The document discusses accounting for debts and notes payable/receivable. It defines debt as an amount borrowed that must be repaid later, often with interest. It describes how to record accounts receivable from sales on credit and accounts payable for purchases on credit using journals. It also discusses aging reports to track payment timelines and calculates allowance for doubtful debts. Notes payable and receivable are current liabilities and assets, with interest expense/income recorded on interest-bearing notes.
1. THE SYSTEM OF ACCOUNTING
ACCOUNTING FOR DEBT
Volume III
WRITTEN BY:
SYED AQEEL RAZA
MASTER OF COMMERCE & POLITICS
2. ACCOUNTING FOR DEBIT
The debt is an amount of money which is borrowed by one party from
another party under the condition to pay back at a later date with or
without interest and it may be borrowed by individual, bank for personal
loan like auto loan, house loan, credit card loan etc. and for business loan
on mark up, debt against selling of goods or services with our without
interest. It may have mortgage, personal and assets’ guarantee.
Most of the companies are operating them to take loan from financial
institution for meeting their financial demands or increasing their volume.
This is right that the debt or loan may increase the efficiency of any
business in many ways one side as to increase production, to purchase
assets; plant and machineries, equipment, raw materials, and to purchase
finished goods for trading; to pay the salaries of employee, bills of suppliers
and to get the rid of many other financial difficulties in the operation of any
business but on the other side may become the cause of financial troubles
in future because of paying huge amount in shape of mark-up or interest.
The profit is generated against investment involves more investment more
profit and less investment less profit and if the investment of his own, the
profit is of his own but the investment acquired from other sources, the
profit is distributed among others. The result is same means profit earned
of that amount of his own but change of growing and loss of his own assets
are under questions.
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
3. Accounting for debts
All debts involve cash and other than trade are considered as loan or some
time sundry debtors as the trade involves goods which are given to sellers
on credit or cash, the seller is bound to pay debt of goods to the party time
to time revolving sales and purchase. The seller who took goods on credit
is called trade debtor.
Trade debtor and creditors
A trade debtor is an entity that owes a debt to another entity during the
course of business in shape of goods or services. The trade debtor credits
the account of the entity that supplied goods or services to him under
account payable controlled by trade creditors and the entity who supplied
goods and services to the debtor must debit his account under account
receivable which is controlled by trade debtor’s account.
Generally, the account of individual party’s receivable is opened in general
ledger but in caseof various parties, another ledger called subsidiary ledger
is created named trade debtors under controlled by account receivable or
debtors ‘control account in general ledger account.
The subsidiary ledger is sub book of the particular account involving
journals like sales journal, sales return and allowances journal, cash receipt
journal and adjustments through journal voucher.
The subsidiary ledger for sale either on cash or credit may be useful to
control the variety of units sold under control account sale.
Trade debtors relate to goods or services for doing business.
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4. Accounting for debts
The trade debtors are who they purchased goods for doing business and
the party from whom the trade debtor purchased goods is called trade
creditors. The goods sold on cash to parties doing trade are also considered
debtors because the goods are supplied on taking advance against sale
come under advance from customers under debtors account.
Then, the trade creditor will have to maintain accounts of the parties to
whom the goods sold on credit.
We know that all individual debtor’s account go in the debtor’s ledger and
creditor’s account in creditor’s ledger under control general ledger account
receivable and account payable or debtors and creditors control accountand for
making subsidiary ledger of accounts receivable or debtor accounts, we
have to maintain journals like sales journal, sales return and allowances
journal, cash receipt journal and adjustments through journal vouchers of
those transactions that do not belong to journals or come after positing of
entries from journals as shown in our volume II Chapter III Ledger Making.
And for this, Accounts payable refers to creditors who deliver goods for
business and get payment after sometime. The amount of invoice is
journalized as inventory account debit and party’s account credit in ledger
account directly or through purchase journal. The purchases in business
may be from different persons or firm may require separate account of the
separate book of accounts like subsidiary ledger which provide detailed
information of each person or firm to accountant. It is controlled in general
ledger by Account payable control account as referred to our volume II
Chapter III Ledger Making.
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
5. Accounting for debts
Therefore, debtors are ascertained by accounts receivable and
creditors by account payable.
ACCOUNTS RECEIVABLE:
Account receivable means to receive the amount from parties to
whom the goods sold on credit or from the purchaser of goods
and have to maintain parties’ ledger account individually as well
as sales journal and sales return journal as illustrated below;
Jan 1. 2015 Sold merchandise to Hakim & Co. Rs.4, 000/= vide Invoice
No1003.
Jan 5. Sold merchandise to Jasco Traders for Rs.5, 000/= vide invoice
No.1004.
Jan 10. An Invoice No.1005 for Rs.10, 000/- was issued against merchandise sold to Star
G/Store.
Jan 15. Sold merchandise to Usman Brothers on credit for Rs.6, 000/- against Invoice
No.1006.
Jan 30. Merchandise consigned to Wali Brothers Rs.6, 000/= vide Invoice
No. 1007.
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
6. Accounting for debts
SALES JOURNAL
Page No.1
DATE ACCOUNT DEBITED INVOICE NO.
POST
AMOUNT
Ref.
