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Financial Accounting
Section D: Recording Transactions and Events
Designed to give you knowledge and application of:
D1. Sales and purchases
D3. Inventory
D4. Tangible non-current assets
D5. Depreciation
D7. Accruals & payments
D8. Receivables & payments
D9. Provisions & contingencies
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Study Guide D8: Receivables and Payables
Learning outcomes
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Examples of receivables and payables.
The benefit and costs of offering credit facilities to customers.
The bookkeeping entries to record and write off a bad debt.
Identify the impact of bad debts on the income statement and on the SOFP.
Prepare the bookkeeping entries to create and adjust an allowance for
receivables.
Illustrate how to include movements in the allowance for receivables in the
income statement and how the closing balance of the allowance should appear
in the SOFP.
Account for contras between trade receivables and payables.
Prepare ,reconcile and understand the purpose of supplier statements.
Classify items as current or non-current liabilities in the SOFP.
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Trade Receivables
SALES
CREDIT
CASH
Journal entry
Amount is received
immediately
Credit sale
Dr
Cr
Trade receivables
Sales
Being credit sales recorded
X
X
Amount received from customer
Dr
Cash
X
Cr
Trade receivables
X
Being cash received for the credit sales recorded
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Amount is receivable &
shown in
Trade Receivable
Account
Trade Payables
Purchases
CREDIT
CASH
Amount is payable &
shown in
Trade payable Account
Amount paid
immediately
Journal entry
Credit purchase
Dr Purchases
X
Cr
Trade payables
X
Being credit purchases recorded
When the payment is made
Dr Trade payables
X
Cr
Cash
X
Being cash paid for the outstanding payables
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Bad Debt
Bad debt: A debt that has become irrecoverable or ‘bad’.
Reasons for bad debt: Dishonesty, insolvency, death of the debtor
Journal entry
Dr
Bad debts expense
X
Cr
Trade receivable
X
Being removing the receivable amount and transferring it to expenses
In the personal ledger these balances will be removed from the ledger.
Impact of Bad debt on SOCI (income statement) and SOFP
SOCI
(income statement)
SOFP
Trade receivables from
Assets is reduced,
lower profit
Net profit is reduced as
there is extra Cost.
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Bad Debt
Example (Refer Example on page 298)
Donald Co. showed a Trade Receivable at the end of the year 31 December 20X6 .Trade
Receivables had the following amounts Receivable from Debtors
Rogers
$15,000
Ronnie
$12,000
Ambush
$6,000
Ian
$27,000
Financial losses
Suffered , paid only
$10,0000
Paid all his dues
Died,
Paid only $4500
Paid all his dues
BAD DEBT $5,000
No Bad Debt
BAD DEBT $1,500
No Bad Debt
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Bad Debt
When bad debts are written off following entry is made:
Dr
Bad debts
6,500
Cr
Trade receivables
6,500
Being amount receivable from Ambush and Rogers written off partly
Trade receivable account
Date
31/12/20X6
$
Balance b/d
Total
Date
60,000
$
31/12/20X6
Bad debts
6,500
31/12/20X6
Balance c/f
53,500
Total
60,000
60,000
Bad debts account
Date
31/12/20X6
$
Date
Trade receivable
6,500
Total
6,500
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31/12/20X6
$
Transferred to SOCI
6,500
Total
6,500
Bad Debt
Presentation in the financial statements
SOCI
SOFP
$
Income
$
$
X
Non-current assets
Less: Expenses
Bad debts
Total
X
Current assets
6,500
X
Trade receivable
60,000
Less: Bad debts
6,500
Total
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53,500
Bad Debt
Sometimes it happens that Bad Debt which was written off earlier is recovered later .Amount
is not credited in receivables as it is not there in receivables. It is treated as unexpected
income in SOCI.
