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Hence my post about Receivable Factoring Guide, many of you people asked me a simple question; “what is journal – entry for factoring of accounts receivable?” To sum-up the factoring procedure; when factoring accounts receivable, the receivables are sold to a finance organization. The factor purchase the accounts receivable at a discount from face value, generally at a discount of 6%. Customers are typically notified. The factoring arrangement is generally without recourse, where the risk of un-collectibility of the consumer’s account rests with the financing institution. Billing and collection is generally done by the factor. The factor charges a commission ranging from 3/4 % to 11/2 % of the net receivables acquired.
The Journal Entry given below:
Cash (proceeds). [Debit]
Loss on sale of receivables. [Debit]
Due from factor (*). [Debit]
Accounts receivable (face amount of receivables). [Credit]
Note: (*) proceeds kept by factor to cover possible adjustments like sales returns, sales discounts and allowances.
Factoring is generally a continual process. The seller of products receives orders and transmits them to the factor for acceptance; if accepted, the products are delivered; the factor advances the funds to the seller; the purchaser pay the factor when cash is due, and the factor regularly remits any excess reserve to the seller of the products. There is a continual circular flow of products and funds among the seller, the purchaser, and the factor. Once the agreement is in effect, cash from this source are unpremeditated.
Account Receivable Factoring Example is given below:
Royal Bali Cemerlang factors $200,000 of accounts receivable. There is a 4 % finance charge. The factor retains 6 % of the accounts receivable.
Suitable journal entries are shown as:
Cash = $180,000. [Debit]
Loss on sale of receivables (4% × $200,000) = $8,000. [Debit]
Due from factor (6% × $200,000) = $12,000. [Debit]
Accounts receivable = $200,000. [Credit]
Factors provide a dependable source of income for service businesses and small manufacturers
Account Receivable Factoring Example case example:
You need $100,000 and are inspect a factoring arrangement. The factor is willing to purchase the accounts receivable & advance the invoice amount less a 4 % factoring commission on the receivables buy. Sales are on thirty-day terms.A14 % interest rate will be charged on the total invoice price & deducted in advance. With the factoring arrangement, the credit department will be abolished, reducing monthly credit expenses by dollar1,500. Hence, bad debt losses of 8 % on the factored amount will be avoided. To net dollar100,000, the amount of accounts receivable to be factored is shown as:
The effective interest rate on the factoring arrangement is given below:
0.14/0.82 = 17.07%
The yearly total dollar factoring cost is given below:
Interest (0.14 × $121,951) = $17,073
Factoring (0.04 × $121,951) = 4,878
Total cost = $21,951
Hope so this post explains what journal entry for factoring of account receivable is.