Receivable | $500 | |
| Reserve Account | $500 |
Later, if the account is charged off:
| Debits | Credits | |
| Bad Debt Expense | $500 | |
| Accounts Receivable | $500 |
Scenario C: Accounting for Factoring: Cash Basis
Cash Basis taxpayer who does not continue to track A/R after sale to Flexent
The initial sale to account debtor – before selling invoices to the bank:
ABC Company sells $100,000 in products or services to its customer.
For the cash basis taxpayer, this would not result in a G/L entry unless A/R was accumulated and then backed out prior to the end of the operating cycle.
The sale of accounts receivable:
ABC Company sells $100,000 in A/R (off balance sheet) to Flexent with a 10% reserve.
| Debits | Credits | |
| Cash | $90,000 | |
| Reserve Account | $10,000 | |
| **Sales | $100,000 |
** Posted to specific customer account on client’s system. Merchant then shows off balance sheet contingent liability for total A/R Sold with Recourse at any given point in time.
Posting payments:
Flexent reports that a $10,000 payment has been received and posted.
| Debits | Credits | |
| No Entry Necessary – was posted as paid when sold to Flexent. |
Credit Memo
The merchant issues a $200 credit on a sale previously posted.
| Debits | Credits | |
| Sales | $200 | |
| Credit Allowed on Sales | $200 |
Repurchase of a delinquent account:
A $500 invoice ages beyond the date of required repurchase (typically 90 days from due date), and the merchant repurchases the item using reserve funds.
| Debits | Credits | |
| Sales | $500 | |
| Reserve Account | $500 |
Any later recoveries could be reflected as a further adjustment to sales and an increase in cash.
Later, if an account is charged off:
| Debits | Credits | |
| Bad Debt Expense | $25 | |
| Finance Charge Income | $25 |
Conclusion: Consult with your Accountant
Again, this article is not intending to offer tax or accounting advice and each business should consult its own accountant to see how the sale of A/R may impact their balance sheet and the tax treatment of their income.
If you would like to learn more about factoring in general, be sure to check out our other resources on the topic.
