Factoring Receivables Journal Entry
Overview
In business, the company may need to sell its receivables which is called factoring receivables if it needs early cash for its business operation and cannot wait to collect all receivables. In this case, the company needs to make the factoring receivables journal entry whether the factoring receivables is with recourse or without recourse.
Factoring receivables with recourse and without recourse may be a bit different from each other. This is due to the factoring receivables with recourse will generate the contingent liability to the company that sells receivables. And if such contingent liability is material and is likely to occur, the company not only needs to disclose it in the notes on financial statements but also needs to make provision for it by recognizing the loss immediately.
Factoring receivables journal entry
The company can make the factoring receivables journal entry by debiting the cash account and loss on sale of receivables account and crediting the accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loss on sale of receivables | 000 | |
| Accounts receivable | 000 |
Loss on sale of receivables is an expense that the factoring company (the factor) charges on transferring of receivables. This journal entry is straightforward as there is no withholding amount kept with the factoring company.
However, the factor usually withholds some amount (e.g. 20% of receivables) as a security against any bad debt that may arise. In this case, the journal entry will need to include this security sum in the due from factor account as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loss on sale of receivables | 000 | |
| Due from factor | 000 | |
| Accounts receivable | 000 |
The due from factor in this journal entry is the amount that the factor withholds in order to cover the risk of bad debts that may occur. Likewise, the factor will pay this withheld amount to the company when those amounts in invoices are collected.
Factoring receivables example
For example, the company ABC sells its receivables of $100,000 to a factoring company in order to receive early cash for its business operation. The company receives total cash of $80,000 from the sale transaction while the amount of $15,000 is retained by the factor as security against bad debts and at the same time, the factor charges a 5% fee on receivables which is $5,000.
In this case, the company ABC can make the factoring receivables journal entry for selling of $100,000 receivables as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 80,000 | |
| Loss on sale of receivables | 5,000 | |
| Due from factor | 15,000 | |
| Accounts receivable | 100,000 |
Factoring receivables with recourse vs non-recourse
Factoring receivables with recourse
Factoring receivables with recourse means that the company selling receivables is liable to the factor if receivables cannot be collected. In other words, the company selling receivables still bears the risk of nonpayment from customers and the factor can demand the money back if the receivables cannot be collected.
Likewise, the factoring receivables with recourse will result in contingent liability on the company. The company is usually required to disclose this contingent liability in the notes to financial statements.
And if the amount of the contingent liability is material and it is likely to happen (e.g. based on past experiences), the company needs to make provision for it. Likewise, if this happens, the company needs to make the journal entry for factoring receivables with recourse as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loss on sale of receivables | 000 | |
| Due from factor | 000 | |
| Recourse liability | 000 | |
| Accounts receivable | 000 |
The recourse liability is an estimated amount (e.g. based on past experiences) that the company expects receivables to be non-collectible.
For example, assuming the factoring receivables of $100,000 in the example above is with recourse. And based on past experiences, the company ABC estimates the fair value of the recourse liability to be $8,000.
If that is the case, the company ABC can make the journal entry for factoring receivables with recourse with the $8,000 recourse liability as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 80,000 | |
| Loss on sale of receivables | 13,000 | |
| Due from factor | 15,000 | |
| Recourse liability | 8,000 | |
| Accounts receivable | 100,000 |
The $13,000 of loss on sale of receivables comes from the fee charges of $5,000 plus the estimated loss due to uncollectible receivables (recourse liability) of $8,000.
Factoring receivables without recourse
Factoring receivables without recourse means that the company selling receivables will not bear the risk of nonpayment from customers. The risks are transferred to the factoring company at the time of sale of receivables. In other words, the company selling receivables will no longer liable for uncollectible receivables after they are transferred to the factor.
Likewise, there is no contingent liability in the factoring receivables without recourse. Hence, the journal entry for factoring receivables without recourse is the same as in the first example.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loss on sale of receivables | 000 | |
| Due from factor | 000 | |
| Accounts receivable | 000 |
It is useful to note that as the factor bears a much higher risk on the factoring receivables without recourse, so the fee it charges to the company is also much higher. Hence, in practice, the two examples above would come with different fee charges if one is factoring receivables with recourse while another is without recourse.