VU Accounting Lesson 27
VU Accounting Lesson 27
VU Accounting Lesson 27
Lesson # 27
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:
o This will bring down the balance of A (receivable/debtor) account to 0 and that
of A (payable/creditor) account to 25,000. The other entry will be:
Where control accounts are being maintained the above two entries are still recorded but with
slight modification:
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.
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.
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.
Recording is also made in the respective accounts of the debtor in subsidiary ledger.
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.
Solution:
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.
Solution:
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 balances
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
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.
• 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.