Factoring Accounts Receivable in Financial Accounting

In some industries, sellers extend very generous credit terms to their customers. For example,furniture retailers sometimes do not require any payment until six months after sale. To obtain cash more quickly, these firms sell (factor) their receivables. In most cases, the receivables are factored to a financial institution that charges a fee as compensation for the cost of collection, the delayed receipt of the cash, and potential uncollectible accounts.

To illustrate, assume that a furniture store has previously made a credit sale for $1,500. If the receivable is subsequently factored for $1,300, cash would increase by $1,300, accounts receivable would decrease by $1,500, and a $200 expense would be incurred.

ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
Cash + $1300 Accounts receivable – $1500 Retained earnings – $200 (financing expense)
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