Accounting for invoice discounting

Accounting for invoice discounting

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I am researching how to account for invoices which have been discounted, and I am finding two conflicting methods. I am hoping some experts out there can go back to basics with me and advise on the correct double entry.

1.On commencement of the discounting facility an advance will be made against the book debt of say for example 95%. What is the double entry for the immediate advance? Would it be DR a ID bank account set up in own accounts , CR short term loan? I am gathering the sales ledger remains untouched and is only used as security and not effectively sold to the discounter?

2.Double entry for the receipt of the funds too please....I think I may be over thinking this one as it seems very complicated...but I am very very rusty. My research has suggested crediting the sales ledger for full amount then raising a credit note for the 5% not advanced and charging to factoring cost?? No mention of it having an effect on the available funds in the ID bank account or on the amount owed to the discounter.

Please help?!?!

Thanks in advance.

Replies (19)

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By petersaxton
07th May 2012 01:18

1 Correct

2 Dr Short term loan

Cr Sales ledger

Why credit note?

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By LeighM
07th May 2012 08:06

Many thanks for your response.....It was my research that suggested the credit note. Its for when the customer pays the discounter. The customer pays in full but the discounter only sends over the advance rate of say 95% of what the customer has paid.

When the customer pays, say £100 it will be

CR sales ledger £100

DR 95% of value to short term loan £95?

DR 5% to ID charges £5?

The credit note suggestion threw me a bit, especially as I know that credit notes affect the advance rate that the discounter gives. That is why I come on here to get some sensible advice!

Thanks again.

 

 

 

 

 

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Me!
By nigelburge
07th May 2012 09:24

and don't forget

the special rules on VAT for discounts which, to my mind, are totally counter-intuitive!!

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Replying to MM Bookkeeping Services:
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By LeighM
07th May 2012 09:51

Oh God...VAT complications next...just what I need!! Thanks for that. Will look in to that next!

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By petersaxton
07th May 2012 09:31

Charges

When there are charges they should be:

Dr Invoice discounting charges

Cr Short term loan

I don't see why it affects the sales ledger.

Do you have a link to the results of your research?

 

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By LeighM
07th May 2012 10:00

Thanks Peter

Whats the double entry for the client paying the invoice to the discounter? Do you have experience in accounting for ID and if so is it a pig or is it alright when you know what you are doing (which I clearly don't at this point!).

Have been searching for the website where I found the credit note info but cant find it now.

 

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By LeighM
07th May 2012 10:10

...sorry peter...just re reading from the start and I see you have answered my question. Your opinion of ease of accounting and administering ID would be appreciated as it appears you have some good knowledge. Many Many Thanks.

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By petersaxton
07th May 2012 10:41

Accounting and problems

Dr Sales ledger

Cr Sales

Invoice raised

Dr ID charges/interest

Cr ID's lending

Any charges or interest

Dr ID's lending

Cr Sales ledger

Payment of invoices

I've had experience of ID with a few clients and I have had to get fully involved from the start.

The accounting is quite straightforward once you have done a few reconciliations between the ID lending in the clients books and the IDs books.

The problem is more to get the ID to enter everything so you have to reconcile your ID part of the sales ledger with their records.

I don't understand how VAT comes into it (other than VAT on invoices/credit notes and charges). There are no discounts.

 

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Replying to TGS:
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By LeighM
07th May 2012 10:49

Thanks so much. The fog has lifted. I am hoping the client I may or may not work for, will have limited transactions for ID purposes.There is likely to be large invoices but I do not expect the volume of invoices to be too high. I hope a few a month for my sake...at least until I get my head around it!!

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By Paul FD
17th May 2012 12:44

invoice discounting

Leigh

 

I've just done this for a client and we are on our third reconciliation. The accounting isn't difficult once the mist has cleared - the hard part is the physical reconciliation.

Effectively the invoice discounter has taken over the sales ledger which means that invoices raised from the take-over point belong to him as does any cash received.

You run the sales ledger in exactly the same way but the cash is usually posted to a trust (bank) account. The accounting entry in your own books will be a debit to the draw down account because this is effectively a repayment of the advance.

My advice is to set up a system to monitor any difference between the sales day book and which invoices you are actually assigning (there may not be any but sometime certain customer accounts are excluded from the scheme). And then as you make payments into the trust account try and identify any differences in terms of what you have credited the sales ledger with and how much has been transferred back to the discounter. Again you may receive cash form excluded debtors and there will be a timing difference between you crediting the cash and the discounter posting it.

