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13 Cards in this Set

  • Front
  • Back

Trade payables

The balance on the payables ledger represents the amounts owing to suppliers for goods or services purchased during the accounting period but NOT paid for by the end of that accounting period



Trade payables will increase if expenses are greater than payments



Trade payables will decrease if expenses are lower than payments

Trade receivables

The balance on the receivables ledger represents amounts still owed to the business for goods or services sold during the accounting period but for which payment has NOT been received by the end of that accounting period



Trade receivables will increase if sales are greater than receipts



Trade receivables will decrease if sales are lower than receipts

Accruals

Accruals are expenses which relate to an accounting period but have not yet been paid. E.G electricity may have been consumed during a period but not yet billed.



These expenses are added to the relevant expense in the income statement and shown as a current liability in the statement of financial position.

Prepayments

Prepayments are expenses which have already been paid but related to a future accounting period. E.G rent may have been paid quarterly in advance for the period January to March. If the year end is end of Feb, some of this payment (one month) will relate to the next accounting period.



The amount paid in advance is deducted from the relevant expense in the income statement and shown as a current asset in the statement of financial position

Accounting treatment

Accruals: dr expense, cr current liability



Prepayments: dr current asset, cr expense

Accounting for bad debts

Bad debts are specific debts owed to a business which are never going to be paid. They are written off as an expense in the income statement.



Notes:


- Sales are shown at their invoice value in the income statement. They are never adjusted for bad debts


- Bad debts written off are shown as an expense in the income statement.


- The credit entry removes the receivable from the receivables ledger.

The double entry for writing off a bad debt

DR bad debts


CR the relevant trade receivable

At the end of the accounting period the total balance on the bad debts account will be transferred to the income statement

DR Income Statement


CR Bad debts

Bad debts recovered

In some instances, a debt written off as bad may be paid in a later period. The amount should be recorded as additional income in the income statement of the period in which the payment is recovered.

Double entry for bad debts recovered

DR Bank/Cash


CR Bad debts recoverable

At the year end this amount will be transferred to the income statement

DR Bad debts recoverable


CR Income Statement (shown as other income)

Allowance for receivables

Experience may show that a certain proportion of receivables at the end of a period will not actually be paid. It is prudent therefore to recognise this and make an allowance for non-payments.



This estimate is known as the allowance for receivables and has a separate ledger account.

Several possibilities with allowance for receivables

When an allowance is first made, it is charged as an expense in the income statement.



When an allowance exists but is increased, the amount of the increase is charged as an expense in the income statement.



When an allowance exists but is decreased, the amount of the decrease is credited back to the income statement (shown as other income)



In the statement of financial position the full amount of the allowance is taken away from trade receivables.