LESSON
GRADE 10
34
CREDIT TRANSACTIONS
CONTROL & ETHICS
WORKSHEET 1
INTERNAL CONTROL OVER CREDIT TRANSACTIONS
Internal control is the systems or procedures that are put in place to monitor various activities in the
business so that any losses are reduced or avoided altogether.
Below are some of the measures that can be used to ensure that internal control takes place.
CONTROLS OVER DEBTORS
 Business should have a good credit policy and it should be adhered to e.g. screening customers
before allowing them to buy on credit
 Division of duties
 There should be a policy for credit approval
 Debtors to be screened carefully – they must be creditworthy
 All transactions must have proper documentation
 Pre-numbered invoices to be used
 Every debtor must have an individual account which must be kept up to date
 The balance of the Debtors Control account must correspond with debtor’s list
 Send out regular statement of accounts
 Give discounts to debtors who pay early
 Charge interest on overdue accounts
 Limit bad debts
 Proper authorization of credit notes and journal entries
 Price codes to prevent undercharging
 Any adjustments to debtors to be confirmed by a senior person
Ways to encourage debtors to pay on time.
- Give discount for early settlement of accounts
- Charge interest on overdue accounts.
- Sent regular reminders and requests for account payment
- No sales to overdue debtors
- Close accounts of long overdue debtors
CONTROLS OVER CREDITORS
 Division of duties
 Proper authorization of purchases and payments
 Check accuracy of invoices from creditors
 Invoices to be processed (stamped) before payment
 Proper documentation must accompany goods received
 Check the goods received with the invoice / delivery note
 Check for damaged goods
 Find an alternative supplier if it happens that problems occur frequently with a supplier
 The balance of the Creditor’s Control account must correspond with creditor’s list
 Employees that buy for the business can not receive any gifts from suppliers – it can be
seen as attempted bribery
 Accounts payable should be paid as late as possible without incurring interest
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ACTIVITY 1
1. What would you do if a debtor exceeds the credit terms granted to him
2 Is it better for a business to extend the payments made to creditors explain your answer
Yes / No
Explain:
ACTIVITY 2
Read the case studies below and decide which of the measures above would have prevented the
situation occurring.
e.g. Mrs B Crook sold goods on credit to her cousin. She then just “lost” the invoice. She
and her cousin thereafter shared the goods.
Use pre-numbered invoices (the bookkeeper would notice the invoice missing)
Use Division of duties (having a separate bookkeeper who could keep track of missing
invoices)
1.
Miss I Steele has not paid her account. You discover that she has debts all over town and so
will not be able to pay her debts.
2.
Your bookkeeper reports to you that the workers will not be paid at the end of the month as
debtors have not been paying their debts. You discover that the business has R500 000 in
outstanding debts!
3.
Miss Cryme, an employee, bought goods on account. She then processed a credit note
indicating that she had returned the goods, but she had not.
4.
B. Baxter, an employee, bought all his goods on the business account. He never paid for these
goods.
5.
Mr S. Potgieter supplied goods to XYZ Wholesalers. The owner of XYZ Wholesalers
discovered that Mr Potgieter was sending an invoice for the full amount of goods but when the
goods were actually counted, they were found to be short.
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6.
Goods bought from a supplier were found to be damaged. The supplier refused to accept them
back, on the grounds that the goods had been signed for which implies they were in good order
when received.
7.
Mr B. Short was responsible for drawing up both the Debtor’s control account and the Debtor’s
ledger. It was discovered that he had been keeping money received for himself and altering
the books to cover up the theft.
8.
Invoices received from a supplier were always accurate, except that it was later discovered that
each invoice had calculation errors (always benefitting the supplier)
9.
Creditors were paid within 30 days so that we could received a discount. Our suppliers
however stopped giving discount, but we still continued to pay within 30 days.
10.
It was discovered that in an attempt to sell more goods, the salesman was offering large
discounts to customers. The owner suspects that the discounts were so large that the business
was not making any money.
ACTIVITY 3
Refer to the steps for purchasing on credit in Lesson 29.
REQUIRED:
Write down each step and explain how each step helps in the internal control process.
Step 1
An order form will be submitted to the supplier
Step 2
The supplier will make up the order and send it to us together with a delivery note/invoice.
Step 3
The goods will be checked against the delivery note
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Step 4
If the invoice is correct it will be stamped and sent to the accounts department.
Step 5
The invoice will be checked against the order form to make sure that the order has been
correctly completed
Step 6
The Creditor’s journal will be posted to the General Ledger and the Creditor’s ledger. These
two must correspond at the end of the month.
Step 7
At the end of the month a statement will be received from the supplier indicating how much
money we owe.
Step 8
We will check the statement against our records of the Creditor’s account.
If they are the same, a cheque will be made
ACTIVITY 4
Indicate which of these activities are ethical and which are not
ETHICAL BEHAVIOUR?
