debtors reconcialation

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  • 7/28/2019 Debtors Reconcialation

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    ACCOUNTING

    7

    Grades 10 and 11 dealt with basic entries related to the debtors, creditors, debtors allowances, creditors

    allowances journals and basic debtors and creditors ledgers. You will remember that when customers or other

    enterprises buy goods on credit from an enterprise, the transaction is recorded in the debtors journal. Any sales

    returns are recorded in the debtors allowances journal and payments received from debtors is recorded by

    making an entry in the cash receipts journal. Errors that are corrected, interest charged on overdue accounts

    and transfers between debtors and creditors accounts are recorded through entries in the general journal.

    Individual accounts foreach debtorare kept in the enterprises debtors ledger. This individual account is a

    summary of all the transactions between the enterprise and the debtor and shows the (total) amount due by

    (or outstanding balance of) the debtor. The entries in the journal are posted daily or monthly to the individual

    account of the debtor

    Grade 12 involves thereconciliation of the control accountwith the debtors or creditors ledger and the

    interpretation of it.

    A new concept introduced in Grade 12 is the debtors age analysis a practical explanation of the age of

    the debt.

    It involves the following:

    Determining how long the debtor is overdue

    Information in the control account and subsidiary ledger which is insufficient to be able to determine the age

    of the debt

    This summary is used for control purposes

    In Grades 10 and 11 we dealt with creditors in the following way: when an enterprise buys goods on credit

    from another enterprise or supplier, the transaction is recorded in the creditors journal. Purchases which are

    returned are recorded in the creditors allowances journal and payments of outstanding creditors accounts

    are recorded by making an entry in the cash payments journal. Errors that are corrected, interest charged on

    overdue accounts and transfers between debtors and creditors accounts are all recorded through entries in

    the general journal.

    An individual account is kept for each creditor in the enterprises creditors ledger. This individual account is a

    summary of all the transactions between the enterprise and the creditor and shows the (total) amount due to (or

    outstanding balance of) the creditor. The entries in the journals as books of first entry are posted daily or monthly

    to the individual account of the creditor.

    LESSON 3: Pre-knowledge

    7

    REWIND:

    Debtors and CreditorsReconciliation

    NOTES:

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    ACCOUNTING

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    Section 1: Debtors Reconciliation

    ACCOUNTING

    Section 1: Debtors Reconciliation

    Section 2: Age Analysis in Practise

    Section 3: Cerditors Reconciliation

    Section 4: Activty

    Multiple-choice Questions

    Additional Activities:

    Answers

    What do we mean by our debtors? They represent money owing to the business. Collection of the debt by

    debtors is vitally important because as a debtors age weakens we are not talking about the physical age of

    the debtor, instead we are referring to the age of his/her debt because the older the debt, the more difficult it

    becomes to retrieve the money owed to the business.

    Every business needs a credit policy and it is important for the business to keep an eye on aging debtors

    accounts and thus avoid possible losses (bad debts). The status of every debtor should therefore be analysedregularly to ensure that the debtor is complying to the terms and agreements set out in terms of the credit

    policy.

    Age Analysis Of Debtors

    We will now examine what information we need to look at to analyse the status of the debtor.

    An age analysis of debtors can be drawn up in order to monitor how long debtors have owed the business.

    The age analysis will provide the business with very important information regarding its debtors. Lets look at the

    information provided in this analysis.

    The following table illustrates a debtors age analysis schedule:

    LESSON 3THEME: FORECAST INCOME STATEMENT

    SHAIDS TRADERS

    DEBTORS AGE ANALYSIS AT 31 DECEMBER 2010 Terms : 30 days

    DEBTORS Amount Due Current

    Period in arrear

    1

    month

    2

    month

    3

    month

    +90 days

    A. Ant R2 000 R1 000 R500 R500

    P. Pine R3 600 R1 800 R500 R500 R800

    C. Cat R3 000 R1 500 R500 R500 R500

    D. Dame R2 500 R1 250 R500 R500 R250

    E. Earl R1 000 R1 000

    R12 100 R5 550 R2 000 R2 000 R1 550 R1 000

    % Total 100% 46% 17% 17% 13% 7%

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    ACCOUNTING

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    REMEMBER

    REMEMBER

    REMEMBER

    NOTES:

    Section 2: Age Analysis in Practise

    This activity will help you understand the debtors age analysis and also provide you with the types of questions

    that you may get in the exams.

    The following is an extract from the statement issued by J.K Traders to debtor Ima Chancer on 30th June 2010

    Terms strictly 30 days.

    Now a question arises, what do we mean by terms?

    By terms we mean what period, are we allowing our debtors to pay their debts? So thats the terms.

    The important thing Matriculates is that a debtors age analysis provides you with information for you to take

    action.

