debtors!and!other! receivables! study!unit!9!...what!does!it!look!like?! lecture 2 date! doc!no!...

!Debtors!and!other!

Receivables!!

Study!Unit!9!

Introduc8on!

Study&Unit&9:&Debtors&and&other&receivables&

Lecture 1

What!do!we!need!to!know!about!Debtors?!

•  The&Debtors&Ledgers&

•  Recogni;on&

•  Measurement&–  Se>lement&Discount&Granted&

–  Credit&Losses&and&Allowances&for&Credit&Losses&•  Wri;ng&off&actual&credit&losses&

•  Recovery&of&credit&losses&

•  Disclosure&

Lecture 1

Accrual!basis!

•  Credit&transac;ons&vs&receiving&the&payment&from&the&debtor?&

•  Income&should&be&recognised&in&the&period&in&which&it&is&earned,&not&when&the&payment&is&received…&

Thus,&we&need&to&recognise&these&as&“Receivables”&

Lecture 1

The!Debtors!Ledger!


Lecture 2

What!is!the!Debtors!Ledger?!

•  The&Debtors&Control&account&in&the&GL&summarises&all&the&movements&and&balances&in&Debtors,&but&doesn’t&account&for&individual&debtors&accounts&

•  In&order&to&allow&for&accurate&statements,&and&informa;on,&we&create&accounts&for&EACH&debtor&in&a&Debtors&Ledger.&The&totals&in&the&Debtors&Ledger&should&agree&to&the&total&in&the&Debtors&Control&in&the&GL&

Lecture 2

What!does!it!look!like?!

Lecture 2

Date! Doc!No! Details! Fol! Debit! Credit! Balance!Sales Received Settlement Discount Granted

SJ CRJ CRJ

xxx

xxx xxx

xxx xxx xxx

Excellent Traders

SeElement!Discount!Granted!


Lecture 3

What!is!it?!•  Encouragement&to&debtors&to&se>le&their&debts&sooner&

–  The&sale&is&recognised,&as&is&the&debtor&

–  The&se>lement&discount&is&recognised,&it&is&not&a&reversal&of&the&sale,&or&a&credit&note&

–  It&will&have&it’s&own&account&in&the&GL,&but&when&disclosing&Sales&in&the&Statement&of&Profit&or&Loss,&it&is&deducted&from&Sales,&showing&the&net&sales&amount&

Lecture 3

What!about!the!VAT?!•  The&en;ty&calculated&VAT&on&their&sale,&charged&the&debtor&VAT,&and&will&pay&the&VAT&to&SARS&

•  The&se>lement&discount&will&reduce&the&VAT&payable&to&SARS,&thus,&our&entries&need&to&include&VAT&(where&applicable,&ie:&for&VAT&vendors)&

Lecture 3

Example!•  ABC&(a&VAT&vendor)&sells&R1&368&(VAT&incl)&goods&to&Pa;swe&Traders&on&credit,&gran;ng&a&se>lement&discount&of&2%&if&they&se>le&the&account&within&30&days,&which&they&do.&

•  The&ini;al&sale&amount&must&be&calculated&and&recorded&excluding&VAT,&with&VAT&Output&recorded&separately:&R1&368&/114&X&100&=&R1&200&

•  VAT&amount:&R1&368&–&R1&200&=&R168&

Lecture 3

Example:!Pos8ng!to!GL!

Date! Details! Fol! Amount! Date! Details! Fol! Amount!Debtors Control

SJ 1 200

Dr ! ! !!!!!!!!!!!!!!!!Sales ! ! ! !!!!!!!!Cr!

Date! Details! Fol! Amount! Date! Details! Fol! Amount!Debtors SJ 168

Dr ! !!!! !!!!!!VAT!Output ! ! ! !!!!!!!!Cr!

Lecture 3

Dr ! !!!! !!!!!!Debtors!Control! ! ! !!!!!!!!Cr!

