Grade 9 Accounting – Credit Transactions
(Posting to the General and Debtors’ Ledgers)
Name
Class
Grade 9 EMS – Term Three Accounting
Introducing credit and working with Debtors.
‘Some debts are fun when you are acquiring them, but none
are fun when you set about retiring them’
Ogden Nash
Words and terms
Revenue:
This another
word for
receipt of
money or
money earned.
LESSON ONE:
In this lesson we introduce the concept of selling on credit and some of
the theory that surrounds this.
Up until now we have only dealt with businesses that deal in cash, as a result you
have only had to record cash transactions in the Cash Receipts and Cash Payments
Journals. In this lesson we introduce businesses that sell their products for cash, as
well as on credit.
Selling items on credit is simply defined as a ‘buy now, pay later’ situation,
something that is quite common in South Africa. There are many retailers in South
Africa that offer a credit option as well as a cash one.
How Credit works:
Before someone is granted a credit facility or an account, their credit history and
financial status is first assessed. This is to determine:
a) should they be granted credit and
b) if so, how much?
Words and
terms
Interest:
Interest is
defined as
the cost on
Once granted credit, the customer may then buy goods without having to pay cash
immediately for them. The retailer simply records how much the customer, now referred
to as a debtor owes them.
money. This
refers to
borrowed
money in
The debtor is required to repay what is now owed to the retailer according to an agreed
set of conditions or terms. From the point of view of the business, it is best if the money
owed is collected as quickly as possible, so their cash flow is not negatively affected.
Interest can be added to the amount owed, this is one way of encouraging the debtors
to pay quickly, another is to send regular reminders using modern communication
methods such as SMS and email.
this case, as
in the case
of a credit
agreement,
the retailer
is financing
the goods
bought.
Why do you think retailers offer a credit option to their
customers, even though they then have to wait to receive the money?
They are happy to offer credit as it allows their customers to purchase goods even
when they don’t have money – thus increasing the sales revenue of the retailer.
1
What to check before giving a customer credit:
Before giving a customer credit it is important to check their credit worthiness by
assessing their financial position and their credit history.
Words and
terms
Credit
check:
In order to
assist
businesses
that offer
credit, we
The following customer details need to be checked:
1.
Their employment history.
2.
Proof of Salary.
3.
A copy of three month’s bank statements.
4.
A copy of the customer’s ID document.
5.
Contact details including: physical address, email address, telephone
numbers.
6.
It is also necessary to conduct a credit check.
have
specific
companies
that
specialise in
the
collection
information
relating to
individuals
credit
history. A
credit check
is involves
finding out
information
Recording the Transactions:
Credit transactions have their own specific source documents. When a business
sells goods on credit to a customer, they issue the customer an invoice, the original
invoice is given to the customer, while the business keeps a duplicate invoice as a
record of the transaction – this record of the transaction is the source document.
All the necessary and relevant information needs to be included on the
invoice, this includes:
1.
An invoice number.
2.
The date the transaction took place.
3.
The name of the debtor, as well as a reference number specific to that debtor.
4.
What the debtor bought.
5.
The cost of the items bough (in other words, what the debtor owes.)
about the
customer’s
credit
history
2
Example of an invoice:
Kunene Traders
Shop 45
Millennium Park
Mamelodi
Tshwane
0122
Bill to:
Date:
Shipping date:
ITEM
Bath Towel
Set of Face cloths
Printed T’s
Khaki chino
Invoice number: 349
(t )+27 012 348 9900
(c) 079 445 09800
(e) Kunene@mweb.co.za
M. Dunga (Debtor Reference: 029)
23 August 2012
Terms:
23 August 2012
QTY
1
Ship to: Billing address
PRICE
89.99
1
3
2
30 days (5 % discount)
Interest at 13.5% on overdue
accounts.
AMOUNT
89.99
56.29
159.99
299.99
56.29
479.97
599.98
1226.23
Subtotal
VAT
171.67
Total
1397.90
Activity One
Use the information below to draw up an invoice for Muster Buster CC, dealers in computer
equipment.
On 23 November 2011, Muster Buster CC sold the following on credit to Mr. P Bell debtor number
D98. 1 JVC 17″ monitor at R1 350 each, 2 Kingston 4gb flash drives at R69,99 each, 1 Easton
500gb external hard drive at R950. Mr. Bell was issued with invoice number I346.
Once you have finished make a list of all the important information that is necessary on an invoice,
use a highlighter to identify these on your invoice.
3
LESSON Two:
In this lesson we look at the accounting cycle, focussing on the different stages in the cycle as well
as how they relate to each other.
Accounting is a process through which we keep a written record of each and every transaction the
business makes during a consecutive twelve month period called a financial year. Each
transaction is recorded in the aptly named books of first entry, with the ultimate goal of
summarizing all of the information into two one page documents. These are the Income Statement
and the Balance Sheet.
The Diagram below is a linear representation of a Financial Year. Many businesses choose to use
1March to 28 February as their financial year.
1 March 2012
28 February 2013
The Financial Year
All transactions that take place during these consecutive twelve months are recorded.
The summaries, the
Income Statement and
Balance Sheet are prepared
right at the end of the year
and include all the
information from the rest
of the year.
A step by step guide to the accounting cycle:
Step One:
The Transaction and Source Document
Source documents are the link between transactions and the accounting system. All Transactions
are recorded on source documents, these source documents are then used to prepare the
accounting journals (the books of first entry).
