Explains how to modify the bookkeeping procedure in maintaining the accounting records of a business after entering into a factoring or invoice discounting arrangement.
One of the questions often asked by a business entering into a factoring arrangement is how will this affect my accounting records. The theory of factoring is that on the assignment of trade debts to the factor a business exchanges a serious of debtors – its customers - for one debtor – the factor. The factor in turn has agreed to pay a certain percentage of the value of debts in advance of settlement by the customer. This means the business no longer needs to maintain a detailed sales ledger in its accounting records as this will be maintained by the factor.
In practice though most businesses prefer to retain a detailed ledger in their own books and therefore continue to run their sales ledger in parallel to the factor. So how should you account for the factoring arrangement?
Assuming an accounting package such as Sage is being used the following is a suggested method of adding factoring to your bookkeeping disciplines:
1. Treat the factoring company as a bank and continue to maintain the sales ledger as you were prior to factoring.
2. As invoices and credit notes are raised they should be posted to the sales ledger in the normal way. There is no need for any additional postings in respect of factoring.
3. Factors payments – treat payments received from the factor as a transfer between banks i.e. a transfer from the factoring account set up as a bank in 1) above to your main clearing bank account.
4. Customer Receipts – the factor will collect payments on your behalf from your customers and will notify you, normally on a daily basis giving details of how the remittances have been allocated. From this information you can post the cash to your factors account as a ‘receipt’ crediting the appropriate account in your sales ledger and allocating the payment as shown in the factors report.
5. Factors Charges – The factor will provide you with VAT Invoices in respect of its charges. It is suggested to account for these correctly you open an account in your Purchase Ledger in the factors name and post their invoices to this account in same way as you would for any other purchase. They should then be marked-off as paid from the factors account.
6. The factor will provide a statement to you normally on a monthly basis. This should be reconciled to your factors account in the same way as you would reconcile your clearing bank statement.
7. Additionally the factor will provide you with an open-item printout of the sales ledger which should be compared to your own records to check that they agree. Any differences should be reconciled and where necessary notified to the factor.
If you would like any help or advice in respect of the impact of factoring on your accounting records and/or factoring and invoice discounting in general please e-mail us at firstname.lastname@example.org or telephone 01444 811654. We will be pleased to assist.