Example
Superb Ltd has the following transactions during the year ended 31/12/20X7:
Credit sales during the year
$50,000
Amount received from receivables
$55,000
Mack and Jack are two customers owing $2,500 and $5,000 respectively. These amounts have
been outstanding for five years. The accounts are now settled with a payment 90% of the amount
outstanding and 10% is considered irrecoverable.
The opening balance of receivables was $8,000.
We will see how these transactions can be recorded in the books of Superb Ltd and the impact of
bad debts on its SOCI (income statement).
Superb Ltd
Trade Receivables
$
Opening balance b/d
Sales
$
8,000
50,000
Cash
Bad debts ($250 + $500) W1
Closing balance c/f
58,000
10
55,000
750
2,250
58,000
Bad Debt recovered
W1
Bad debts = 10% of $2,500 and 10% of $5,000
= $250 and $500
= $750.
$750 should be debited to the SOCI (income statement) as bad debts written off.
As a result, profit will reduce by $750.
Nature of general allowance for receivables
 Management estimates the percentage of debts which become bad.
 In doing this, management relies heavily on historical accounting data.
 Due to the concept of prudence, the company recognises this percentage as a cost in the
income statement.
 This ensures that the profits and the assets of an entity are not overstated.
 An allowance for receivables also known as a provision for bad debts allows the entity to
recognise the cost, without touching individual receivable accounts.
Example
The historical records of Best Ltd show that, on an average, Tom does not pay 5% of the total debts
he owes to the Best Ltd. Tom owes 500,000 to Best Ltd in the current year.
In this case, a provision of $25,000 ($500,000 x 5%) for bad debts will be shown as an expense in
the SOCI (income statement) and deducted from the total receivables in the SOFP.
Although the $25,000 is shown as a cost; the individual accounts of the receivables are not
touched. A separate allowance account is created.
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Nature of General Allowance for Receivables
Journal entry
1. In the year in which allowance is created
Dr Bad and doubtful debts expense (SOCI)
Cr Allowance for receivables (SOFP)
Being an allowance made against doubtful debts
X
X
2. In the Subsequent years
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Allowance at the end of year will change as sales will change .It will be
calculated on the basis of new sales.
It is compared with the existing opening balance of allowance.
Refer example on page 300
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Nature of General Allowance for Receivables
If required new allowance > Existing opening balance then the allowance has to be
increased with the amount of difference.
Journal entry
Dr Bad and doubtful debts expense
X
Cr
Allowance for receivables
X
Being an increase in allowance for receivables accounted for.
If required new allowance < Existing opening balance then the allowance has to be
decreased with the amount of difference
Journal entry
Dr Allowance for receivables
X
Cr
Bad and doubtful debts expense
X
Being a decrease in allowance for receivables accounted for.
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Presentation in the Income Statement and the SOFP
Bad debts recognised as
expenses
Increase in allowance recognised
as expenses
SOCI (Income
statement)
Decrease in allowance is credited
back to income statement
If decrease in allowance > bad
debts, then excess is disclosed as
other income.
Closing balance of allowance reduced
from trade receivables
SOFP
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When Bad Debts and Allowance for receivable are calculated
Sequence of calculation of debts
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Adjust the amount of contra transactions if any.
Deduct the amount of bad debts from the receivables (if they are not already reduced)
Then deduct any specific allowances and
Then calculate the allowance based on the remaining ‘good’ receivables
TTT (Time to Test)
Following are the details of Jacob Inc.
 Opening balance in trade receivable as at 1 January 20X6 is $70,000
 Allowance for receivable account as at 31 December 20X6 is $2000.
 Credit sales during the year are $200,000
 Cash received from debtors during the the year is $160,000
 Allowance at the rate of 4 % is to be maintained on closing balance of accounts
receivable.
 Bad debts during the year are $1500
 One of the customers is also supplier for Jacobs Inc. Amount payable to him is $3,000
and amount receivable from him is $4000.
Required:
Prepare the Trade receivable account in the books of Jacob Inc.
