THE SYSTEM OF

ACCOUNTING

ACCOUNTING FOR DEBT

Volume III

WRITTEN BY:

SYED AQEEL RAZA

MASTER OF COMMERCE & POLITICS

ACCOUNTING FOR
DEBT
The debt is an amount of money which is borrowed by one
party from another party under the condition to pay back at
a later date with or without interest and it may be borrowed
by individual, bank for personal loan like auto loan, house
loan, credit card loan etc. and for business loan on markup,
debt against selling of goods or services with our without
interest. It may have a mortgage, personal and assets
guarantee.
Most of the companies are operating them to take a loan
from the financial institution for meeting their financial
demands or increasing their volume. This is right that the
debt or loan may increase the efficiency of any business in
many ways one side as to increase production, to purchase
assets; plant and machineries, equipment, raw materials,
and to purchase finished goods for trading; to pay the
salaries of employee, bills of suppliers and to get the rid of
many other financial difficulties in the operation of any
business but on the other side may become the cause of
financial troubles in future because of paying huge amount
in shape of mark-up or interest. The profit is generated by
investment involves more investment more profit and less
investment less profit and if the investment of his own, the
profit is of his own but the investment acquired from other
sources, the profit is distributed among others. The result is

same means profit earned that amount of his own but

change of growing and loss of his own assets are under
questions.

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Accounting
debt

for

All debts involve cash and other than trade are considered as
a loan or some time sundry debtors as the trade involves
goods which are given to sellers on credit or cash, the seller
is bound to pay the debt of goods to the party time to time
revolving sales and purchase. The seller who took goods on
credit is called trade debtor.
Trade debtor and creditors
A trade debtor is an entity that owes a debt to another entity
during the course of business in the shape of goods or
services. The trade debtor credits the account of the entity
that supplied goods or services to him under account
payable controlled by trade creditors and the entity who
supplied goods and services to the debtor must debit his
account under account receivable which is controlled by
trade debtors account.
Generally, the account of individual partys receivable is
opened in general ledger but in the case of various parties,
another ledger called subsidiary ledger is created named
trade debtors under controlled by account receivable or
debtors control account in general ledger account.

The subsidiary ledger is sub book of the particular account

involving journals like sales journal, sales return and
allowances journal, cash receipt journal, and adjustments
through journal voucher.
The subsidiary ledger for sale either on cash or credit may
be useful to control the variety of units sold under control
account sale.
Trade debtors relate to goods or services for doing business.

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Accounting
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The trade debtors are who they purchased goods for doing
business and the party from whom the trade debtor
purchased goods is called trade creditors. The goods sold on
cash to parties doing trade are also considered debtors
because the goods are supplied on taking an advance
against sale come under advance from customers under
debtors account.
Then, the trade creditor will have to maintain accounts of the
parties to whom the goods sold on credit.
We know that all individual debtors account go in the
debtors ledger and creditors account in creditors ledger
under control general ledger account receivable and account
payable or debtors and creditors control account and for

making subsidiary ledger of accounts receivable or debtor

accounts, we have to maintain journals like sales journal,
sales return and allowances journal, cash receipt journal and
adjustments through journal vouchers of those transactions
that do not belong to journals or come after posting of
entries from journals as shown in our volume II Chapter III
Ledger Making.
And for this, Accounts payable refers to creditors who deliver
goods for business and get payment after some time. The
amount of invoice is journalized as inventory account debit
and partys account credit in ledger account directly or
through purchase journal. The purchases in business may be
from different persons or firm may require a separate
account of the separate book of accounts like subsidiary
ledger which provide detailed information about each person
or firm to an accountant. It is controlled in general ledger by
Account payable control account as referred to our volume II
Chapter III Ledger Making.
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Accounting
debt

for

Therefore, debtors are ascertained by accounts

receivable and creditors by account payable.
ACCOUNTS RECEIVABLE:
Account receivable means to receive the amount
from parties to whom the goods sold on credit or

from the purchaser of goods and have to maintain

parties ledger account individually as well as sales
journal and sales return journal as illustrated below;
Jan 1. 2015 Sold merchandise to Hakim & Co. Rs.4, 000/=
vide Invoice No1003.
Jan 5. Sold merchandise to Jasco Traders for Rs.5, 000/= vide
invoice No.1004.
Jan 10. An Invoice No.1005 for Rs.10, 000/- was issued against
merchandise sold to Star G/Store.
Jan 15. Sold merchandise to Usman Brothers on credit for Rs.6, 000/against Invoice No.1006.

