Factoring of debtors

This article describes a way you can show the purchasing of the debtors and payments in your company file.

 

This article is provided for guidance only, and might not be suitable for your business requirements. If you need clarification or additional information, check with your accounting advisor or post your question below.

 

Let's look at the following example:

 

• Company ABC has $10,000 worth of debtors that will be factored.
• Company XYZ will purchase these debtors, and pay Company ABC in two stages: 70% and then 25%, the remaining 5% being the charge.
• ABC Ltd will need to close the individual debtors that are in their debtor's ledger and allocate them to the one Factoring entity's account.

Using the above example, we'll set up the factoring accounts, then close off the debtors to be factored.

 

 

Task 1 - Set up the factoring accounts

 

Company ABC needs to set up an account with Bank privileges in the ASSET section of the chart of accounts:

 

1. Go to the Accounts command centre and click Account List.
2. Click the Asset tab then click New.
3. Select Bank in the Account Type drop-down menu. In BusinessBasics select the Detail Account [Postable] option.
4. Give the account a unique number that suits your account list.
5. Name the account Factoring Cheque Account.
6. Click OK. Here's an example:
   
    

Company ABC also needs to set up an Expense account to show the 5% fee charged by the Factoring Entity:

 

1. Go to the Accounts command centre and click Account List.
2. Click the Expense tab then click New.
3. Give the account a unique number that suits your account list.
4. Name the account Factoring Charge.
5. Click OK. Here's an example:
   
    

 

Task 2 - Close off the debtors to be factored

 

1. Go to the Sales command centre and click Receive Payments. In BusinessBasics go to the Command Centres menu and choose Sales then choose Receive Payments.
2. Select one of the debtors and enter the factored amount for that debtor in the Amount Received and Amount Applied fields as shown in the window below.
3. At the top left of the window, select the Asset account created in Task 1 above. Here's an example:
   
    

Note: Use the General Ledger [Summary] report to see the total value of the factored debtors outstanding. These will be shown in the Debit column of the report.

 

 

To record the payment from the factoring entity

 

When Company XYZ pays Company ABC the first 70% of the factored debtors, the payment should be entered through the Receive Money window in the Banking command centre. The account selected at the top left should be your cheque account or the account that the payment will be deposited into. The allocation account would be the Factoring Cheque Account set up in Task 1 above. When Company XYZ pays the other 25%, the same procedure would be followed.

 

Here's an example:

 

In the General Ledger [Summary] report these payments will be shown on the Credit side. The net amount will be the factoring charge.

 

Note that theres is no GST in this transaction.

 

 

To show the factoring charges

 

To show the 5% fee charged by the Factoring Entity, enter a transaction through the Spend Money window as shown below. The account in the top left would be the Factoring Cheque Account and the Allocation account would be the expense account (Factoring Charge) created in Task 1 above.

 

Here's an example:

 

 

The charge will be shown on the Credit column of the General Ledger [Summary] report. Once the additional 25% of the factored amount is received, this transaction will close off completely the Factoring Account to a balance of $0, unless there are other factored debts still outstanding in the same account.

 

The applicable GST tax code is also included within this transaction as Company XYZ would charge GST for their services.