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Trade debtors is the value of sales invoiced for which money is still owed to the business. Debtors are recorded in the balance sheet of the accounts as a current asset. 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. Trade debtors control account is separated into individual accounts for each named trade debtor. The list of amounts due from the sum of all named 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: 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. 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. 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. Create a summary page, listing each customer and their outstanding amount at each month end or year end, depending on the volume of activity. 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 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. Always include enough information to enable you to find the invoice from the information recorded on the customer's page. Agree the total of the "money owed" column to the debtor/customer control line in the trial balance column of the extended trial balance. 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)
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