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Debtors Print E-mail

The recognition of trade debtors is linked to the recognition of Revenue, which is recognised in accordance with IAS 18.  Trade debtors is the value of revenue invoiced for which money is still owed to the business after the transfer of risk and rewards of ownership from the seller to the buyer. In practice, this usually happens when goods are dispatched and invoiced to the customer. Recognising revenue in the event of rendering of services is more difficult to define and is covered separately in IAS 18.  A good example is revenue recognition for service contracts in IT companies, where software installation has been performed and the price charged includes a period of after sales support.  The portion of the revenue allocated to service contracts is deferred to the balance sheet as an asset and released to the income statement over the period of the contract, whereas the software installation charges are recognised immediately. 

Debtors are recorded in the balance sheet of the accounts as a current asset at the time that sales are recorded, but before cash has been received from the customer. The debtors control account in the balance sheet will be the net of all invoices to customers (debits) less the receipts from all customers (credits), and should always be a debit balance.  Receipts received in advance of invoices are recorded as liabilities labelled 'prepayments'.  In practice these receipts are allocated to the appropriate debtor account and transferred from the trade debtors control account to the prepayments account in a presentation journal called a 'reclassification journal' in order to present trade debtors at their 'gross value' in the balance sheet. 

In the general ledger, the trade debtors control account is separated into individual accounts for each named trade debtor. Most software packages have a facility to 'allocate' an invoice for sales or a receipt from a customer to the named trade debtor account, and to print a detailed list of transactions for each trade debtor, or a full list of balances for all trade debtors.  The list of amounts due from the all named trade debtors should equal the total value of trade debtors in the balance sheet.  If a customer makes an advanced payment on account it is recorded as a credit balance on the trade debtor account and subsequent sales invoices are netted off against the credit.  At year end when the accounts are prepared, the credit balances are temporarily transferred via a journal to payments on account and presented as a liability on the balance sheet for future services to be performed.

The procedure used to record and calculate the value of debtors is as follows:

  1. Create a separate account for each customer. This can be a tab in separate spreadsheet, a page in a book or a balance sheet account in the debtors control area of your accounting software.

  2. From your sales list for each month, list each customer's invoices noting the details of the first four columns in the table below. One account will usually contain all the sales invoices to that customer and all the receipts from that customer for the complete accounting period. 

  3. Insert the receipt from the customer in the "amount paid" column, matching each receipt to a specific invoice where possible. Note down how much is still owed in the "money owed" column. If the receipt is a payment made in advance of services performed, note the receipt in a separate line from all the other invoices but reference it to the subsequent invoices until it is 'used up'. The idea is to be able to tell at a glance at any point in time how much customers owe separately and in total.

  4. Create a summary page, listing each customer and their outstanding amount at each month end or year end, depending on the volume of activity.

  5. Add a bad debt column to the list to mark debts that will not be paid, and include them in the annual summary.

Customer X


Invoice number

Invoice Date

Date paid

Gross amount

Amount paid

Money owed

Bad debt

Accounting entries
  1. The gross amount of sales would have been recorded on the date of the sales invoice as  Debit Trade debtors (gross), Cr Sales (Net before VAT) and Cr VAT control.  If the business is not registered for VAT, simply record the gross amount in Trade Debtors and Sales.

  2. Always include enough information to enable you to find the invoice from the information recorded on the customer's page.

  3. Agree the total of the "money owed" column to the debtor/customer control line in the trial balance column of the extended trial balance.

  4. It is useful to know how much each customer owes for two reasons:

  • So you know who to ask for payment

  • So you can stop letting one of your poor paying customers buy on account before they damage your cash position.

  • So you can collect debt via small claims court proceedings if the debt is extensive and very late. (Small claims court forms are available on the internet)

Bad debt reviews

It is good business practice to perform regular review of trade debtor accounts to identify any amounts that are unlikely to be recovered.  These balances are known as 'bad debts'.  Bad debts are not removed from the trade debtor account by reversing the original invoice, but are transferred to the profit and loss account when it becomes unlikely to receive an economic benefit from the customer in question. A good example is when a customer goes insolvent.  

Provisions for bad debt allow the business to provide for amounts where recovery is uncertain, but not impossible. A company will usually create a formal policy based on its circumstances, such as providing for all debts older than 6 months and writing of all debts older than twelve months.  The difference between provision and write off lies in the tax treatment, in that specific debts written off are allowable and a general provision is not allowable as a tax deduction in the tax return of the company.  In order to write off a specific debt, the company has to be able to demonstrate that it attempted to collect the debt and was either not able to contact the individual in question or have received confirmation that the invoice will not be paid.

Larger companies will notify credit rating agencies if customers fail to pay their invoices in order to warn other companies not to engage these customers. Legal avenues are available for debt collection, such as Money Claims Online or Debt collection agencies, but the benefit of doing so has to be assessed against the likely benefits.  The costs to be considered include loss of customer goodwill, legal fees and court fees.

A positive way for a business to collect debts is to employ the services of debt factoring agencies.  The factor will buy book debts at a fee, and take care of all debt collecting procedures.  Some offer fixed fee agreements whilst others charge a percentage of the sales value.  The use of factoring agencies is very effective for creating a smooth cash flow cycle and avoiding direct confrontations with customers, but it has to be considered whether potential customers will be discouraged from buying if the service of such agencies is engaged.  




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