The source documents for the CRJ are the:
Receipt
Cash register roll
The Source document for the CPJ is the:
Cheque counterfoil
The Source document for credit transactions is:
An Invoice
Step Two: The Journals (books of first entry)
The journals are known as the books of first entry as they record transactions in the accounting
system for the first time. Similar transactions are grouped together with the aim of organizing and
summarizing the information.
4
Although there are more, in Grade nine you deal with the following journals:
Cash Journals:

Cash Receipts Journal

Cash Payments Journal
Credit Journals:

Debtors’ Journal

Debtors’ Allowances Journal

Creditors’ Journal

Creditors’ Allowances Journal
Step Three: The Ledger
The General Ledger is a further summary of the information contained within the journals.
Information from the journals is posted or transferred to the General Ledger, this action brings
together information kept separate in the various journals, for example the increase and decrease
in the Bank Account.
The General Ledger is divided up into two sections:
Balance Sheet Section:
This includes Capital, Drawings, all asset accounts, and all liability accounts.
The Nominal Section:
This includes all of the Income accounts and the expense accounts.
Subsidiary Ledgers:
In addition to the General Ledger, we also have subsidiary ledgers. These are the Debtors’ ledger
and the Creditors’ Ledger. In these ledgers, each debtor and creditor will have their own account.
Each individual transaction with the debtor or creditor is shown. Thus by looking at the debtor’s or
creditor’s ledger account, you can see how much is owed to or by the other party.
Step Four: The Trial Balance
The drawing up of the Trial Balance follows on from the completion of the General Ledger. The
Trial Balance is divided up into the same two sections as the General Ledger, The Balance Sheet
Section and the Nominal Section. It is a further summary of the General Ledger and each account
is represented as a one line entry, with either a Debit or a Credit Balance or Total. It is a one page
summary of the entire financial year of the business.
Step Five:
The Financial Statements
Although it is a one page summary, the Trial Balance is nor a usable accounting statement. It is no
indication of the financial performance of the business, nor does it present the financial position of
the business. For this purpose we have the Financial Statements.
5
1.
The Balance Sheet
This Statement uses the Balance Sheet section of the Trial Balance to show the financial
position of the business on a particular date, usually the last day of the financial year. The
Balance Sheet is divided up into two sections, Assets and Owner’s Equity and Liabilities. It
is called a Balance Sheet, as these two section must balance (be equal). The assets
section shows us what assets the business owns, while the Owner’s Equity and Liabilities
Section shows us where the business got the money from to buy the assets.
The Balance Sheet is a reflection of the Accounting Equation:
ASSETS = OWNER’S EQUITY + LIABILITIES
2.
The Income Statement
The Income Statement is prepared using the Nominal Section of the Trial Balance. In the
Income Statement all income accounts are added together to calculate total income.
Likewise, all expense accounts are added together to calculate total expenses. The total
expenses amount is subtracted from the total income amount in order to calculate Net
Profit for the year.
The following is a summary of the Income Statement:
Total Income – Total Expenses = Net Profit
6
Activity Two
Draw a diagram that represents the accounting cycle. Your diagram needs to show the order of
the accounting cycle, starting with Transactions and ending with the Financial Statements.
7
Activity Three
Accounting is said to be a process of recording all the financial transactions made by a business
during a given period.
1.
Explain why a business owner would want to keep accurate accounting records for his or
her business.
2.
In addition to the owner of a business, who are the other parties that may express an
interest in the financial records of a business?
LESSON Three:
The focus of this lesson is recording credit sales in the Debtors’ Journal.
Words and
terms
As you are already aware, when a transaction takes place, it is recorded on a source
document. This source document is then recorded in one of the books of first entry. In the
case of a credit sale, when the business sells on credit to one of its customers, the
transaction is recorded on an invoice. As already mentioned, the customer keeps the
original, and the business uses a duplicate as their source document. This source
document is then recorded in the Debtors’ Journal – the book of first entry used to record
credit sales.
Contra
account:
Every
transaction
in
accounting
The format of the Debtors’ Journal:
The format of this journal is fairly straightforward, and we only have amount columns for
Sales and Cost of Sales. The additional columns are for document, day, details (the
debtor’s name), and Folio (Fol). The Folio column is an important column as it records the
debtor’s reference number.
has a debit
and a credit
entry. The
two
accounts
involved are
Example:
The transaction below shows how the Debtors’ Journal is used:
On 17 June, sold goods to P. Allen, debtor 3, for R900. The cost price of the goods was
R450, issued invoice 24.
known as
each other’s
contras.
8
Debtors’ Journal of EX Ample Traders for June 2012
Doc
Day
Details
Fol
Sales
Cost of
Sales
Take note:
The transaction does not mention whether the goods were sold for cash or on credit. It does,
however, mention that an invoice was issued as a source document. This is our clue as to what
type of transaction this is. It is important for you to know what source documents are associated
with each type of transaction, as it they provide important clues as to where a transaction should
be recorded.
The double entry of the Debtors’ Journal:
You will notice that the amounts in the Sales and the Cost of Sales columns in the Debtors’
Journal are different. This is because each column represents one double entry. We already know
that for every debit there must be an equal credit – this is the principle of double entry. The double
entry of each column will be discussed in detail below.
The double entry of the Sales Column:
The sales account in the General Ledger is an income account, and therefore increases on the
credit side. As goods are being sold in this example, sales is increasing and therefore credited.
The contra account which is debited is the asset Debtors’ Control. This asset represents the
money that is owed to the business. The more money that is owed to the business, the bigger the
asset Debtors’ Control gets.
The double entry of the Cost of Sales Column:
This is dealt with in the same way as the cost of sales column in the Cash Receipts Journal. The
asset Trading Stock is being used to earn an income, we therefore have less Trading Stock, and
therefore credit it. The Trading Stock is becoming the expense Cost of Sales, therefore we debit it.
