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How to account for invoice discounting

By Annapoorna

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Updated on: Jul 26th, 2022

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5 min read

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Invoice discounting is an invoice financing method wherein the unpaid invoices of the company are leveraged to raise working capital. It provides quick access to funds by giving discounts to the lender company in exchange for early payment of invoices. This article discusses in detail the accounting entries to be passed at various stages of the invoice discounting process.

Various invoice discounting platforms are available in the market. A business entity can sign up with one such platform to initiate the process. The lender may demand documents from the buyer, such as open and accepted invoices. Both the parties should agree to the terms and conditions and the time frame for repayment.

Following are the scenarios under invoice discounting and its accounting entries:

Here is an illustration to help you understand the accounting treatment for invoice discounting.

An enterprise purchases goods worth INR 100,000 from its vendor. The credit period is 30 days, and the payment is due on the T+30th day. Discount: 2%.

The following entries reflect the transaction:

Cash Discounting

S. No.






Activity 
(Cash Discounting)

Accounting Entry

Dr./Cr.

Amount (₹)

Remarks
1.
Purchase of Goods

Purchase A/c







Dr.
1,00,000







Vendor A/c







Cr.

1,00,000

2.
Discounting (own Funds)

Vendor A/c

Dr.
2,000
Payment Date advanced on Invoice

Cash Discount GL

Cr.
2,000
KG doc posted on discounting date; record Profit Center (PC) and other changes as pre-decided with Client
3.
Payment (on Day T)

Vendor A/c

Dr.
98,000

Cash A/c

Cr.
98,000






Early payment made by Enterprise

Bank Financing

S. No.






Activity 
(Bank financing)

Accounting Entry

Dr./Cr.

Amount (₹)

Remarks
1.

Discounting 
(External Funds via Bank / NBFC)



Cash Discounting GL








Cr.
1,000






Posted on Discounting Date







Vendor A/c







Dr.

1,00,000

Invoice is cleared in Vendor ledger

SCF Program GL
Cr.
99,000

New Document created due on the original due date/extended date (if extended as per programme)
2.

Payment (Day T+30)


SCF Programme GL

Dr.
99,000

To be cleared on maturity date/extended date


Bank

Cr.
99,000

Bank debits the current a/c of Client

TReDS

S. No.






Activity 

(External Funds via TReDS)

Accounting Entry

Dr./Cr.

Amount (₹)

Remarks
1.

Discounting



Interest















Dr.
1,000







Interest charged by TReDS on Disc Date








Bank







Cr.

1,000


Debit entry in bank for Interest


Cash Account GL
Cr.
2,000


Posted on discounting date, record PC





Vendor GL

Dr.
100,000


Invoice is cleared in Vendor ledger



SCF Program GL

Cr.
98,000


New Document created due on the original due date/extended date

2.

Payment (on Day T+30)

SCF Program GL
Dr.98,000
To be cleared on maturity date/extended date







Bank
Cr.98,000
TReDS debits the current a/c of Client basis NACH submitted earlier


About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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