When a business enters into an invoice discounting arrangement there are several entries to make in the Company Books to reflect not just the accounts receivable position but also to ensure that the liability owed to the invoice discounting company is correctly disclosed.
Example of the Accounting Entries for Invoice Discounting
Biz Ltd has an invoice discounting arrangement with a lender who offers them 75% prepayment on all invoices raised, at a charge of 1% per invoice and monthly interest rate of 2%.
Biz Ltd raises and sends a customer invoice on 1 July of £50,000, which was paid in full on 10 August, here are the accounting entries to reflect this:
1. Enter the Sale/Trade Debtor
|Dr||Trade debtors (Balance Sheet)||50,000|
2. Enter the 75% advance from the invoice discounting lender and 1% discounting charge
|Dr||Bank (Balance Sheet)||37,000|
|Dr||Invoice Discounting Charges (Profit & Loss)||500|
|Cr||Invoice Discounting control (Balance Sheet)||37,500|
3. As part of month end routine for July, the invoice discounting lender sends a monthly account statement.
This shows interest on the borrowed amount of £750. The statement must be reconciled to the accounts and the interest charge entered in the Company Books.
|Dr||Invoice Discounting Interest (Profit & Loss)||750|
|Cr||Invoice Discounting control (Balance Sheet)||750|
4. On 10 August the customer settles the invoice in full, using the bank account of the invoice discounting lender.
Firstly the debtors ledger needs to be updated to show that the customer has paid, but that the payment was made to the invoice discounter.
|Dr||Invoice Discounting control (Balance Sheet)||50,000|
|Cr||Trade debtor (Balance Sheet)||50,000|
The invoice discounting control account now shows a debit balance – the balance of 25% is still owed less the amount owed for the interest charge noted in step 3 above of £11,750. Biz Ltd should expect the invoice discounter to transfer the balance owed at which point the accounting entry would be:
|Dr||Bank (Balance Sheet)||11,750|
|Cr||Invoice Discounting control (Balance Sheet)||11,750|