The asset Trading Stock is being converted into the expense Cost of Sales.
9
Activity Four
Use the information provided to prepare the Debtors’ Journal of Merlin Stores for August 2012.
Then answer the questions that follow.
Transactions for August 2012:
3
Issued invoice i32 to M. Morgan, Debtor 1, for R900. Cost price was R600.
8
Sold goods on credit to A. Pendragon, Debtor 2, for R750, cost was R500, issued invoice
i33.
12 Issued invoice i34 to M. Morgan for R1 500, cost of goods sold amounted to R1 000.
16 Sold goods on credit to Z. Luther, Debtor 4, issued invoice i35 for R3 900, cost
price of goods sold amounted to R2 600.
Questions:
1.
How much does D1 owe Merlin Stores?
2.
What mark-up on cost does Merlin Stores use?
3.
Merlin stores has been struggling with debtors paying them late. What could they do in order
to encourage quicker payment?
Debtors’ Journal of Merlin Stores for August 2012
Debtors’
Doc Day Details
Fol
Control
Cost of
Sales
Activity Five
The object of this exercise is to help you to differentiate between cash and credit sales. You will
need to look for the following clues that will indicate whether a sales transaction is cash or credit:
The wording of the transaction (Cash or Credit).
The source document: Invoice = credit
Songololo Stores sells goods for cash as well as on account. Use the information provided below
to prepare the Cash Receipts Journal and the Debtors’ Journal for Songololo Stores for April 2012.
Songololo Stores uses a 25 % mark-up on cost.
10
Transactions for April 2012:
1
Sold goods to B. Zulu (D4) for R1 250, issued invoice 62.
3
Cash sale to R. Vuka (D1), cost of goods sold amounted to R100.
5
Issued invoice 63 to V. Matlock (D3) for R1 000.
7
Sold goods for cash, R825.
10 B. Zulu was issued with invoice for goods purchased with a cost price of R1 600.
13 Issued invoice 65 to R. Vuka for R3 750.
15 Issued receipt 044 to FNB for R27 for interest received on current account.
18 Sold goods on credit to T. Lourens (D2), issued invoice 66 for R1 500.
19 Cash sale of goods with a cost price of R540.
22 Sold goods on credit to V. Matlock, issued invoice 67 for R2 750.
Cash sale to B. Zulu, R1 225.
27 R. Vuka was issued invoice 68 for R200 for goods bought on credit.
29 Issued receipt 045 to P. Gheely, our tenant, for R4 000 for rent received.
Debtors’ Journal of Songololo Stores for April 2012
Doc Day Details
Fol
Cost of
Sales
Sales
Cash Receipts Journal of Songololo Stores for April 2012
Doc Day
Details
Analysis
Bank
Sales
11
Cost of
Sales
Sundry accounts
Amount
Details
Incorporating credit sales into the accounting system:
Let’s begin by comparing a credit sale to a cash sale:
Cash Sale
Description We sell goods to a customer, the
customer receives goods, and in
return we (the retailer) receive money
(payment)
Double
entry 1
Dr Bank
Cr Sales
Remember – we are the
ones doing the selling! So
it is from our point of view
as the business
Credit sale
We sell goods to a customer, the
customer receives goods. We do not
receive payment, however the
customer agrees to pay us at some
point in the future. The customer now
owes us money, and is referred to as
a debtor.
Money is received Dr Debtors
as a result of the
control
income sales.
Cr Sales
In this case, the
business is
generating an
income from
sales, but no
money is
received.
Instead, the
promise of money
in the future is
received.
Double
Dr Cost of sales
This records the
Dr Cost of sales
This records the
entry 2
Cr Trading
loss of the asset
Cr Trading
loss of the asset
Inventory
trading inventory
Inventory
trading inventory
SAME
as it is used to
SAME
as it is used to
generate and
generate and
income.
income.
As we can see the only difference is that money is not received in a credit
transaction. Therefore the bank account is replaced with the Debtors Control
Difference
account. This asset account represents money that will be received in the near
future.
12
Revision Activity
Recording transactions in the books of first entry:
NB source documents
(Use the source
documents to help you
choose the correct
journal)





Cheque counterfoil (CPJ)
Receipt (CRJ)
Cash register roll (CRJ)
Invoice (issued to a debtor when they
purchase form us) (DJ)
Credit note (Issued when a debtor returns stuff
to us) (DAJ)
You are provided with information from the books of Strummer Stores for the month of April 2012.
Strummer Stores are retailers of musical equipment, they sell goods for cash and credit. Strummer
Stores uses a mark-up of 100 % on cost. You are required to record these transactions in the
following books of first entry:
1.
2.
3.
4.
The Cash Receipts Journal
The Cash Payments Journal
The Debtors’ Journal
The Debtors’ Allowances Journal
Transactions for April 2012:
Day
1
2
4
7
11
15
17
19
21
22
25
26
29
30
Transaction
Bought merchandise from Humble Suppliers for R800, issued cheque 89.
Sold goods for cash, R1 400.
Issued invoice 68 to B. Babatu (D4) for R840 and invoice 69 to K. Karabo (D1) for R220.
Paid R2 890 with cheque 90 to Usain Suppliers. R2 200 for merchandise, and R690 for
stationery.
Sent cheque 91 to Free-fall Formats for advertising, R1 450.
Bought packing material from medi-pack, paid R560 with cheque 92.
Sold goods for cash, R1 700.
B. Babatu returned goods, issued credit note 32 for R84.
Sold goods for cash, R400.
