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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
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