Clear Finance
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:
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 |
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 |
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 |