In short
Factoring is the transfer of accounts receivable to a third party (a factor) for cash. It is accounted for as a sale if the transferor surrenders control of the receivables; otherwise it is a secured borrowing.
Key takeaways
- In a sale, the receivables are removed and any fee or discount is recognized as a loss.
- With recourse, the seller records a recourse liability for expected bad debts.
- If control isn't surrendered, the receivables stay on the books and a liability is recorded.
Where it's tested
FAR: Cash, Receivables & Bad Debts — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company factors $200,000 of receivables without recourse, receiving $185,000 cash. How is the transaction recorded?