    The credit control department can make use of the above information to:

    Send out statements this will inform debtors about their outstanding debt to the business.

    Determine bad debts it will be used by the credit department and by senior managers in order to

    determine the business bad debts. It will provide information about which debtors are not paying, which

    debtors owe us for a long period of time and were we unable to recover the debt

    Remember it is not a simple procedure in which the business can just write off a debtor as

    irrecoverable. The procedure involves: sending out statements and reminders and if necessary lawyers

    letters are issued on behalf of the business. If the process therefore becomes more expensive than

    retrieving the debt the business will eventually write the debt off as a bad debt.

    Determine provision for bad debts once again, think of the accounting concept i.e. the prudence concept.

    The business does not anticipate any future gains but takes losses into consideration. The business therefore

    takes into consideration that some debt may not be paid and as a result sets up provision for bad debts

    which becomes a negative asset.

    Charge interest on outstanding accounts because debtors do not comply and do not pay on time their

    accounts are charged with interest.

    Encourage debtors to pay accounts promptly the purpose of this is to encourage the debtors to pay their

    account promptly.

    Offer discounts those debtors that comply with the terms will be given discounts and in this way they will be

    able to pay their accounts promptly.

    The purpose of the age analysis is to help management make certain decisions.

    +120 days 90 days 60 days 30 days Current Total

    1 300 300 600 700 1 400 4 300

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    ACCOUNTING

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    Section 3: Cerditors Reconciliation

    At the end of each month a statement is received from creditors. The statement shows the transactions that

    have taken place during the month. What does this tell us? It shows us the transactions that have taken place

    in that particular month. So its information that the creditor has sent us telling us about the transactions that

    have occurred in that particular month. What do we do with this statement? We take the statement must be

    compared to the creditors ledger account to ensure that the details of all invoices and other transactions

    reflected on it are correct before payment can be made. Why? Once we can verify the accuracy of that

    information we are now in the position to make the necessary payments, so obviously we receive the statement,

    we verify the accuracy and now we go on to make the payments.

    Procedure to follow:

    Compare the monthly statement against the creditors ledger account in the Creditors Ledger. Remember

    that we have for each of our creditors a separate account in our subsidiary ledger namely the creditors ledger

    and there each account of every creditor appears.

    The debit column of the statement is compared to the credit side of the ledger account and the credit column

    on the statement is compared with the debit side of the ledger account. Can you recall? When you did the

    bank reconciliation statement same thing debit and credit, remember in your books its a creditor somebodyyou owing money too. Whereas in their books you are a debtor, you owe money to them. Remember to

    understand the relationship we are talking about here.

    If there are any errors or omissions in the books of the business receiving the statement, they must be corrected.

    (it is important to verify the entry before recording). Important information, you have to verify the entry before

    recording.

    If the creditor made any errors (arithmetical, omissions), the business receiving the statement must notify the

    creditor so that the necessary corrections can be made by the creditor. They can arrive at the correct balance

    by preparing a Creditors Reconciliation Statement. In todays times its highly possible that errors can be made

    although we are using computers there is a possibility that an error can occur.

    Answer the following questions:

    1. Which amount is outstanding the longest?

    Answer: R1 300

    Why because this debts is outstanding for a 120 days plus.

    2. How much credit has the business allowed, Ima Chancer most recently?

    Answer: R1 400

    3. What percentage of, Ima Chancers account is overdue?

    Answer:

    2 200x 10014 300

    = 51%

    4. Should J.K Traders have allowed Ima Chancer credit during June? Substantiate.

    Answer: No, Chancer is not a good payer and there are amounts already outstanding for more than 300

    days Very important if we look at a debtors account we are expected to draw certain conclusions based on

    information that is provided to us. When you are doing a debtors age analysis remember you are expected

    to make certain decisions, what are those decisions as you have seen the questions that have been posed

    to you and the answers that have been given to you it clearly becomes evident to you that the idea behind

    drawing up a debtors age analysis is for you to interpret a debtors account and once you have interpreted

    the debtors account you are expected to make decisions on detectors age analysis .clearly in this sector

    what have you seen that you must be able to interpret the account answer questions based

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    ACCOUNTING

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    NOTES:

    Differences that can arise:

    The creditor may have prepared the statement on a different date from the date on which the business

    receiving the statement. Something that we have discussed with bank Recon its a timing difference, the

    statement is prepared sent to you and as a result of a timing delay we have differences in the statement.

    Invoices omitted/entered incorrectly. Sometimes it happens even when we capturing data that they

    maybe some differences with regards to difference in amounts or omissions.

    Credit/Debit notes omitted/ entered incorrectly

    Amounts paid/ discounts entered incorrectly. Take notes of payments that have been made. Take notes of

    the discounts that we have received from our creditors if are they entered correctly.