The trick is to remember that the discounter will mirror your ledger but will only post totals - (i.e. totals of invoices assigned and totals of cash) This means that when it comes to doing the reconciliation the onus is on you to prove the differences as they don't know how they totals (of invoices or cash) are made up.

They never say in the advertising but the first few months are hell - and it very much depends on how the bookkeeper controls the paper flow.

 

Best of luck

 

 

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By Robjoy
17th May 2012 13:09

More to it than first appears

I'm not disagreeing with what's been said, but from personal experience of accounting for ID over several years, bear in mind the following:

You might want to separate discounted from non-discounted debts very clearly: e.g. a separate Accounts Receivable account.

I found it invaluable to identify invoices with the notification batch number - the id used when notifying invoices to the discounter. Made it much easier to check my notifications against the discounter's.

Confusions and disputes can arise in reconciling the discounted ledger and loan account when customers payments go straight to your client (takes some people months to change to paying the discounter!), invoices are posted as discounted when they ought not to have been (and vice versa), discounted foreign currency invoices are paid at a different exchange rate than the invoice, the discounter and your client disagree (to put it politely) about whether or when a customer paid (and whether payment was within payment terms), the allocation of credit notes, and so on. So make sure your client is equipped with reports and clear methods for resolving reconciliation issues - they can be a major headache and source of bad feeling between client and discounter.

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By petersaxton
17th May 2012 14:01

Excel

I think it's best to have two spreadsheets:

One spreadsheet to reconcile the sales ledgers: A column for the client sales ledger, a column for the ID sales ledger, a column for the difference amount, then a column for each transaction that makes up the difference amount.

Another spreadsheet to reconcile the balance owed to the ID on the client balance sheet with the balance owed by the client on the ID's balance sheet.

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By pete_t
18th May 2012 10:56

Accounting for Invoice Discounting / Factoring Transactions

The always seems to be a great deal of confusion surrounding the bookkeeping entries for Invoice discounting / Factoring transactions – unnecessarily so.

 

It is all quite logical – all standard stuff. You do not need top give consideration to any of these transactions on an invoice by invoice ledger, split your ledgers, look at special VAT problems etc.

 

The concept of confidential invoice discounting advances is very straightforward and is separate and distinct from the operation of your sales ledger. It should be looked at as no more than an overdraft facility – the level of which varies with the lenders security i.e. the debtors ledger (or part of it) secures the overdraft.

 

You very simply operate your sales ledger in the normal way and post cash as and when it is received from the debtor – clearly all relevant receipts must be advised to the factoring company.

 

You need to set up another bank account in your books of account – say XYZ Invoice Discounting Ltd. The entries are then very simple.

 

Sage is probably one of the most commonly used accounting programmes and I will use the Sage procedures as an example – as follows.

 

First we set up the nominal accounts:-

 

A/c 6000          Bank Current account (Balance Sheet)

A/c 7000          XYZ Invoice Discounting Limited (Balance Sheet)

A/c 4900          Finance Charges & Interest (P&L a/c)

A/c 4999          Invoice Discounting charges (P&L a/c)

 

Typical entries are as follows:-

 

Advances from the Invoice Discounting Company

 

Using the Sage Bank Transfer Routine:

 

Transfer from A/c 7000           £10,000

Transfer to A/c 6000               £10,000

 

Invoice Discounting Company Discount

 

Using the Sage Bank Payment routine:

 

Payment using A/c 7000         £675.32 (analysed to A/c 4900)

 

Invoice Discounting Company Charges (say over limit fees or bank transfer costs)

 

Using the Sage Bank Payment routine:

 

Payment using A/c 7000         £25.00 (analysed to A/c 4999) described as say “BACS charges”

 

 

Repayments to Invoice Discounting Company

 

Using the Sage Bank Transfer Routine:

 

Transfer from A/c 6000           £8000

Transfer to a/c 7000               £8000

 

At the end of the month you will perform a Bank Reconciliation routine on A/c 7000 as normal – using the Invoice Discount Company’s month end statement – which will read as follows:

 

Advances                                £10,000.00

Invoice Discount                     £     675.32

Charges                                  £       25.00

Less Repayments                  £ -8,000.00

                                                ---------------

Balance to XYZ (ID)Ltd           £   2700.32

                                                ---------------

 

The procedure is slightly more complex if you are using Invoice Factoring – but not radically.

 

You do not need to segregate your sales ledger, adjust VAT – there is nothing special about this proposition.

