How to enter factored invoices into accounting software.

When a business comes up short on cash they have the option to sell their accounts receivables to get cash now. Companies who provide this type of financing are referred to as Factoring Companies. This service comes at a price, but it can be an easier way for a business to get cash without trying to get a line of credit at a bank.

Many small business keep a relationship with a factoring company for times when they come up short on cash.  It's common to experience a shortage of cash due to longer than average aging accounts receivables, large payroll expense and high carrying costs. 

As a bookkeeper to small business owner's, I often see a lot of mistakes when the data is inputed into the accounting software. Understandably, since the reports from the factoring company are meant to track their company debits and credits, not yours. 

So lets break this down.

First, we need to make sure you have the correct accounts in your Chart of Accounts. These should be:      

  1. Factored Invoice Reserve Account - an asset account
  2. Factored Invoice Hold Account - an asset account
  3. Factored Invoice Sold Account - a current liability account
  4. Factored Fee Expense Account - an expense account

Now, lets make an assumption that the factoring company will only advance you 80% of the total invoice until its paid and they charge a fee of $100. Keep in mind the fee usually increases the longer the invoices ages, but lets make this simple for this example.

January 1: You sell a $10,000 invoice and submit this request on Schedule A to the factoring company. The request is approved and money is sent to your bank account. The journal entry today should be:

  1. Debit Cash - $8,000 (80% of $10,000.00)
  2. Credit Factored Invoices Sold Account - $8,000

Cash increases and so does the factored invoices sold account.  This accurately reflects that the company has borrowed money against the accounts receivable on the balance sheet.

January 30: The $10,000 invoice is paid and you receive a collections report issued by the factoring company. The journal entry today should be:

  1. Debit Cash or Factored Invoice Hold Account - $1,900
  2. Debit Factored Fee Expense Account - $100
  3. Debit Factored Invoices Sold Account - $8,000
  4. Credit Accounts Receivable - $10,000 (done automatically by receiving payments into Quickbooks or Xero)

Cash has increased less the amount of the factored fee expense. The accounts receivable and factored invoice sold account are effectively "zeroed out" and all Debits = Credits.

If you are like many other businesses who struggle to keep your bookkeeping records accurate, please contact me for a free consultation. I specialize in helping business owners keep organized and accurate bookkeeping records.


What is Use Tax?


Most of us know what sales tax is. It's that tax you pay on just about every purchase you make. Unless you are lucky to live in one of those states that does not have one - Oregon, Alaska, Delaware or Montana. I live in the San Francisco Bay Area of California and our sales tax ranges from 8.25% to 9.75%. Ouch! Over a period of a year, that amount can really add up.

But what is use tax? It is a tax imposed on purchases where no sales tax was collected at the time of purchase, but normally would have been collected for purchases in ones home state of residence.

Therefore if you are in a state that collects sales tax on purchases, you are required by the State Board of Equalization to pay a "use tax" on all your purchases where you did not pay sales tax, but consumed, enjoyed or stored this purchase.

Example: You are a thrifty business owner who lives in California but buys your printing supplies online from a retailer based in Oregon and they do not charge you sales tax on those purchases. You think you are being savy saving ALL that money on sales tax. After all, you go through thousands of dollars in printing supplies each year. Well, by IRS standards, you are required to pay a "Use Tax" on those purchases. 

As your bookkeeper, you should keep me informed of any purchases throughout the year that may require you to report a use tax. Not doing so, can you cost you big if you were to be audited by the IRS.

Feel free to reach me by email if you have any questions pertaining to the use tax.




The Modern Keeper, LLC.