Issued invoice 70 to D. Diboko (D2) for R660.
Issued credit note 33 to D. Diboko for goods not as per invoice, R100.
Issued receipt 58 to K. Karabo for R220 paid on account.
Sold goods for cash, R4 500.
Issued invoice 71 to G. Goloka (D3) for R3 000.
Issued cheque 93 to Superior Suppliers for merchandise, R8 000 and stationery R340.
Paid Hercules Properties R4 500 with cheque 94 for rent.
Cashed a cheque for salaries, R7 500
13
Cash Payments Journal of Strummer Stores for April 2012
Doc
Day
Details
Bank
Trading
Stock
Sundry accounts
Stationery
Amount
Details
Cash Receipts Journal of Strummer Stores for April 2012
Doc
Day
Details
Fol
Analysis
Bank
Cost of
Sales
Sales
Debtors’
Control
Sundry accounts
Amount
Debtors’ Journal of Strummer Stores for December 2012
Doc Day Details
Fol
Sales
Cost of
Sales
Debtors’ Allowances Journal of Strummer Stores for December 2012
Debtors’
Cost of
Doc Day Details
Fol
Allowances
Sales
14
Details
Transaction by transaction revision:
Buying an Asset:
An asset is an item of value that is owned by a business. It can be used repeatedly for the benefit of the
business.
Examples of assets
Land and
Buildings
The premises that a business
OWNS.
Vehicles
Anything used for
transportation purposes.
Equipment
Items used by the business
repeatedly without losing
value.
E.g. data projector, Sewing
machines, 3D printers.
Buying an Asset:
On 3 April Levi purchases a new computer from Mecer Computers for R9 000. He pays with his first
cheque, number 001.
No: 001
Date:
PAY:
Amount:
R
004556 5858 001 002
Signed:
15
Mr L. Pacioli
Can you see a double entry?
In the business TWO things have happened:
1. The business has less money in their BANK account.
2. The business now has more EQUIPMENT.
1.
Double entry:
What do we know: Two accounts are involved namely BANK and EQUIPMENT
Assets
Bank Account
Get bigger on the DEBIT side.
Is the Bank getting SMALLER?
Get smaller on the CREDIT side
ASSET
Equipment Account
Get bigger on the DEBIT side.
Is the Equipment increasing?
Get smaller on the CREDIT side
2. In the Cash PAYMENTS Journal:
Cash Payments Journal of LEVIS for April 2015
Doc
Day
Details
Bank
Materials
Wages
Sundry accounts
Amount
Details
3. On the Accounting Equation
Assets =
Effect
Reason
The accounting equation
OE +
Effect
Reason
16
Liabilities
Effect
Reason
Paying for or buying an expense:
An expense is something that the business pays for that is consumed when it is used. Another way of
saying this is that it is used up when used.
Examples of expenses
Materials
This refers to the ‘stuff’ that
is used when rendering a
service. All service businesses
use different materials when
providing their service.
e.g. Shampoo to a hairdresser.
Water and
Electricity
This is consumed or used up
as it is used. It is therefore an
expense.
This is the amount paid to
workers in a business.
Wages
As a pen or pen is used, it is
being used up. It is therefore
classed as an expense.
Stationery
Advertising
Advertising is an expense
that businesses pay in
order to promote their
businesses.
17
Paying for an expense:
On 5 April Levi bought materials from Makro for R600. He paid with cheque number 002.
No: 002
Date:
PAY:
Amount:
R
004556 5858 001 002
Signed:
Mr L. Pacioli
In the business TWO things have happened:
1. The business has less money in their BANK account.
2. The business now has more MATERIALS - but the owner now has less money in the
business.
Can you see a double entry?
1.
Double entry:
What do we know: Two accounts are involved namely BANK and MATERIALS
Assets
Bank Account
Get bigger on the DEBIT side.
Is the Bank getting SMALLER?
Get smaller on the CREDIT side
Materials 600
Expenses
Materials Account
Get bigger on the DEBIT side.
Is the Materials increasing?
Get smaller on the CREDIT side
Bank 600
2. In the Cash PAYMENTS Journal:
Cash Payments Journal of LEVIS for April 2015
Doc
Day
Details
Bank
Materials
Wages
Sundry accounts
Amount
Details
3. On the Accounting Equation
Assets =
Effect
Reason
The accounting equation
OE +
Effect
Reason
18
Liabilities
Effect
Reason
Selling goods for Cash:
On 7 April Levi stores sold goods with a cost price of R400 for R840, cash.
For this transaction there are two double entries:
1.
Bank and Sales
o Bank increases
o Sales increases
2.
Trading stock and Cost of Sales
o Trading stock decreases
o Cost of sales increases
1.
Double entries:
1.
What do we know: Two accounts are involved namely BANK and SALES
Assets
Bank Account
Get bigger on the DEBIT side.
Is the Bank getting BIGGER?
Get smaller on the CREDIT side
Sales 840
INCOME
Sales Account
Get smaller on the DEBIT side.
Is the Sales account increasing?
Get bigger on the CREDIT side
Bank 840
2.
What do we know: Two accounts are involved namely TRADING STOCK and COST OF
SALES
Assets
Trading Stock Account
Get bigger on the DEBIT side.
Is the Trading Stock getting SMALLER?
Get smaller on the CREDIT side
Cost of sales 400
Expense
Cost of Sales Account
Get bigger on the DEBIT side.
Get smaller on the CREDIT side
Trading stock 400
19
Is the Cost of Sales account
increasing?