Date! Details! Fol! Amount! Date! Details! Fol! Amount!Debtors SJ 1 368

Example!•  When&Pa;swe&se>les&the&invoice,&what&will&the&amount&be&that&they&pay?&

R1&368&–&(R1&368&X&2%)&

R1&368&–&R68.40&=&R1#299.60#

•  The&difference&is&Se>lement&Discount,&which&must&be&split&between&Se>lement&Discount&Granted&and&VAT:&R68.40&/&114&&X&100&=&R60&

VAT&=&8.40&

Lecture 3


Date! Details! Fol! Amount! Date! Details! Fol! Amount!Debtors CRJ 1 299.60

Dr ! !!!! !!!!!!!!!!!!!!!Bank ! ! ! !!!!!!!!Cr!

Lecture 3

Dr ! !!!! !!!!!!Debtors!Control! ! ! !!!!!!!!Cr!

Date! Details! Fol! Amount! Date! Details! Fol! Amount!Debtors SJ 1 368 Bank

and Discount

CRJ 1 368


Date! Details! Fol! Amount! Date! Details! Fol! Amount!Bank CRJ 8.40

Dr ! !!!! !!!!!!!!!!!!!!!VAT!Input ! ! ! !!!!!!!!Cr!

Lecture 3

Dr ! !!!!!!!!!!SeElement!Discount!Granted ! ! !!!!!!!!Cr!

Date! Details! Fol! Amount! Date! Details! Fol! Amount!Bank CRJ 60

Recording!•  When&the&debtor&pays,&it&will&be&recorded&in&the&CRJ,&thus&the&Se>lement&Discount&and&VAT&Input&should&be&recorded&there&too.&There&will&generally&be&another&two&columns&(Se>lement&Discount&Granted&and&VAT&Input)&in&the&CRJ&to&account&for&this&

•  Note&that&the&Debtors&Control&in&the&GL&account&is&now&at&zero…&by&accep;ng&the&credit&terms&and&paying&early,&their&account&is&fully&se>led&

Lecture 3

Allowance!for!SeElement!Discount!

Granted!


Lecture 4

Future!SeElement!Discounts!granted!

•  If&Debtors&will&pay&in&the&future&and&poten;ally&get&a&Se>lement&Discount,&that&means&that&Revenue&is&inappropriate&(since&we&should&disclose&Revenue&at&the&amount&we&will&receive)&

•  Thus,&we&create&an&allowance&of&the&es;mated&amount&of&the&future&se>lement&discounts&to&be&granted&

Lecture 4

Example:!GJ!

•  General&Journal&

Date! Details! Fol! Debit! Credit!

28 Feb Settlement Discount Granted

xxx

!!!!!Allowance for Settlement Discount Granted

N10 xxx

Allowance for settlement discount expected to be granted in the next financial year

Lecture 4

General!Journal!–!February 2013 ! ! !!!!!!!!!!!!!GJ1!

Example:!GJ!

•  General&Journal&–&Closing&off&


28 Feb Sales xxx

!!!!!Settlement Discount Granted

xxx

Closing transfer of settlement discount granted

Lecture 4


Example:!GJ!

•  General&Journal&–&Closing&off&


28 Feb Sales (after settlement discount)

xxx

!!!!!Trading Account xxx

Closing transfer of sales

Lecture 4


Measurement!of!Debtors!


Lecture 5

Measurement!•  In&order&to&provide&the&most&useful&financial&informa;on,&Debtors&are&measured&at&the&realisable&value&(recoverable&amount)&ie:&the&amount&we&will&actually&receive&in&terms&of&the&sale&

•  This&means&we&need&to&create&an&Allowance&for&Credit&Losses&

Lecture 5

Measurement!•  The&sale&is&not&reversed,&since&the&nonhpayment&by&debtors&is&not&a&reflec;on&of&the&nonhoccurrence&of&the&sale&

–  It&does,&however,&affect&profit&

•  The&Allowance&for&Credit&loss&is&deducted&from&Trade&and&Other&Receivables&when&we&disclose&it&in&the&Statement&of&Financial&Posi;on&

Lecture 5

Allowance!for!Credit!Losses!