Jan 30. Merchandise consigned to Wali Brothers Rs.6, 000/=

vide Invoice No. 1007.

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Accounting
debt

SALES JOURNAL
DATE

ACCOUNT DEBITED

INVOICE NO.

POS
T

Page No.1
AMOUNT

for

Ref.
1.1.2015
5.1.2015
10.1.2015
15.1.2015
30.1.2015

Hakim & Co.

Jasco Traders
Star G/Store
Usman Brothers
Wali Brothers

1003
1004
1005
1006
1007

_/
_/
_/
_/
_/

TOTAL

Accounts receivable (Dr.)

Sales (Cr.)

4,000
5,000
10,000
6,000
6,000

31,000

31,000.31,000.-

The entry of sales journal will be recorded through journal

voucher as to account receivable debit and sales credit
narrating to record sales for the month of January 2015 and
to individual parties account or debtors account in
subsidiary ledger making reference sales journal.

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Accounting
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In case of sold goods returns, the following sales return

journal is made to record sales returns from the selected
transactions below;

Jan 20. Merchandise returned from Jasco Traders Rs.500/vide credit memo No.1050.
Jan 30. Received merchandise from Star G/Store vide
credit memo No. 1055 for Rs.1000/=
SALES RETURNS AND ALLOWANCES
JOURNAL
Page No.1
DATE

20.1.201
5
30.1.201
5

CREDI
T
MEMO

PO
ST
Ref.

Jasco Traders

1050

_/

500

Star G/Store

1055

_/

1,000

ACCOUNT CREDITED

TOTAL
Sales Return & Allowances
(Dr.)
Accounts Receivable
(Cr.)

AMOUNT

1,500
150
0
1500

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Accounting
debt

for

The entry of sales return and allowances journal will be made

by journal voucher narrating to record sales return for the
month of January 2015 and to individual accounts of the
party.

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Accounting for debt

The total of carry forward balance of customer accounts

must be equal to the carry forward balance of account
receivable as shown below;
Hakim & Co.
Jasco Traders
Star G/Store
Usman Brothers
Wali Brothers
TOTAL

4,000
4,500
9,000
6,000
6,000
29,500.-

ACCOUNT PAYABLE

Accounts payable means to pay the amount to the

parties who supplied goods on credit or to the seller
of goods.
Account payable account is made like account
receivable account as illustrated below;
PURCHASES

Jan 1. Purchased merchandise from Aftab Traders Rs.10,

000/= vide Invoice No. 3201.
Jan 10. Purchased merchandise from Iqbal & Co. Rs.5000/=
vide Invoice No.1312.
Jan 15. Merchandise purchased on account from Jamshed Brothers for
Rs.5000/= vide Invoice No. 4242.

Jan 20. Received an invoice No.2323 for purchase of

Rs.5000/= from Azad Traders

Jan 30. Goods purchased for Rs.10000/- against Purchase Inv. # 1035
from Amjad Brothers.
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Accounting
debt

for

Account payable is recorded by journal voucher narrating to

record purchases for the month of January 2015 making
reference purchase journal.

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Accounting
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for

PURCHASE RETURN

Jan 15. Debit Note Issued to Aftab Traders for Rs.1000/against damaged goods returns and received credit memo
No.4322.
Jan 30. Damaged goods returned to Jamshed Brothers for
Rs.500/- with Debit Note No.3343 and received credit
Note.4633.