2. In the Cash RECEIPTS Journal:
Cash Receipts Journal of LEVIS for April 2015
Doc
Day
Details
Analysis
Bank
Sales
Cost of
Sales
Sundry accounts
Amount
Details
3. On the Accounting Equation
Assets =
Effect
Reason
The accounting equation
OE +
Effect
Reason
20
Liabilities
Effect
Reason
Selling goods on credit:
On 11 April Levi stores sold goods with a cost price of R800 for R1680, issued invoice to D. Prius.
For this transaction there are two double entries:
1.
Debtors’ control and Sales
o Debtors’ Control increases
o Sales increases
2.
Trading stock and Cost of Sales
o Trading stock decreases
o Cost of sales increases
1.
Double entries:
1.
What do we know: Two accounts are involved namely BANK and SALES
Assets
Debtors’ Control Account
Get bigger on the DEBIT side.
Is the Bank getting BIGGER?
Get smaller on the CREDIT side
Sales 1680
INCOME
Sales Account
Get smaller on the DEBIT side.
Is the Sales account increasing?
Get bigger on the CREDIT side
Debtors control
1680
2.
What do we know: Two accounts are involved namely TRADING STOCK and COST OF
SALES
Assets
Trading Stock Account
Get bigger on the DEBIT side.
Is the Trading Stock getting SMALLER?
Get smaller on the CREDIT side
Cost of sales 800
Expense
Cost of Sales Account
Get bigger on the DEBIT side.
Get smaller on the CREDIT side
Trading stock 800
21
Is the Cost of Sales account
increasing?
2. In the Debtor’s Journal:
Debtors’ Journal of LEVIS for April 2015
Doc
Day
Debtors
Control
Details
Cost of
Sales
3. On the Accounting Equation
Assets =
Effect
Reason
The accounting equation
OE +
Effect
Reason
22
Liabilities
Effect
Reason
Money received from a debtor:
A debtor who owes an amount of R1550 settles his account in full. Receipt 22 is issued.
Can you see a double entry?
In the business TWO things have happened:
1. The business has more money in their BANK account.
2. The business is now OWED less money by a debtor.
1.
Double entry:
What do we know: Two accounts are involved namely BANK and DEBTORS’ CONTROL
Assets
Bank Account
Get bigger on the DEBIT side.
Is the Bank getting BIGGER?
Get smaller on the CREDIT side
Debtors control 1550
ASSET
Debtors’ Control
Get bigger on the DEBIT side.
Is the Debtors’ control decreasing?
Get smaller on the CREDIT side
Bank 1550
2. In the Cash RECEIPTS Journal:
Cash Receipts Journal of LEVIS for April 2015
Doc
Day
Details
Analysis
Bank
Sales
Cost of
Sales
Debtors’
Control
Sundry accounts
Amount
3. On the Accounting Equation
Assets =
Effect
Reason
The accounting equation
OE +
Effect
Reason
23
Liabilities
Effect
Reason
Details
Returns from a debtor:
On 17 April D. Prius returned unwanted goods to Levi stores. The goods were originally sold for
R84 and had a cost price of R40.
For this transaction there are two double entries:
1.
Debtor’s control and Debtors’ Allowances (makes sales smaller)
o Debtors’ Control decreases
o Debtors’ Allowances increases
2.
Trading stock and Cost of Sales
o Trading stock increases
o Cost of sales decreases
1.
Double entries:
1.
What do we know: Two accounts are involved namely BANK and SALES
Assets
Debtor’s Control Account
Get bigger on the DEBIT side.
Debtors’ control gets?
Get smaller on the CREDIT side
Debtors Allowances 84
INCOME
Debtors’ Allowances Account
Get bigger on the DEBIT side.
Debtors’ Allowances gets?
Get smaller on the CREDIT side
Debtors Control 84
3. What do we know: Two accounts are involved
namely TRADING STOCK and COST OF
SALES
Assets
Trading Stock Account
Get bigger on the DEBIT side.
Trading Stock gets?
Get smaller on the CREDIT side
Cost of sales 40
Expense
Cost of Sales Account
Get bigger on the DEBIT side.
600
Cost of Sales gets?
Get smaller on the CREDIT side
Trading stock 40
24
2. In the Debtors’ Allowances Journal:
Debtor’s Allowances Journal of LEVIS for April 2015
Doc
Day
Debtors
Allowances
Details
Cost of
Sales
3. On the Accounting Equation
Assets =
Effect
Reason
The accounting equation
OE +
Effect
Reason
25
Liabilities
Effect
Reason
Posting to the General Ledger from the journals of businesses that offer credit, namely the
Cash Receipts Journal, the Debtors’ Journal, and the Debtors’ Allowances Journal.
Introduction:
We have already covered posting from the Cash Journals to the General Ledger. You are advised
to go over those lessons in preparation for this lesson.
In the explanations below each journal that records transactions with debtors will be explained
separately. Each double entry will be discussed in detail. To assist you in understanding the
posting to the General Ledger, you are encouraged to go over the summary below. This summary
explains the difference between each of the types of ledger accounts.
Summary of the types of ledger accounts:
Assets
Liabilities
E.G. Debtors’ Control
E.G. Creditors’ Control
+
-
-
+
Increase on
the debit side
Decrease on
the credit
side
Decrease on
the debit side
Increase on
the credit
side
Expenses
Incomes
E.G. Cost of Sales
E.G. Sales
+
-
-
+
Increase on
the debit side
Decrease on
the credit
side
Decrease on
the debit side
Increase on
the credit
side
26
1. Posting the Debtors’ Journal:
Debtors’ Journal of EX Ample Traders for June 2012
Doc Day Details
Fol
Sales
Dr ____ Cr ____
Cost of
Sales
Dr ____ Cr ____
The total of the Sales column (R4 600):
Debtors’ Control B9
June
1
Balance
b/d
6 450
Sales N1
In the above example, you can see the posting of the Sales column total to the General Ledger.