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Answer
Trade Receivable Account as at 31 December 20X7.
Date
$
Balance b/d
Sales
Total
Date
70,000
200,000
270,000
$
Cash received account
160,000
Bad debts account
1,500
Accounts payable
3,000
Balance c/d
105,500
Total
270,000
Disclosed in
SOFP
Disclosed in
Disclosed in SOCI as expense
Allowance required for year 31 December 20X7 is 4% of 105,500 is $4,220 SOCI as
Less: Balance in the allowance account
($2,000) expense
Increase in allowance account
$2,220
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Contras between Trade Receivables and Trade Payables
Meaning
Offsetting (canceling) the amount due to a party in the receivable ledger with the
amount due from the same party in the payables ledger
Procedure for contra adjustments :
 Find out lower amount of two payments
 Pass the following journal entry:
Dr Trade payables control account (in the nominal ledger)
Cr Trade receivables control account (in the nominal ledger)
Being accounts adjusted for contra entries
Refer example on page 306
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X
X
Prepare, reconcile and understand the supplier statements
To ensure all the transactions are recorded correctly it is useful to obtain supplier
statement and compare with our record.
Comparison may show certain entries do not match, the reason could be
 Errors
 Omissions
 Differing opinions on:
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Invoice
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Payments
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Rejections
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Rates and discounts
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Proforma for Reconciliation
Reconciliation: is explanation of the difference between any two balances
General proforma for reconciliation:
Balance payable to ________ according to our records:
(All items that cause the amount shown by supplier as receivable to be
higher than amount shown by us as payable will be added)
Add: Items where our credit entries are < compared to debit entries in supplier’s
statement
 Purchases not recorded by us
 Purchases recorded at a lower amount by us
 Any other amounts debited by supplier to us, but not credited by us, partially or fully.
Add: Items where our debit entries are > compared to the credit entries in
supplier’s statement.
 Discounts received recorded only by us
 Discounts received recorded at a higher amount by us (difference in amount)
 Purchase returns recorded only by us
 Purchase returns recorded at a higher amount by us (difference in amount)
 Any other amounts debited by us but not credited by the supplier partially or fully
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Proforma for Reconciliation continued
(All the items that cause the amount shown by the supplier as receivable to
be lower than the amount shown by us as payable will be deducted)
Less: Items where our credit entries are > compared to the debits recorded by the
supplier
 Purchases recorded only by us or recorded at a higher amount by us.
Less: Items where our debit entries are < compared to the credit recorded by the
supplier
 Discounts recorded at a lower amount or not recorded by us.
 Purchase returns recorded at a lower amount or not recorded by us
 Balance according to the supplier’s records.
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Classify items as Current or Non-current Liabilities in the Statement
of Financial Position
Current liabilities
Liabilities that are to be paid within 12 months from the date of reporting period or
form a part of operating cycle
Example
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Trade payables: includes bills of exchange payable
Bank overdraft: payable on demand
Current tax payable
Accrued expenses: expenses already incurred by entity but not yet paid, for which bills
are not yet received e.g. electricity, rent etc
Non-current liabilities
Liabilities that are payable after more than 12 months
Example
 Fixed duration loans taken from a bank, repayable after more than a year
 Debentures: are securities issued by a limited company, repayable after specified term.
 Holders of debentures are lenders of money to company.
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RECAP
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Can you explain and identify examples of receivables and payables ?
Can you prepare the bookkeeping entries record and to write off a bad debt ?
Can you Identify the impact of bad debts on the income statement and on the SOFP ?
Can you prepare the bookkeeping entries to create and adjust an allowance for
receivables ?
Can you illustrate how to include movements in the allowance for receivables in the
income statement and how the closing balance of the allowance should appear in the
SOFP ?
Can you account for contras between trade receivables and payables ?
Can you prepare ,reconcile and understand the purpose of supplier statements ?
Can you classify items as current or non-current liabilities in the SOFP ?
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