Accounts Receivables & Accounts payables

1. Accounts receivable All amounts owed to the business by its customers are called Account Receivables. An amount owed to the business by someone other than a customer is called Notes Receivable (or other receivables). Accounts receivable and notes receivable are current assets of a business as they are converted into cash within one operating cycle of the business (which is usually less than 12 months).

Journal Entries for Accounts receivable For example, Ali purchased goods worth 1000AFs from a shop on 30 days credit. Now till the time Ali does not pay the price of the goods to the shop-owner, he shall be a debitor of the business. And his account shall be shown as one of the receivables in the balance sheet of the business. 1. Entry to record the sale and creation of a current asset (= debitor): Alis a/c Dr. 1000 To Sales a/c 1000

2. Entry to record the payment made by Ali: Cash a/c Dr. 1000 To Alis a/c 1000 With this entry the current asset account (Alis account) is closed from the books of the business.

2. Bad Debts The amount of accounts receivables that cannot be recovered from the customer is called bad-debts. For example, goods sold to customer for $1000 and after some days he only pays $900. So bad-debts are $100. The journal entry for write-off of bad debts will be:
Customers a/c Sales a/c Dr. 1000 1000

Recording of sales made to customer Cash a/c Dr. Bad debt expense a/c Dr. Customers a/c Recording of receipt of cash and bad debts 900 100 1000

Recovery of Bad Debts If the customer makes the payment for the amount already treated as bad debt expense, this is treated as a gain by the business. The journal entry is:

Cash a/c Dr. To Bad debt recovered a/c Recording of gain due to receipt of cash for receivables already expensed as bad debts

100 100

3. Cash Discount given to customers : Manufacturers usually sell their products on credit and give discount on price if the buyer pays early. This is called Sales discount or Cash discount. For example, the credit terms of a sale could be as follows: 2/10, n/30 - (read as 2,10, net 30) - this means that the buyer has to pay the money within 30 days from the sale of the goods. And if the buyer pays the money within 10 days of the sale of the goods, he shall get 2% discount on the price of the goods. If the business gives a discount on price to the customer it is treated as an expense.

Example - Rehmat sold goods worth 1000 AFs to Larsen Co. on terms of 2/10, n/30 and got the payment within 10 days, the journal entries will be: Larsen Co. a/c Dr. To Sales a/c (to record the sale of goods on credit) 1000 1000

Cash a/c Dr. 980 Discount provided a/c Dr. 20 Larsen Co. a/c 1000 (to record the receipt of cash and discount taken by the buyer)

4. Accounts Payables Amounts of money owed by the business to its suppliers is called accounts payables. Amounts owed by the business to financial institutions (e.g. banks) are called Notes Payable or short-term loans. Accounts payable and notes payable are shown as the current liability on the balance sheet of the business. The business has to repay them in the next 12 months.

Journal Entries for Accounts Payable For example, a business purchased goods worth 1000AFs from Ali on 30 days credit. Now till the time the business does not pay the price of the goods to Ali, he shall be a creditor of the business. And his account shall be shown as one of the payables in the balance sheet of the business. 1. Entry to record the purchase and creation of a current liability (= creditor): Goods a/c Dr. 1000 To Alis a/c 1000

2. Entry to record the payment made to Ali: Alis a/c Dr. 1000 To Cash a/c 1000 With this entry the current liability account (Alis account) is closed from the books of the business.

5. Cash Discount received from suppliers : If the business receives a cash-discount on price from the suppliers it is treated as an income. Example- A shop purchased goods from Ali worth 1000 AFs on terms of 2/10, n/30 and paid within 10 days to get the discount, the journal entry will be: Goods a/c Dr. 1000 To Alis a/c 1000 (to record the purchase of goods on credit) Alis a/c Dr. 1000 To Cash a/c To Discount received a/c

980 200

Comprehensive exercise 1Rehmat sold goods for 1000 AFs on credit terms of 2/10, n/30 and got the payment within 10 days. The customer could only pay 500 AFs to Rehmat. Journalise these accounting events.

6. Trade Discount These are the discounts given on the selling-price (or list price) of the goods. Trade discounts are never recorded in the books of accounts. For example, Ali went to a wholesaler and saw the listprice of color-television as $1000. Ali purchased 5 color televisions from the wholesaler. And the wholesaler gave 10% trade discount to Ali. So now, both Ali and the wholesaler will only use $4500 as the amount of purchase and sale in their account-books.

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