Purchase returns are recorded by journal vouchers narrating

to record purchase return and allowances for January 2016
making reference PRJ-1.
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Accounting
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The total of carry forward balance of parties account must be equal to

the carry forward balance of account payable as shown below;
Aftab Traders
9,000
Iqbal Brothers
5,000
Jamshed Brothers 4,500
Azad Traders
5,000
Amjad Brothers
10,000
TOTAL
33,500
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Accounting
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THE A G I N G
An aging schedule has to design which shows invoices and
its due dates and enables to settle or receive on maturity. It
can be made for both accounts payable and accounts
receivable.
In accounts payable aging, the
suppliers from whom the goods
business indicates which supplier
avoid any credit or supply problem
date.

analysis of payment to
purchased on credit for
is paid first in order to
or the maturity of invoice

ACCOUNT PAYABLE AGING REPORT

Accounts payable is the result of all purchases made by a
business from regular vendors on a credit basis. Many
businesses pay for services and materials 30, 60, 90 or 120
days after receipt of invoice for controlling their cash flow.
With this information, a company can decide which items
can be paid on time based on the amount of cash the
company has on hand and which invoices the company may
need to pay late.
An account payable aging report lists the due date of
payments that a company owes to vendors and has
generally set up with 30 days time but consists on;

00 to 30 days old

31 to 60 days old

61 to 90 days old

Older than 90 days

The report helps the user in determining which invoices are

overdue for payment and assumes that all invoices are due
for payment within 30 days.
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Accounting
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The aging of account payable schedule shows that the company

had purchased goods on credit from customer1 and customer2 and
paid them within the credit limit of 30 days when customer3,
customer4, and customer5 were not paid older than 45, 40 and 90
days.
In the case of paying the part amount into the bill, the balance will
be treated older than the date of purchase as shown in customer1.

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Accounting
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ACCOUNTS RECEIVABLE AGING

This report directs managements attention to accounts that
are slow to receive first by the customer and then by the
date of the sales invoice. It is also useful in determining
Allowance for doubtful accounts.
AGING OF ACCOUNTS RECEIVABLE

If we assume the credit terms are net 30 days and invoices

are within 30 days will be classified as current and;
Any unpaid invoices in April are classified as 1-30 days past
due.
Any unpaid invoices in March are classified as 31-60 past
due and so on.
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Accounting
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The aging of accounts receivable is used to calculate the estimation of

allowance for uncollectible bad debts like;

The estimated amount of uncollectible is recorded in the ledger by debiting

allowance for uncollectible bad debt and crediting accounts receivable.

The individual account will also affect.

In the case of collection some part of the uncollectible amount, the balance of
accounts
receivable and allowance for doubtful accounts will increase by reversing
the entry
above.
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Accounting for debt

NOTES PAYABLE AND NOTES RECEIVABLE

In order to enjoy maximum benefit from the business, firms

or persons borrow money from banks, financial institutions,
friends or relative and mostly against notes which may be
interest bearing or non-interest bearing depends on the
receiver and the payer. Interest bearing notes will be paid on
the due date of the note along with the actual amount.
A promissory note is an instrument in writing unconditional
undertaking, signed by the maker to pay a certain amount
only to, or to the order of, a certain person, or to the bearer
of the instrument.
The firm or person who gave amount on promissory note
would enjoy the interest at the rate specified in the notes
which called interest income and the firm or person who took
the amount on promissory notes would pay the interest on
notes payable called interest expense.
The note is treated as an asset by the holder and liability by the giver.
NOTE PAYABLE
The note payable is current liability taken in any of the
following cases;
- To receive cash as a loan

- To clear the liabilities

- To purchase assets
- To pay for expenses
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Accounting for debt

Suppose that;
-

To receive cash as loan;

Cash
xxxx
Notes Payable

xxxx

To clear the liability by notes for 90 days at 5% interest;

Accounts payable
5% Notes payable

xxxx

Purchase machinery against notes for 60 days

Machine
xxxx
Notes payable

xxxx

xxxx

The payment of expenses;