 

If you need any further assistance let me know 

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By petersaxton
18th May 2012 11:14

Need and usefulness

1 If you don't have a separate sales ledger for the invoices that are on the IDs books and there are many invoices not on the clients books the reconciliation is onerous.

2 Although setting up an account as a bank account even when it's not a bank account is common, there is still the need to make an alteration to the balance sheet report.

The sales ledger reconciliation can still take some time because of errors made by the ID.

"confidential invoice discounting advances"? What does that mean? I thought it was obvious if you use an invoice discounter.

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By pete_t
18th May 2012 11:43

Need and usefulness

There are 2 sorts of invoice discounting - one where the customer knows about it - the other is confidential invoice discounting where the customer doesn't. Most ID companies insist on exclusivity to the client firm's debtor book.

Maybe your thinking of Factoring - which is a different type of operation and the debtor is responsible for making payments directly to the Factoring company - this is not the case with ID - payments are still made by the Debtor to the client company - who in turn report it to the ID company and their credit line is adjusted accordingly.

Whatever the case - what do you need to reconcile.These invoices are part of the ID company's security - and is usually secured by a fixed and floating charge over the book debts (all of them). The standard periodic Debtors Ledger reconciliation is all that is required. In the event your are using Factoring then - yes - as mentioned - it is little more complex. If we follow the Sage Accounts example - if the ledger were to be split - you simply need to adjust your Debtors Ledger account codes - this can be simply done by prefixing all "in house" accounts with say an letter "C"(for company) and "F" for factored accounts. All reports can then be generated for the relevant factored and non factored accounts.

As far as alterations to the Balance Sheet is concerned - are you suggesting it in some way needs to be segregated from - say an overdraft - which is normally repayable on demand or at short notice (as with ID) and forms part of Current Liabilities?

 

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By petersaxton
18th May 2012 12:01

My view

I'm not thinking of factoring - I am thinking of invoice discounting. All the times I have seen this in operation a separate bank account is used and it is either explicitly stated who it belongs to or it is easy to work out.

You need to reconcile the client sales ledger to the IDs sales ledger. What has security got to do with whether a reconciliation is needed?

I'm saying that the money owed to the ID is not a bank account and so shouldn't be shown as a bank account. It should be shown as a creditor. It may be more convenient to treat the account as a bank account on a day to day basis and adjust the reports generated for the balance sheet.

 

 

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By Robjoy
18th May 2012 16:48

Discounting v Factoring

I've done both. The process of reconciliation is much the same. If you don't make sure you have everything in place from the start so that you can dig out reconciliation problems without driving yourself nuts ploughing through every blasted sales transaction in the month you will regret it.

In either case, the need to reconcile is the same as it ever is: some external organisation with the power to make my life difficult has a record of some aspect of my business, and the condition of that record may have a material effect on the operation of my business. So I arm myself with thorough, detailed, careful records in order that I can quickly resolve any discrepancies. Keeping the bookkeeping effort to the minimum is not my priority.

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By jjuuko joseph kiyimba
19th May 2012 08:58

ACCOUNTING FOR INVOICE DISCOUNTING FACILITIES

 I dont which side you are of the transaction. I am going to give you two options

One for the institution giving the discounted facility.

I)If its you giving out the facility, recogonise the transaction in this manner

DR: Debtors (if the facility is being given out for less that a year)

CR: Bank or the cash account

By doing this you will have realised the debtor in the books

For any amounts recieved as premium

Dr; intrest recievable

Cr: Bank

To recogonise premium earned over the facility tenor, this will have to go on for the tenor of the facility

DR;Bank

CR:Debtors

Do this when the client pays up facility that you advance him for invoice discoutning.

In line with the IAS 1 requirements, please provide a disclosure note in the finacial statement notes so that users can understand the transaction.

 

2)Receipient of the facility

Recogonise the facility as a current laibility for the tenor adavanced. No adjustemnt is required under IAS 8 because this is a prospective transaction.Dr the bank to recogonise the cash

When the intrest becomes due on the facility.Dr the profit and loss accout and credit  the intrest recivable.This will recogonise the cost of the liability above.

 

On payment Dr Bank and credit the current liability account for the discouted facility.

Provide disclosure notes.

 

Hope this sorts you out

 

 

 

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By petersaxton
19th May 2012 09:42

No

 

"For any amounts recieved as premium

Dr; intrest recievable

Cr: Bank"

Wrong way round.

"When the intrest becomes due on the facility.Dr the profit and loss accout and credit  the intrest recivable.This will recogonise the cost of the liability above."

This is wrong way round, too.

 

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