MU_ACC003_2011_DEBTORS AND CREDITORS RECON_TT_WEB002 by wuzhengqin

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REWIND:
Debtors and Creditors
Reconciliation
 LESSON 3: Pre-knowledge
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 for each debtor are kept in the enterprise’s 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 the reconciliation of the control account with the debtors or creditors ledger and the
interpretation of it.
A new concept introduced in Grade 12 is the debtor’s 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 creditor’s 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 enterprise’s 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.

NOTES:




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  LESSON 3
  THEME: FORECAST INCOME STATEMENT
  • Section 1: Debtors Reconciliation
  • Section 2: Age Analysis in Practise
  • Section 3: Cerditors Reconciliation
  • Section 4: Activty
  • Multiple-choice Questions
  • Additional Activities:
  • Answers




 Section 1: Debtors Reconciliation
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 debtor’s ‘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 analysed
regularly 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. Let’s look at the
information provided in this analysis.
The following table illustrates a debtors age analysis schedule:

 SHAID’S TRADERS
 DEBTORS AGE ANALYSIS AT 31 DECEMBER 2010                              Terms : 30 days
                                                                             Period in arrear
        DEBTORS              Amount Due         Current      1              2           3           +90 days
                                                            month         month       month
 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%




[Remember icon and box]                        8
The important thing Matriculates is that a debtor’s age analysis provides you with
information for you to take action.
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The important thing Matriculates is that a debtor’s age analysis provides you with information for you to take
action.


REMEMBER 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 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.


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




 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
 The following is an extract from the statement issued by J.K Traders to debtor Ima Chancer on
that you may get in the exams.
30th June 2010
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?
Terms strictly 30 days.
 By terms we mean what period, are we allowing our debtors to pay their debts? So that’s the
Now a question arises, what do we mean by terms?
 terms.
By terms we mean what period, are we allowing our debtors to pay their debts? So that’s the terms.

  +120 days       90 days       60 days        30 days        Current         Total
    1 300           300           600            700           1 400          4 300

Answer
NOTES: 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?
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    Answer: R1 400
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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 Chancer’s account is overdue?
   Answer:
   2 200 x 100
   4 300    1
   = 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 debtor’s 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


 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 it’s 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 creditor’s 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 it’s a creditor somebody
you 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 today’s times its highly possible that errors can be made
although we are using computers there is a possibility that an error can occur.




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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 creditor’s 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 creditor’s 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.


NOTES:




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         creditors account as it appears in our creditor’s 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
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         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.
Section 4: Activty
Section 4: ACTIVTY
Study the information provided and answer the questions that follow.                                               slide
Study the information provided and answer the questions that follow.
Information:
Information:
                                         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              GJ         2 520                  ?                 CJ           69 600
                 credits
                 Balance              C/d       64 240                  ?                 GJ           2 280
                                                   121                                               121 280
                                                   280
                                                          Nov      1    Balance           B/d          64 240


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 creditor’s 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 I’m 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 that’s where will find the amount.




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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 today’s 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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Get Real!
 Real-life application segment
Now, let’s 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 didn’t fit!. The other scenario is that the statement from the clothes shop
is 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 Nazz’s account.




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