Only the total is posted, as it is a summary of all the transactions in the journal. The total of R4 600
represents the income earned from credit sales, as well as the amount that debtors owe. It is
therefore posted to the credit side of the Sales account (an income which increases on the credit
side) and the debit side of the Debtors’ Control account (an asset which increases on the debit
side).
The total of the Cost of Sales column (R2 300):
Trading Stock B12
June
1
Balance
b/d
6 450
Cost of Sales N2
Trading stock is being removed from the store room, and is being used to generate a profit. This
needs to be reflected in the accounting records. Therefore the amount of R2 300 is credited to the
Trading Stock account (decrease) and debited to the Cost of Sales account (increase). The asset
becomes and expense when it is used up to make a sale.
27
Let’s Practice:
Post the Debtors’ Journals below to the General Ledger accounts provided from the books of
Giant Industries for the month of July 2014.
Debtors Journal of Giant Industries for July 2014
Doc
Day
Details
Fol
Sales
Cost of Sales
Dr ____ Cr ____ Dr ____ Cr ____
Extract from the General Ledger of Giant Industries for July 2014
Trading Stock
Month
Day
Details
Fol
Amount
Month
Day
Details
Fol
Amount
Day
Details
Fol
Amount
Day
Details
Fol
Amount
Day
Details
Fol
Amount
Debtors’ Control
Month
Day
Details
Fol
Amount
Month
Sales
Month
Day
Details
Fol
Amount
Month
Cost of Sales
Month
Day
Details
Fol
Amount
Month
28
The debtors’ ledger is known as a subsidiary ledger, this is due to it not being part of the
actual accounting cycle, but rather a specific tool for managing the amounts owed by debtors.
In the Debtors’ Ledger, each debtor has their own account; this allows specific transactions to be
recorded individually. As a result, a quick glance at any debtor’s individual ledger account will tell
you how much that debtor owes the business.
Format of the Debtors’ Ledger
Debtor’s Ledger of M. Onster
Month Day
Document number
In this column we record the
source document number of the
particular transaction
Code
Debit +
Credit -
Balance
See
code
table
Transactions
that result in the
debtor owing
more are
recorded in this
column, such as
when the debtor
purchases
goods.
Transactions
that result in the
debtor owing
less are
recorded in this
column, for
example
payments or
returns.
The balance
column shows a
running balance.
This means that
the effect of
every
transaction
changes the
balance.
Explanation of Codes:
Explanation
This is the code for a credit sale
This is the code for a payment
This is the code for a return
Code
1
2
3
D1
The codes are used as a quick
means of identifying
transactions. Codes are not
standardized and businesses
use different codes.
What is the difference between the Debtors’ Control account in the General Ledger
and the Subsidiary Debtors’ Ledger?
The Debtors’ Control account is prepared using journal totals and therefore
represents transactions with all debtors. In the Debtors’ Ledger, each debtor has an
individual account that shows what each debtor owes.
Take Note:
Posting from the Debtors’ Journal to the Debtors’ Ledger
Debtors’ Journal of EX Ample Traders for June 2012
Doc Day Details
66
4
Fol
C. Roth
Cost of
Sales
Sales
980
D1
600
Debtor’s Ledger of C. Roth
Month Day
June
Document number
1
Account Rendered
4
Invoice 66
Code
The entry on 1
June is the
balance owed
by debtor C
Roth at the
beginning of
the month.
D1
Debit
Credit
Balance
560
1
980
29
1 540
Explanation:
As you can see in the above example, the individual transaction is posted to the individual debtor’s account. In this
case, debtor C. Roth. The transaction is posted on the day that it took place, in this case the 4 th of June. The
document number as pointed out above is written out in full, so that you can see what type of transaction is being
posted (an invoice records a sale to a debtor) and therefore choose the correct code. In this case code 1 (for a sale).
The amount in the Debtors’ Control column, which records the value of the sale, and therefore what the debtor owes,
is posted to the ‘Debit’ column in the ledger. The debit column represents an increase in what is owed by the debtor. It
is therefore added to the amount in the balance column (line above) to get the new balance amount. Thus by looking
at the most recent balance column, you can always tell what a debtor owes.
Activity 9.1
1
Which business issued the statement?
2
Who owes the business money?
3
How much does the customer owe the business in total?
4
Identify the two types of transactions shown on the statement below.
4.1
4.2
5
Why do you think the current amount (R3 300) and the amount due (R16 000) are different
30
Activity 9.4 (Page 150)
Posting the Debtors’ Journal to the General Ledger:
The total of the Sales column (R9 750):
Debtors’ Control B9
June
1
Balance
b/d
14 300
Sales N1
The total of the Cost of Sales column (R6 500):
Trading Stock B12
June
1
Balance
b/d
11 000
Cost of Sales N2
Debtors’ Ledger of Pippa Photography for March 20.1
Jarred Naidoo
D1
Debit
Credit
Code
Date
Details
(plus)
(minus)
Kumeul Moodley
Date
D2
Details
James Wood
Date
Balance
Code
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
D3
Details
Code
31
Activity 9.5 (Page 150)
Posting the Debtors’ Journal to the General Ledger:
Debtors’ Control B9
Dec
1
Balance
b/d
Trading Stock B12
Dec
1
Balance
b/d
Sales N1
Cost of Sales N2
Debtors’ Ledger of Scrunchy Traders for December 20.5
Andrew Smith
D4
Debit
Credit
Code
Date
Details
(plus)
(minus)
Nebs Khuzwayo
Date
D3
Details
Travis Grigesh
Date
Code
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
D2
Details
Jason Galt
Date
Balance
Code
D1
Details
Code
32
Posting the Debtors’ Allowances Journal to the General Ledger:
The Debtors’ Allowances Journal records returns made by debtors to the business. As a result of
the return, two changes can be identified. Firstly the debtor owes less, and secondly the business
now has more stock. As a result, there are two columns, one to cancel the sale, and the second
one to record the increase in stock.