Advertising expenses
Notes Payable

xxxx
xxxx

At the time of maturity or due date, the money lender pays the
liability, if the note is non-interest bearing as;

Notes Payable
Cash/Bank

xxx
xxxx

If the note is interest bearing means face value of note along with
interest for the cost of furniture Rs.10000 issued a note for 3 months @
6% p.a. interest;
Furniture
10000
6% Notes payable
6% notes payable
Interest expense
Cash/bank

10000

10000
150
10150

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Accounting for debt

NOTES RECEIVEABLE

The principal amount of notes receivable is a current asset

and the interest on interest bearing notes is interest income
under calculation; principal amount x interest rate x time
period = interest earned.
The payee is the party who receives the amount of the note
and the maker is the party who give notes to the payee. The
principal amount is to be paid on the maturity date of the
note.
The notes receivable is given in the following cases;
- To pay cash as loan
- To receive acceptance of note in payment of an account
- To sell assets

- A loan provided to others against a note

Notes receivable
Cash/bank
- Received a note in payment of an account
Notes receivable
Account receivable (customer)
- A sale of asset/merchandise against a note
Notes receivable
Sales
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Accounting for debt

A note can be endorsed to others in payment of his

liabilities, it means that the holder can transfer /endorse
notes to others, the entry will be;
Account payable (party)
Notes receivable
The holder of the note may keep it till maturity, and collect
the amount on the due date

1- In cash of non-interest bearing note t

a. Cash
i. Notes receivable

In case of interest-bearing note;

Cash/bank
Notes receivable
Interest income
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Accounting for debt

THE BILL OF EXCHANGE

A bill of exchange is an unconditional duly

written and signed order form given one to
another directing to pay the certain sum of
money to a person or firm, either on demand or
at a fixed or future date and time.
The bill of exchange is similar to cheque and
promissory note drawn able by an individual or
bank and/or transferable by endorsement. If
the bill is issued by the bank, it can be referred

to as bank draft and by individual as trade

draft.
BILLS RECEIVABLE/PAYABLE

Like account receivable and account payable,

the account of bill of exchange is maintained
as explained below;
On May 1, 2015 Hameed sold goods to Karim on
credit for Rs.3000/= and sent him a draft of a bill for
3 months after date. Karim accepted the bill and
returned duly signed it to Hameed on May 10.
Hameed presents the bill for payment and met the
bill.
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Accounting for debt

JOURNAL ENTIRES OF HAMEED -

RECEIVER

May 1, 2015 Hameed sold goods on credit to Karim for Rs.3, 000/=
Accounts Receivable (Karim)
3,000
Sales
3,000
May 10, Hameed received a bill for Rs.3, 000/=
Bills Receivable 3,000/=
Accounts Receivable (Karim)
July 10, 2015 Hameed received cash against bill

Cash
Bills receivable
JOURNAL ENTRIES OF KARIM (PAYER)
May 1, 2015 Karim goods on credit from Hameed for Rs.3, 000/=
Purchases
3,000
Accounts Payable (Hameed)
3,000
May 10, Karim paid a bill for Rs.3, 000/=
Account payable (Hameed)
Bills payable

3,000/=
3000/=

July 10, 2015 Karim paid cash against bill

Bills payable
Cash
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The accounting for debts involves two parties

receiver and payer wherein who gives money will
receive and who takes it will pay with or without
interest as agreed mutually. The receiver will
maintain account receivable and payer account
payable.

In trade, the debt is given to increase sales volume in

the shape of goods and services as well as for paying
liabilities and purchasing assets against negotiable
instruments with or without interest.
The businessman is forced to work more and more to
gain profit to pay the debt of borrowed money. One
side the debt increases the volume of business and
another side opens the door of employment but
sometimes caused the trouble in business due to
mismanagement.

WRITERS VIEW

WRITTEN BY:

SYED AQEEL RAZA

MASTER OF COMMERCE & POLITICS