When a business enters into an invoice discounting arrangement there are several accounting 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 Cr
Dr Trade debtors (Balance Sheet)         50,000
Cr Turnover (P&L)         50,000

2. Enter the 75% advance from the invoice discounting lender and 1% discounting charge

Dr Cr
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 Cr
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 Cr
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 Cr
Dr Bank (Balance Sheet)         11,750
Cr Invoice Discounting control (Balance Sheet)         11,750

What is the Difference Between Invoice Discounting and Factoring?