Lecture 6

Irrecoverable!vs!DoubSul!•  Credit&Losses&are&recognised&for&Debtors&who&we&KNOW&will&not&pay&their&accounts&

•  Allowance&for&Credit&Losses&are&recognised&for&Debtors&who&we&THINK&may&not&pay&their&account&

Lecture 6

Why!do!we!‘allow’!for!it?!•  The&accrual&basis&–  Recognise&the&expense&in&the&same&period&the&related&income&was&earned.&&

–  If&a&debtor&doesn’t&pay&their&debt,&the&nonhpayment&should&be&recorded&in&the&same&period&as&the&sale.&Since&this&is&difficult&to&get&completely&correct,&and&only&;me&can&allow&a&more&accurate&amount,&we&‘es;mate’&the&amount&un;l&we&know&for&sure&&

Lecture 6

Why!do!we!‘allow’!for!it?!•  The&accrual&basis&–  Recognise&the&expense&in&the&same&period&the&related&income&was&earned.&&

–  If&a&debtor&doesn’t&pay&their&debt,&the&nonhpayment&should&be&recorded&in&the&same&period&as&the&sale.&Since&this&is&difficult&to&get&completely&correct,&and&only&;me&can&allow&a&more&accurate&amount,&we&‘es;mate’&the&amount&un;l&we&know&for&sure&&

Lecture 6

Es8ma8ng!the!Allowance!for!Credit!

Losses!


Lecture 7

How!do!we!es8mate!the!Allowance?!

•  We&have&no&defini;ve&measure&of&who&will&and&won’t&pay&in&the&future,&so&we&need&to&base&our&es;mate&on&an&assessment&of&the&risk&of&nonhpayment&

•  The&best&way&to&do&this&is&to&consider&how&long&the&debtor’s&account&has&been&outstanding&

–  A&debtor&who&has&their&balance&in&30&days?&

–  A&debtor&who&has&their&balance&in&90&days?&

Lecture 7

Debtors!Age!Analysis!•  The&age&of&the&debt&is&a&good&place&to&start&with&our&es;mate&

•  The&age&analysis&lists&each&debtor,&and&breaks&down&their&debt&into&different&‘ages’&

Lecture 7

Debtors!Age!Analysis!Debtors!Age!Analysis!as!at!….!

Customer! Total!Due! Current!Balance!

Period!in!arrears!

30!Days! 60!Days! 90!Days! 120!Days!

&&&&

Lecture 7

Calcula8ng!the!es8mate!•  Although&the&age&analysis&is&the&star;ng&point,&just&because&an&amount&is&in&90&days,&doesn’t&mean&they&WON’T&pay&

•  We&need&to&individually&assess&each&of&the&debtors,&based&on&payment&history&etc&

•  Aper&each&debtor&has&been&assessed,&a&list&of&Doubqul&Debts&will&be&drawn&up&&

Lecture 7

Recording!the!Allowance!for!Credit!

Losses!


Lecture 8

Example:!GJ!



28 Feb Credit Losses xxx

!!!!!Allowance for credit losses

xxx

Allowance for possible credit losses created

Lecture 8


Recording!the!Allowance!•  Credit&Losses&represents&an&expense&

•  The&Allowance&for&Credit&Losses&will&decrease&Debtors&on&the&Financial&Statements&

•  Credit&Losses&are&closed&off&to&the&Profit&or&Loss&account&

Lecture 8

Increasing!the!Allowance!•  The&Allowance&for&Credit&Loss&is&in&the&Statement&of&Financial&posi;on,&the&balance&will&remain&there&un;l&it&is&removed&

•  The&business&will&have&to&create&another&allowance&for&the&next&year,&if&it&is&higher&than&the&prior&year,&there&are&two&op;ons&to&record&this&

Lecture 8

Increasing!the!Allowance!•  Reverse&the&en;re&allowance&(using&the&General&Journal),&and&create&the&allowance&for&the&full&amount&of&the&new&es;mate&

OR!•  Pass&a&journal&for&the&difference&between&the&old&and&the&new,&thus&only&adjus;ng&the&‘old’&balance&to&represent&a&higher&balance&

Lecture 8

Decreasing!the!Allowance!•  The&Allowance&might&need&to&be&decreased&from&the&prior&year,&in&which&case,&you&can&pass&a&journal&for&the&difference&between&the&old&and&the&new&to&reverse&out&the&excess&amount&

Lecture 8

Wri8ng!off!credit!losses!where!an!

allowance!exists!


