My client, Emma, has recently sold all of her accounts receivables to a lending institution in lieu of a business loan. Basically all of my client’s customers will now have to send in payment to this lending institution and, in turn, the lending institution will disburse these discounted funds to my client.
Emma has hired AccuraBooks to track the accounts receivables in her local company bookkeeping files but also account for the client payments to the factoring company (the lending institution) in which credit is applied to the outstanding customer invoices.
Factoring companies (companies that purchase your receivables in exchange for some other compensation), take a discount from your outstanding “earned” receivables and put it into an escrow-type of account called a Reserves account. Factoring companies also earn bank fees, called factoring fees, on each outstanding customer invoice that they purchase from you. The funds in the Reserves account are refunded back to you once they receive payment from the customer.
Factoring companies also have their own set of Accounts Receivables books for each of their customer’s clients (Emma’s clients), so they can track who still owes and how much to discount further if customers pay late or not pay at all.
It is the job of AccuraBooks to maintain the bookkeeping of all of these balances in my client’s books and it is a rather cumbersome process to do this. But basically, in a nutshell, whenever the factoring company PURCHASES a batch of customer invoices from my client, I do the following in Emma’s books:
- Debit to the bank account (where the purchase dollars settle to)
- Debit to the Reserves account (the portion held in escrow until the customers pay)
- Debit to the Factoring Fees account (this is non-refundable)
- Credit to the total Factoring Accounts Receivables account (this AR account is NOT my client’s but rather the total AR as per the Factoring Company’s books (for my client’s account); this amount should reconcile to the total amount in my client’s books each month).
On the flip side, whenever the factoring company RECEIVES payments from the customers, I do the following in Emma’s books:
- Apply payment to the customer’s open invoice (as if Emma were the one to receive the payment).
- In the undeposited funds screen (if using Quickbooks), I also enter a negative line item for the exact negative amount as the payment to be deposited, therefore the total deposit to post will be a net amount of zero. The negative amount on the line item will be applied to that Factoring Accounts Receivables account, thereby reducing this account’s balance in the process, and this makes sense since BOTH the AR in both my client’s books and the factoring company’s books (for my client) will be reduced. Note: Please remember, Emma is not actually receiving any funds here as she was already paid for these receivables when the factoring company purchased them, as stated above.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your Certified Public Accountant for verification and clarification about the contents of this article.