This stage introduces debtors and shows how to process debtor related transactions including sales invoices and credit notes, payments and part-payment of invoices, recharging costs, refunds and discounts, and credit control.

Sales invoices debit 'Accounts Receivable' - Debtors - and credit a sales account. Debtors are assets on the balance sheet until paid (when the asset then becomes money in the bank).

Cash Receipts	Bank Statement	Trial Balance
Cash Payments	Bank Reconciliation	Balance Sheet
Cash Statement	Bank Advice Notes	Profit & Loss
Bank Receipts	Sales Invoices	General Ledger
Bank Payments	Aged Debtors	Journal

Narrative

Opening a bank account has made it more convenient for Alex but sometimes there's no one there when he finishes, so instead of writing out a cash receipt he writes - raises - an invoice instead. That way his customers can settle up later. Although he would rather be paid straight away, he feels he knows some of them well enough to have confidence that they won't forget. But he can also see it's important that he keeps track of who owes him money.

What he doesn't expect is that the amount he charges isn't always what he is eventually paid and he sometimes has to give a 'discount' or risk upsetting a good customer.

He also finds himself having to give a refund for some work which isn't properly completed because he is so busy.

He tries to branch out into design work, which is the work he enjoys the most, and through this another unexpected aspect of his business arises, which is buying and selling garden ornaments.

At first he just charges for these at cost, but he realises that he is providing a free service and might be able to make some extra money by adding a 'mark-up'.

Processing

Income

Process the sales invoices first in numerical order. Make a new sales account for Design Services (e.g. invoice 1003 ) so that this is a separate line on the Trial Balance.

Also, create a new sales account called 'Expenses Recovered' for the expenses that are recharged (e.g. 1004). It's good practice to keep income and expenditure separate rather than 'net off' the income against the expenditure.

Takes care not to confuse the invoices with the three credit notes. When you enter these, note:

• The first of these is a straight refund and processed as a partial reverse of invoice 1001.
• The second credit note is a discount and you will need to make a new expense account to track these discounts.

Enter the cash sales in the normal way, keeping an eye out for any paid by cheque.

Enter the bank income. Some of the bank income is marked up showing which invoices are paid. Some you will have to work out. There is some cash income and some different income grouped on the same 'lodgement' (cash and cheques paid into the bank).

Expenditure

Enter the cash and bank expenditure as before. Some of the transactions are marked up that they are recharged. Use a new account called 'Cost of Customer Goods' for these.

To enter the payment for Alex's drawings you will need a new account called 'Drawings' and you should make this an equity account-type. Although they are a cost to the business, drawings are kept separate from other expenses.

You will also need an account for 'Printing'.

The refund cheque number 10006 (tx-115) needs to be allocated to the customer's debtor account. Some systems will let you do this directly to the Debtors Control (Accounts Receivable), for others you may need to use a credit note and a bank payment as two entries instead of one. To do this you will have to use a Contra account, which in this case is specifically for the double-entry of each of the two transactions. The credit note will be a credit on the customer's account and a debit to the Contra account. The cheque will be a debit on the Contra account and a credit on the Bank.

 

There are two payments made using the debit card online with printouts of web pages as the supporting document. The first -The Mail Room (tx-104) is good quality and shows the full information including the company name and number. The second -Catnip Print (tx-113) - is poor quality and while it's better than nothing, it could be seen as inadmissible in an audit.

Reconciliation & Assessment

Start with the Cash Account and check the balance agrees to the statement provided by Alex Baker. If it's wrong then it's probably cash that has been banked.

Run through the bank reconciliation as before. You should find there are now two cheques that haven't cleared; the one 'brought forward' from the previous quarter and a new one for £60 (tx-115). You can see from the reconciliation provided how the balance shown on the bank statement compares to the balance per the accounts. Notice that the cheque from the previous quarter is also still outstanding.

Run the Trial Balance, Profit and Loss and Balance Sheet reports and check they match up.

Run an 'Aged Debtors Report'. There should be one customer with a balance outstanding. Note how this report shows the age of the debt. As an unpaid balance gets older it will be show in the columns moving from left to right. This report helps to prioritise credit control action and ensure invoices are not unpaid for too long.

Observations

• The invoice numbering has been started at 1001 (rather than 1) and the credit notes start with 101. The sort order for some systems is helped by having some leading numbers otherwise 10 can sort as being before 2. It doesn't really matter where the numbering starts, but it is helpful to stick to the sequence once started. It's common for the reference numbering (a unique number to identify the transaction) to be mixed up with a reference for a job or customer. This is unhelpful for the book-keeper as the incrementing numbers make it easier to spot if an invoice is missing.

• The payment of a debtor does not affect the P&L.

• Invoice 1004 has two different sales items but only one debtor - in double-entry terms the two credits add up to the single debit:

   

• On the first two invoices where costs have been recharged (Invoice 1004 and 1006) they have been recharged 'at cost'. The last one (Invoice 1007) a mark-up of £15 has been added.

• The Equity section of the Balance Sheet shows the profit made by the business, minus the drawings taken out - the residual profit that is in theory the value of the business.

VAT

Alex Baker is not registered for VAT in this quarter and no VAT accounting is necessary yet. However, his entertaining has paid off and he has negotiated a big contract with a local residents association and decided to register as he thinks his turnover will go over the VAT threshold very soon.

 

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Next steps: Creditors & VAT