Lecture 9

Allowance!vs!Actual!•  The&allowance&affects&expenses&and&the&Allowance&for&Credit&losses.&Debtors&Control&and&the&individual&debtors&accounts&are&not&affected&by&the&allowance&since&it&represents&an&es;mate&

•  Should&an&amount&actually&be&wri>en&off,&it&needs&to&be&set&off&against&that&par;cular&debtor,&thus&an&adjustment&would&be&needed&

Lecture 9

Op8on!1![!GJ!



28 Feb Allowance for Credit Losses

xxx

!!!!!Debtors Control xxx

Writing off the following debtors as irrecoverable: xxxxx

Lecture 9


Op8on!1!–!Remaining!allowance!•  The&Allowance&at&the&end&of&the&prior&year&relates&to&the&current&year,&so&any&amount&actually&wri>en&off&would&affect&the&prior&year&allowance&

•  When&calcula;ng&the&adjustment&needed&for&the&new&allowance,&deduct&the&actual&credit&losses&from&the&prior&year&provision&first&

Lecture 9

Op8on!2!–!GJ!1!



28 Feb Credit Losses xxx

!!!!!Debtors Control xxx

Writing off the following debtors as irrecoverable: xxxxx

Lecture 9


Op8on!2!–!GJ!2!



28 Feb Allowance for Credit Losses

xxx

!!!!!Credit Losses xxx

Reduction of allowance for Credit Loss

Lecture 9


Recovery!of!Credit!Losses!wriEen!

off!


Lecture 10

Credit!Losses!Recovered!•  Should&money&be&recovered&from&debtors&that&have&been&wri>en&off,&this&is&recorded&in&a&separate&account,&Credit&Losses&Recovered&

•  The&debtors’&account&is&not&affected,&since&the&amount&was&wri>en&off&completely&

•  The&amount&should&also&not&be&allocated&to&the&Credit&Losses&account&

Lecture 10

Credit!Losses!Recovered!



28 Feb Bank xxx

!!!!!Credit Losses Recovered

xxx

Credit losses, written off, recovered from

Lecture 10


VAT!on!Credit!Losses!and!Credit!

Losses!Recovered!!


Lecture 11

VAT!implica8ons!•  VAT&was&charged&on&the&original&sale,&and&paid&over&to&SARS&

•  Should&the&debtor&be&wri>en&off&as&a&Credit&Loss,&you&can&claim&an&input&on&that&amount&(Keep&in&mind&that&the&amounts&will&be&VAT&inclusive)&

•  If&you&then&recover&an&amount&that&was&wri>en&off,&you&will&have&to&pay&SARS&the&VAT&on&that&amount&

Lecture 11

Disclosure!of!Debtors!in!the!

Financial!Statements!


Lecture 12

Informa8on!•  The&credit&losses&allow&for&more&useful&informa;on&in&two&ways:&

–  Earnings&are&reflected&according&to&the&accrual&method&(ie:&earnings&show&income&and&related&expenses&in&the&period&the&income&was&earned)&

–  The&asset&(debtors)&is&reflected&at&an&amount&expected&to&be&realised&by&the&business&

Lecture 12

Statement!of!Financial!Posi8on!Current Assets Inventories Trade and other Receivables (1) Cash and Cash Equivalents

&xxx xxx xxx &

Lecture 12

(1) Debtors – Allowance for Credit Losses

debtors!and!other! receivables! study!unit!9!...what!does!it!look!like?! lecture 2 date! doc!no!...

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