    Arithmetical errors. Sometimes it happens that this error can crop up which will result in a difference between

    the creditors account that we receiving the statement and our account as it appears in our creditors ledger.

    Transactions not recorded. Total omission and this would mean that one of these two accounts is not going to

    reconcile. Once again, what does the word reconcile mean? Reconcile means to bring together our balance

    as per our creditor in our creditors ledger account and the statement that we receiving from our creditor.

    Interest charged by creditor not taken into account. We have discussed all the different errors that can arise

    with will result in a difference between what our creditors account as it appears in our creditors ledger and

    the statement that we are receiving from our creditor.

    To recap, we take the differences into account in order to reconcile the amount as it appears in the account

    in our creditors ledger and the statement that we are receiving from our creditor. Once we are to reconcile

    then we know that we are on track.

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    ACCOUNTING

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    Section 4: Activty

    Study the information provided and answer the questions that follow.

    Information:

    Questions

    1. Give one possible reason for the entry of R600.

    It appears on the credit side of my control account and the folio reference for the R600 is the cash receipt

    journal, obviously we receive money. What does this mean? If we receive money from a creditor, what

    sometimes happens is that a creditors account has a balance whereby it happens that we have return

    goods and we have paid for it and therefore we need to get refund from a creditor? A possible transaction

    for that will be a refund from a creditor. Why? We are receiving money therefore a debit to bank and credit

    to my credit control.

    2. Provide a description for the transaction of R2 620.

    Our creditors control account is decreasing in value. Why is it decreasing? Because we are returning

    equipment to a supplier.

    3. Cash discounts amounting to R960 were received from creditors. How much was paid to them?

    They are telling that we have paid our creditors R49 900 and the question says that you have received

    discount to the value of R960, so u take the R49 900 subtract the R960 and you left with R48 940. This means

    that the actual amount that was paid is R48 940 to our creditors.

    4. Interest has been charged by a creditor on his overdue account. In which amount quoted above is this

    interest included?

    When interest is charged in our account, the account increases in value meaning our liability increases as a

    result we going to find in my general journal Im going to get a figure of R2 280.

    5. A creditor with a credit balance is transferred to the debtors ledger. In which amount quoted above is the

    transfer included?

    The figure is R2 520

    6. Which source document supports the entry of R69 600?

    My source document will be my original purchases invoice.

    7. Briefly explain possible ways of checking the balance of R64 240.

    All that you need to do is to compare to your creditors ledger and thats where will find the amount.

    General ledger of Botox Traders

    Balance sheet section

    Creditors Control a/c

    Oct 31 ? CPJ 49 900 Oct 1 Balance B/d 48 800

    Equipment CAJ 2 620 31 ? CRJ 600

    Journal

    credits

    GJ 2 520 ? CJ 69 600

    Balance C/d 64 240 ? GJ 2 280

    121

    280

    121 280

    Nov 1 Balance B/d 64 240

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    ACCOUNTING

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    1. Compare to the creditors list

    Check to see if entries agree with source documents

    Compare to statements received from creditors

    You have seen now the interpretive types of questions that examiners can pose with Regards creditors, debtors

    with all we have dealt with in todays segment. Remember we just completed the creditors ledger account,we had question to answer on it and you can see it involves application which is calculations and it involves

    evaluation and it involves judgment based on information. Make sure that you understand your work so that you

    can be able to answer your questions.

    NOTES:

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    ACCOUNTING

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    Now, lets consider a practical example which will help us understand the age analysis of debtors in a household

    situation. A household receives an account at the end of the month which reflects a period of current days

    at 30, 60, 90 or 120 days. This shows the members of the household what is due for each 30, 60 ,90 or 120 day

    period. If there are amounts under each of these timeframes the household can immediately see that there

    account is in arrears and this means interest will be charged if the account is not paid in time. It can also benefit

    the consumer if it motivates them to pay earlier which will qualify them for early payment discounts.

    The benefit of a debtors or creditors recon is basically the same as a bank reconciliation because the one is

    a check on the other. For example, if Nazz buys clothes on account from a big fashion store, her purchase will

    appear on her statement which allows her to acknowledge the purchase and make the necessary payment at

    the end of the month. She could of course, also choose to return the goods if she is not satisfied with the purchase

    . So on receipt of the perhaps the outfit didnt fit!. The other scenario is that the statement from the clothes shopis incorrect because it reflects an amount greater that the actual purchase price. Looking at the statement, Nazz

    immediately sees the mistake she can take the original invoice and have the billing corrected.

    Mistakes such as this can be the result of human error, the wrong invoice being posted Nazzs account.

    Real-life application segment

    14

    Get Real!