Debtors’ Allowances Journal of EX Ample Traders for June 2012
Doc
Day Details
Fol
Debtors’
Allowances
Cost of
Sales
The total of the Debtors’ Allowances column (R500):
Debtors’ Control B9
June
1
Balance
b/d
6 450
Debtors’ Allowances N3
The total of the Debtors’ Allowances column, R500, is posted to the credit (minus) side of the
Debtors’ Control account as the debtors owe R500 less. The amount is also posted to the contra
account, Debtors’ Allowances to record the cancellation of the sale.
The total of the Cost of Sales Column (R250):
Trading Stock B12
June
1
Balance
b/d
6 450
Cost of Sales N2
The total of the Cost of Sales column represents the total value of stock that was returned by
debtors. As this amount would have been returned to the businesses actual store room, the
amount must also be added to the Trading Stock account (the Trading Stock account represents
the Store room). The double entry for this is to debit the Trading Stock account as it is increasing,
and to credit the Cost of Sales account.
33
Posting from the Debtors’ Allowances Journal to the Debtors’ Ledger:
Take note:
Debtors’ Allowances Journal of EX Ample Traders for June 2012
Doc
Day Details
23
7
C. Roth
Fol
Debtors’
Allowances
D1
98
Cost of
Sales
60
Debtor’s Ledger of C. Roth
Month
Day
Document number
Code
June
1
Account Rendered
4
Invoice 66
1
7
Credit Note 23
3
D1
Debit
(Owe more)
Credit
(Owe less)
Balance
The amounts
in the
Debtors’
Ledger of C.
Roth from
the previous
example are
shown in
grey text.
560
980
1 540
98
1 442
Explanation:
In this example, which is a continuation of the previous example, a return by a debtor, recorded in
the Debtors’ Allowances Journal is posted to the Debtors’ Ledger.
A return by a debtor to a retailer is seen as a reversal of the original sales transaction. As a result
of the return, the amount that the debtor owes the retailer decreases. The return is recorded in the
DAJ, this is then posted to the individual debtor’s accounts.
As the account is an asset, it decreases on the credit side, due to the return, the debtor owes less,
and the account is therefore credited.
In the above example, debtor C. Roth is returning something previously purchased for R98, C
Roth therefore owes EX Ample Traders R98 less. R98 is therefore subtracted from the amount in
the balance column,
R1 540, resulting in a new balance of R1 442 (this is therefore the amount that debtor C. Roth
currently owes EX Ample Traders).
Did you know?
Asset accounts increase on the Debit side and decrease on the Credit side.
34
Activity
Debtors’ Allowances Journal of Crash Hardware for January 20.1
Doc
Day Details
Fol
Debtors’
Allowances
Cost of
Sales
The total of the Debtors’ Allowances column (R1 600):
Debtors’ Control B9
Debtors’ Allowances N3
The total of the Cost of Sales Column (R350):
Trading Stock B12
Cost of Sales N2
Debtors’ Ledger of Crash Hardware for January 20.1
B. Bean
D1
Debit
Code
Date
Details
(plus)
J. Jones
Date
Balance
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
D2
Details
R. Rivers
Date
Credit
(minus)
Code
D3
Details
Code
35
Activity 9.8 (Page156)
Debtors’ Journal of Face – It for March 20.8
Doc
Day Details
Sales
Cost of
Sales
Dr _____
Dr _____
Cr _____
Cr _____
Fol
Debtors’ Allowances Journal of Face – It for March 20.8
Doc
Day Details
Fol
Debtors’
Allowances
Cost of
Sales
Dr _____
Dr _____
Cr _____
Cr _____
General Ledger of Face-It for March 20.8
Balance Sheet Section
Debtors’ Control B9
Trading Stock B12
Nominal Section
Sales N1
31
36
Debtors
Control
DJ
16 140
Debtors’ Allowances N3
Cost of Sales N2
Debtors’ Ledger of Face-It for March 20.8
R. Naidoo
D1
Date
Details
S. Jackson
Date
Details
Credit
(minus)
Balance
Code
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
D3
Details
J. Savage
Date
Debit
(plus)
D2
M. Gilks
Date
Code
Code
D4
Details
Code
37
J. Jansen
D5
Date
Details
Debit
(plus)
Code
Credit
(minus)
Balance
What is the total owed by the five debtors?
3. Posting the Cash Receipts Journal to the General Ledger:
As this has already been covered, only the posting of the Debtors’ Control column will be covered.
Cash Receipts Journal of EX Ample Traders for June 2012
Doc
Day
Details
Fol
Analysis
Bank
Sales
Cost
of
Sales
Debtors’
Control
Sundry
accounts
Amount
Details
Debtors’ Control B9
June
1
Balance
b/d
6 450
Being an asset, the Debtors’ control account decreases on the credit side. The total of the
Debtors’ control column in the Cash Receipts Journal represents payments received from debtors;
the amount is therefore posted to the credit or minus side of Debtors’ Control, as the debtors now
owe the business R4 600 less.
