Dictionary / Factor
What does Factor mean in accounting?
Quick definition
Accounts payable & receivableOne who buys trade receivables with or without recourse, his profit coming from a commission, such as a fraction of one percent, and from interest on advances against receivables. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
The factor buys your open invoice
You run a commercial staffing firm. You invoice a clinic client $22,400 on May 8 for April temps, then sell that open receivable without recourse to a factor. On May 9 the factor deposits $17,752: an 80 percent advance of $17,920 minus a $168 commission (0.75 percent), and it will charge interest on the advance until the clinic pays them. In QuickBooks Online or Xero, do not match the deposit to the clinic invoice. Cash is up $17,752, take accounts receivable off your books (or move it to due from factor), and expense the commission and later interest.
A bank line leaves the invoices yours
You run a kitchen-supply wholesaler. On October 3 you draw $9,000 from your revolving line of credit at the bank, which is secured by open invoices including an $11,200 bill to a catering client. The bank did not buy those invoices; the caterer still remits to you. In QuickBooks Online or Xero, the $9,000 deposit is a loan: interest is on the draw, there is no invoice-purchase commission, and accounts receivable stays on your books. A factor would have bought the catering invoice and collected from the caterer.
Why it matters
A factor is a company that buys your open accounts receivable, with or without recourse, and earns a small commission plus interest on the cash it advances you. You will not post this most months; it shows up when you sell invoices for working capital instead of waiting for customers to pay. Treat the deposit as a customer collection, or mix this up with a bank line of credit, and the aging, the loan balance, or both will be wrong. The neighbor factor ledger is a factory cost book, not this buyer.
Further reading
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What is Factor in bookkeeping?
One who buys trade receivables with or without recourse, his profit coming from a commission, such as a fraction of one percent, and from interest on advances against receivables.
When should I use Factor?
Use Factor when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Factor?
Factor is used for factor entries, while F.O.B covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.