Yes
1
The business sues a debtor who has not paid his debt and asks the
court to declare him insolvent
2
A person asks the court to declare him bankrupt so that he does not
have to pay his debts
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No
ANSWERS
34
ACTIVITY 1
1. What would you do if a debtor exceeds the credit terms granted to him
Charge interest on overdue accounts
No sales until payment is received
Close account of long overdue debtor
2 Is it better for a business to extend the payments made to creditors explain your answer
Yes / No YES
Explain: The longer the business takes to pay its creditors, the longer he has his money
available in the business
ACTIVITY 2
1.
Miss I Steele has not paid her account. You discover that she has debts all over town
and so will not be able to pay her debts.
Screening customers before allowing them to open an account
2.
Your bookkeeper reports to you that the workers will not be paid at the end of the month
as debtor’s have not been paying their debts. You discover that the business has R500
000 in outstanding debts!
Give discounts for prompt payment
Charge interest on overdue accounts
Send out constant reminders e.g. sms, telephone calls etc
Do not allow debtors to buy until they have paid.
3.
Miss Cryme, an employee, bought goods on account. She then processed a credit note
indicating that she had returned the goods, but she had not.
Division of duties – returns must be properly authorized.
4.
B. Baxter, an employee, bought all his goods on the business account. He never paid
for these goods.
Official order forms must be used when ordering goods.
Order forms must be properly authorized by management.
5.
Mr S. Potgieter supplied goods to XYZ Wholesalers. The owner of XYZ Wholesalers
discovered that Mr Potgieter was sending an invoice for the full amount of goods but
when the goods were actually counted, they were found to be short.
Check the goods received with the actual invoice.
6.
Goods bought from a supplier were found to be damaged. The supplier refused to
accept them back, on the grounds that the goods had been signed for which implies
they were in good order when received.
Check for damage on receiving the goods
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7.
Mr B. Short was responsible for drawing up both the Debtor’s control account and the
Debtor’s ledger. It was discovered that he had been keeping money received for
himself and altering the books to cover up the theft.
Division of duties
A senior person must verify that the control account and lists correspond.
8.
Invoices received from a supplier were always accurate, except that it was later
discovered that each invoice had calculation errors (always benefitting the supplier)
Check calculation on invoices
9.
Creditors were paid within 30 days so that we could received a discount. Our suppliers
however stopped giving discount, but we still continued to pay within 30 days.
Take as long as possible to pay without incurring interest.
10.
It was discovered that in an attempt to sell more goods, the salesman was offering large
discounts to customers. The owner suspects that the discounts were so large that the
business was not making any money.
Use secret price codes to ensure no undercharging takes place.
ACTIVITY 3
Step 1
An order form will be submitted to the supplier
If properly authorized this will make sure that no unauthorized people are buying on the
business account.
Step 2
The supplier will make up the order and send it to us together with a invoice.
We can see exactly how much we are being charged
Step 3
The goods will be checked against the delivery note
We can check that the correct number of items have been delivered
Step 4
If the invoice is correct it will be stamped and sent to the accounts department.
Division of duties – different people will receive the goods to those processing the payment.
Step 5
The invoice will be checked against the order form to make sure that the order has
been correctly completed
To prevent suppliers making up a short order and still charging for the full order.
Step 6
The Creditor’s journal will be posted to the General Ledger and the Creditor’s ledger.
These two must correspond at the end of the month.
Two sets of information, done by different people, must be the same. To be verified by a
senior person.
Step 7
At the end of the month a statement will be received from the supplier indicating how
much money we owe.
We can check that we are paying only for goods actually received by us.
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Step 8
We will check the statement against our records of the Creditor’s account.
If they are the same, a cheque will be made.
Ensure that the cheque is only written out once the amounts have been verified as being
correct. The cheque should only be signed once verification has shown the amount to be
correct.
ACTIVITY 4
ETHICAL BEHAVIOUR?
Yes
1
The business sues a debtor who has not paid his debt and asks the
court to declare him insolvent
2
A person asks the court to declare him bankrupt so that he does not
have to pay his debts
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No
x
x
CHALKBOARD SUMMARY
CONTROL OVER
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Creditors
Debtors
Good credit policy
Screening
customers
Division of duties
Policy for credit
approval
Debtors must be
creditworthy
proper documentation
Pre-numbered invoices
individual account
Debtors Control account
must correspond with
debtor’s list
Send out regular
statement
Give discounts for
paying early
Charge interest
Proper authorization of
entries
Price codes to
Any adjustments
confirmed by a senior
person
34 Accounting Grade 10
 Division of duties
 Proper authorization
 Check accuracy of
invoices
 Invoices to be
processed
 Proper
documentation
 Check the goods
received
 Check for damaged
goods
 Find an alternative
supplier if necessary
 The Creditors Control
account must
correspond with
creditor’s list
 No gifts from
suppliers
 Accounts should be
paid as late as
possible
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