38
Posting from the Cash Receipts Journal to the Debtors’ Ledger:
Cash Receipts Journal of EX Ample Traders for June 2012
Doc
44
Day
Details
15
Fol
Analysis
D1
C. Roth
560
Bank
Cost of
Sales
Sales
560
Debtors’
Control
Sundry
accounts
Amount
560
Debtor’s Ledger of C. Roth
Document number
Code
Details
D1
Month
Day
Debit
Credit
Balance
June
1
Account Rendered
4
Invoice 66
1
7
Credit note 23
3
98
1 442
15
Receipt 44
2
560
882
560
980
1 540
Explanation:
In the cash receipts journal above, you can see the recording of a receipt from a
debtor, C. Roth. Like any cash received, cash received from a debtor is recorded in
the cash receipts journal.
The effect of this receipt is that debtor C. Roth owes EX Ample traders less money.
The receipt is for R560, therefore C. Roth owes R560 less, as this is what he has
paid on his account.
Being an asset, the account decreases on the credit side, and because the debtor
owes less, due to payment, the account is decreasing. Hence the account must be
credited.
As a result of prior transactions, the debtor owed EX Ample Traders an amount of
R1 442. The debtor has now paid an amount of R560, and therefore now owes
R882. This can be seen in the Balance column which is updated after every
transaction.
39
Activity 9.9 (Page 160)
R. Duthie
Date
Debtors’ Ledger of Dlamini Drink Distributors
D1
Debit
Credit
Code
Details
Balance
(plus)
(minus)
S. Graham
Date
D2
Details
J. Baxter
Date
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
D3
Details
M. Clark
Date
Code
Code
D4
Details
Code
Dlamini Drink Distributors
Debtors’ List as at 31 October 20.1
40
Activity
Use the Journals below to prepare the account of K. Khoza D1 in the Debtors’ Ledger of Ndebele
Traders for the month of November 2012.
On 1 November K. Khoza owed an amount of R1 568 to Ndebele Traders.
Debtors’ Journal of Ndebele Traders for November 2012
Doc
33
34
35
36
37
Day Details
2
5
9
17
25
Fol
Z. Zitha
K. Khoza
D. Dlamini
K. Khoza
M. Mabena
D1
D3
D4
D3
D2
Debtors’
Control
700
1 400
1 380
1 560
600
5 640
Cost of
Sales
350
700
690
780
300
2 820
Debtors’ Allowances Journal of Ndebele Traders for November 2012
Doc
12
13
14
15
Day Details
7
15
22
29
K. Khoza
Z. Zitha
D. Dlamini
K. Khoza
Fol
Debtors’
Allowances
D3
D1
D4
D3
400
50
90
80
200
25
45
40
620
310
Cost of
Sales
Cash Receipts Journal of Ndebele Traders for November 2012
Doc
Day
63
64
65
Details
Fol
Analysis
1
K. Khoza
D3
1 568
1 568
8
Cash
450
450
15
Z. Zitha
8 50
850
22
Cash
940
940
30
K. Khoza
66
D1
D3
FNB
Bank
Sales
Nov
1
Sundry accounts
Amount
Details
450
225
940
470
850
2 000
2 029
5 837
Date
Debtors’
Control
1 568
2 000
29
K. Khoza
Cost of
Sales
29
1 090
695
4 418
Interest
Received
29
D3
Details
Code
Debit (plus)
Account Rendered
Credit
(minus)
Balance
1 568
41
Activity 9.11 (Page 162)
General Ledger of JJ Electronics – July 20.6
Balance Sheet Section
Capital B1
July
1
Bank B2
July
1
Balance
b/d
46 030
Vehicles B3
Trading Stock B4
July
1
Balance
b/d
33 500
Debtors’ Control B5
July
1
Balance
b/d
11 420
42
Balance
b/d
200 000
Nominal Section
Sales N1
July
1
Total
b/d
185 400
Total
b/d
22 500
Total
b/d
7 200
Debtors’ Allowances N2
Cost of Sales N3
July
1
Total
b/d
116 000
Current Income N4
July
1
Salaries and Wages N5
July
1
Total
b/d
85 900
Water and Electricity N6
July
1
Total
b/d
22 500
Rent Income N9
July
1
43
B. Ben
Date
Details
Debtors’ Ledger of JJ Electronics
D1
Debit
Credit
Code
(plus)
(minus)
D. Denver
Date
D2
Details
K. Kennedy
Date
Code
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
Debit
(plus)
Credit
(minus)
Balance
D3
Details
S. Smith
Date
Balance
Code
D4
Details
Code
JJ Electronics
Debtors’ List as at 31 July 20.6
44
Activity
Study the two ledger accounts below, prepared by a trainee accountant.
Although all of the amounts are correct, the trainee has managed to mix-up her debits and credits.
Some of the entries are on the incorrect side, and in one case the accountant was so unsure, she
put an entry on both sides of an account (effectively cancelling the entry!).
You are required to re-draw and correct the accounts in your book. Don’t forget to balance the
accounts at the end of the month.
Trading Stock B9
July
31
Cost of Sales
Bank
Dj
Cpj
8 340
15 450
July
1
Balance
b/d
3 640
31
Cost of Sales
Crj
6 200
Balance
c/d
4 550
Debtors’ Control B13
July
1
30
Balance
Bank
b/d
Crj
7 400
Sales
Dj
6 350
7 000
Answers
Trading Stock B9
19 090
Aug
1
Balance
19 090
4 550
b/d
Debtors’ Control B13
13 750
Aug
1
Balance
b/d
13 750
6 750
45