The influence of factoring on accounting records is often wondered by a business entering into a factoring arrangement. 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 last has agreed to pay a certain percentage of the value of debts in advance of settlement by the customer. This means that all these will be maintained by the factor because the business no longer needs to maintain a particular sales ledger in its accounting records.
Consequently most businesses continue to run their sales ledger in parallel to the factor preferring to retain a detailed ledger in their own books. Your task is to consider how you should account for the factoring arrangement.
The following is a suggested method of adding factoring to your bookkeeping disciplines:
1. As you were prior to factoring treat the factoring company as a bank and continue to maintain the sales ledger.
2. You should post invoices and credit notes to the sales ledger in the normal way.
3. Factors payments are received from the factor as a transfer between banks.
4. Customer receipts mean that the factor will collect payments on your behalf from your customers and will inform you, normally on a daily basis giving details of how the remittances have been allocated. Then 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. VAT Invoices will provide you in respect of its charges. It is suggested to account for these correctly. Then you open an account in your Purchase Ledger in the factors name. The next will be to post their invoices to this account in same way as you would for any other purchase. Do not forget that they should then be marked-off as paid from the factors account.
6. A statement will be provided by the factor to you normally on a monthly basis. This should be adapted to your factors account in the same way as you would adapt your clearing bank statement.
7. You will be provided by the factor 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 adapted and where necessary inform to the factor.
| 
