ZeePedia Add to Favourites   |   Contact us


Financial Accounting

<<< Previous A PERSON IS BOTH DEBTOR AND CREDITOR Next >>>
 
img
Financial Accounting (Mgt-101)
VU
Lesson-27
A PERSON IS BOTH DEBTOR AND CREDITOR
This happens so many times in business that a person is both your debtor and creditor. This means that you
are purchasing one thing from him. So, you have to pay him against that purchase and at the same time you
are selling him another thing for which he has to pay you. For example, you purchase item X from Mr. A for
Rs. 50,000 and sell him item Y for Rs. 25,000. Now, one way of settling the payable and receivable is that
you can pay Mr. X 50,000 and ask him to pay you Rs. 25,000. The other and may be the wiser method is that
you pay him Rs. 25,000 and both transactions are settled. This is how such transactions are handled in real
life.
JOURNAL ENTRIES
Normally where no control accounts are maintained, following entries will be recorded:
Debit: A (payable/creditor) account
25,000
Credit:
A (receivable/debtor) account
25,000
This will bring down the balance of A (receivable/debtor) account to 0 and that of A
o
(payable/creditor) account to 25,000. The other entry will be:
Debit: A (payable/creditor) account
25,000
Credit:
Cash / Bank
25,000
This will settle the payable account fully.
o
Where control accounts are being maintained the above two entries are still recorded but with slight
modification:
Debit: Creditors Control account
25,000
Credit:
Debtors Control account
25,000
At the same time A's account in Creditor's ledger is debited with 25,000 and Credited in
Debtors' ledger with the same amount.
Debit: A (payable/creditor) account
25,000
Credit:
Cash / Bank
25,000
This entry comes from the creditor's column of cash / bank book payment side as usual.
BAD DEBTS
Provision does not affect debtors account in simple books. It will, therefore, have no effect either on debtor
control account or debtors ledger.
At the time of actual bad debt, the journal entry
Debit
Provision / Bad Debts
Credit
Individual Debtors Account
If control account system is in operation, the debit entry will be same but the credit effect will go to Debtors
control account with a credit effect to Individual Debtors Account in Debtors Ledger.
Similar treatment is given to discounts received and allowed.
184
img
Financial Accounting (Mgt-101)
VU
RECORDING OF BAD DEBTS IN CONTROL ACCOUNTS
To record bad debts in control accounts, following entries are recorded:
 In case no provision was created for doubtful debts:
Debit:
Bad Debts
Credit:
Debtors Control Account
In case provision was created for doubtful debts:
Debit:
Provision for Doubtful Debts
Credit:
Debtors Control Account
Recording is also made in the respective accounts of the debtor in subsidiary ledger.
RECORDING OF DISCOUNTS RECEIVED IN CONTROL ACCOUNTS
To record discount received in control accounts, following entry is recorded:
Debit:
Creditors Control Account
Credit:
Discount Received Account
Recording is also made in respective accounts of the creditors in subsidiary ledger.
RECORDING OF DISCOUNTS ALLOWED IN CONTROL ACCOUNTS
To record discount allowed in control accounts, following entry is recorded:
Debit:
Discount Allowed Account
Credit:
Debtors Control Account
Recording is also made in the respective account of the debtors in subsidiary ledger.
ILLUSTRATION # 1
Following information is given from the books of Mr. A(Debtor) for the month of June, 2002. You are
required to prepare Debtors Control Account and work out the closing balance of debtors control account
of Mr. A.
Opening Balance Dr.
85,500
Transactions during the month:
Sales for the month
90,000
Sales return for the month
2,500
Payments received
140,000
Discount allowed
5,000
Bad debts written off
4,000
185
img
Financial Accounting (Mgt-101)
VU
SOLUTION
Debtors Control Account
Debit Side
Credit Side
Date
No.
Narration
Dr. Rs.
Date
No.
Narration
Cr. Rs.
Jun 01
Bal B/F
85,500 Jun
Returns
2,500
Jun
Sales
90,000 Jun
Receipts
140,000
Jun
Discount allowed
5,000
Bad Debts
4,000
Jun 31
Bal C/F
24,000
Total
175,500
Total
175,500
ILLUSTRATION # 2
Following information is given from the books of Mr. B(Creditor) for the month of June, 2002. You are
required to prepare Creditors Control Account and work out the closing balance of Creditors control
account of Mr. B.
Opening Balance
Cr.
65,000
Transactions during the month:
Purchases for the month
70,000
Purchases return for the month
5,000
Payments made
90,000
Discount received
3,000
SOLUTION
Creditors Control Account
Debit Side
Credit Side
Date
No.
Narration
Dr. Rs.
Date
No.
Narration
Cr. Rs.
Jun
Returns
5,000 Jun 01
Bal B/F
65,000
Jun
Payments
90,000 Jun
Total purchases
70,000
Jun
Discounts
3,000
received
Jun 31
Bal C/F
37,000
Total
135,000
Total
135,000
ILLUSTRATION # 3
186
img
Financial Accounting (Mgt-101)
VU
The financial year of Atif Brothers is closed on June 30, 2002. You are required to prepare Debtors control
account and Creditor control account from the data given below:
Opening balance
Debtors
150,000
Creditors
250,000
Sales
Cash
Note 1
180,000
Credit
260,000
Purchases
Cash
Note 1
120,000
Credit
200,000
Total receipts
Note 2
350,000
Total payments
Note 2
250,000
Discount allowed
15,000
Discount received
10,000
Bad debts written off
25,000
Increase in provision for doubtful debts
Note 3
5,000
SOLUTION
Debtors Control Account
Debit Side
Credit Side
Date
No.
Narration
Dr. Rs.
Date
No.
Narration
Cr. Rs.
Jun 01
Bal B/F
150,000 Jun
Receipts(N2)
170,000
Jun
Sales(N1)
260,000 Jun
Discount allowed
15,000
Bad Debts
25,000
Jun 31
Bal C/F
200,000
Total
410,000
Total
410,000
Creditors Control Account
Debit Side
Credit Side
Date
No.
Narration
Dr. Rs.
Date
No.
Narration
Cr. Rs.
Jun
Payments
130,000 Jun 01
Bal B/F
250,000
Jun
Discounts
10,000 Jun
Total purchases
200,000
received
Jun 31
Bal C/F
310,000
Total
450,000
Total
450,000
Notes to the accounts
187
img
Financial Accounting (Mgt-101)
VU
1. In control accounts, only cash sales/purchases are dealt with. Credit sales/purchases are not
included in control accounts,
2. Receipts/Payments include both cash and credit receipts/payments. So, we enter the figures in
control accounts, after deducting cash sales/purchases from total receipts/payments. i. e.
Receipts = 350,000 ­ 180,000 = 170,000
Payments = 250,000 ­ 120,000 = 130,000
3. Provision for doubtful debts has no effect on control accounts. So, any change in provision will not
affect actual bad debts.
BENEFITS OF SUBSIDIARY LEDGERS
Subsidiary ledgers contain the record of all individuals Debtors and Creditors.
Subsidiary ledgers give information about the main clients and slow moving clients which is
helpful for the management in decision making.
If the business has distributors in different areas, subsidiary ledger gives information about
sale of different distributors in different areas which are helpful for the management in
decision making.
188
Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES