Accounting Entries for Invoice Discounting

The accounting entries for invoice discounting need to reflect the trade debtors position correctly but also the liability of the money loaned to the business.

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 for invoice discounting which reflect what has happened:

1. Enter the Sale/Trade Debtor

DrTrade debtors (Balance Sheet)        50,000 
CrTurnover (P&L)         50,000

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

DrBank (Balance Sheet)        37,000 
DrInvoice Discounting Charges (Profit & Loss)             500 
CrInvoice 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.

DrInvoice Discounting Interest (Profit & Loss)750 
CrInvoice 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.

DrInvoice Discounting control (Balance Sheet)        50,000 
CrTrade 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:

DrBank (Balance Sheet)        11,750 
CrInvoice Discounting control (Balance Sheet)         11,750

Updated 27 March 2019


About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.