1.1.2015 Hakim& Co. 1003 _/ 4,000
5.1.2015 Jasco Traders 1004 _/ 5,000
10.1.2015 Star G/Store 1005 _/ 10,000
15.1.2015 Usman Brothers 1006 _/ 6,000
30.1.2015 Wali Brothers 1007 _/ 6,000
TOTAL 31,000
Accounts receivable (Dr.) 31,000.-
Sales (Cr.) 31,000.-
The entry of sales journal will be recorded through journal voucher as to
account receivable debit and sales credit narrating to record sales for the
month of January 2015 and to individual parties’ account or debtors
account in subsidiary ledger making reference sales journal.
7. <THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
Accounting for debts
In case of sold goods returns, the following sales return journal is made to
record sales returns from the selected transactions below;
Jan 20. Merchandise returned from Jasco Traders Rs.500/- vide credit
memo No.1050.
Jan 30. Received merchandise from Star G/Store vide credit memo No.
1055 for Rs.1000/=
SALES RETURNS AND ALLOWANCES JOURNAL
Page No.1
DATE ACCOUNT CREDITED
CREDIT POST
AMOUNT
MEMO Ref.
20.1.2015 Jasco Traders 1050 _/ 500
30.1.2015 Star G/Store 1055 _/ 1,000
TOTAL 1,500
SalesReturn& Allowances(Dr.) 1500
AccountsReceivable(Cr.) 1500
8. <THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
Accounting for debts
The entry of sales return and allowances journal will be made by journal
voucher narrating to record sales return for the month of January 2015 and
to individual accounts of party.
9. <THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
Accounting for debts
The total of carry forward balance of customer accounts must be equal to
the carry forward balance of account receivable as shown below;
10. Hakim & Co. 4,000
Jasco Traders 4,500
Star G/Store 9,000
Usman Brothers 6,000
Wali Brothers 6,000
TOTAL 29,500.-
ACCOUNT PAYABLE
Accounts payable means to pay the amount to the parties who
supplied goods on credit or to the seller of goods.
Account payable account is made like account receivable account
as illustrated below’;
PURCHASES
Jan 1. Purchased merchandisefromAftab Traders Rs.10, 000/= vide Invoice
No. 3201.
Jan 10. Purchased merchandise from Iqbal & Co. Rs.5000/= vide Invoice
No.1312.
Jan 15. Merchandise purchased on account form Jamshed Brothers for Rs.5000/= vide
Invoice No. 4242.
Jan 20. Received an invoice No.2323 for purchase of Rs.5000/= from Azad
Traders
Jan 30. Goods purchased for Rs.10000/- against Purchase Inv. # 1035 from Amjad
Brothers.
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
Accounting for debts
11. Account payable is recorded by journal voucher narrating to record
purchases for the month of January 2015 making reference purchase
journal.
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
Accounting for debts
PURCAHSE RETURN
12. Jan 15. Debit Note Issued to Aftab Traders for Rs.1000/- against damaged
goods returns and received credit memo No.4322.
Jan 30. Damaged goods returned to Jamshed Brothers for Rs.500/- with
Debit Note No.3343 and received credit Note.4633.
Purchase returns are record by journal vouchers narrating to record
purchase return and allowances for January 2016 making reference PRJ-1.
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Accounting for debts
13. The total of carry forward balance of parties account must be equal to the carry forward
balance of account payable as shown below;
Aftab Traders 9,000
Iqbal Brothers 5,000
Jamshed Brothers 4,500
Azad Traders 5,000
Amjad Brothers 10,000
TOTAL 33,500
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
Accounting for debts
14. THE A G I N G
An aging schedule has to design that shows an invoices and its due dates
enables to settle or receive invoices on maturity. It can be made for both
accounts payable and accounts receivable.
In accounts payable aging, the analysis of payment to suppliers from whom
the goods purchased on credit for business indicates which supplier is paid
first in order to avoid any credit or supply problem or the maturity of
invoice date.
ACCOUNT PAYABLE AGINT REPORT
Accounts payable is the result of all purchases made by a business from
regular vendors on credit basis. Many businesses pay for services and
materials 30, 60, 90 or 120 days after receipt of invoice for controlling their
cash flow. With this information, a company can decide which items can be
paid on time based on the amount of cash the company has on hand and
which invoices the company may need to pay late.
An account payable aging report lists the due date of payments that a
company owes to venders and has generally set up with 30 days time but
consists on;
00 to 30 days old
31 to 60 days old
61 to 90 days old
Older than 90 days
The report helps user in determining which invoices are overdue for
payment and assumes that all invoices are due for payment within 30 days.
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
15. Accounting for debts
The aging of account payable schedule shows that the company
had purchased goods on credit from customer1 and customer2 and
paid them within the credit limit of 30 days when customer3,
customer4 and customer5 were not paid older than 45, 40 and 90
days.
In case of paying part amount into bill, the balance will be treated
older than the date of purchase as shown in customer1.
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Accounting for debts
16. ACCOUNTS RECEIVABLE AGING
This report directs management’s attention to accounts that are slow to
receive first by customer and then by the date of sales invoice. It is also
useful in determining Allowance for doubtful accounts.
AGING OF ACCOUNTS RECEIVABLE
If we assume the credit terms are net 30 days and invoices are within 30
days will be classified as current and;
Any unpaid invoices in April are classified as 1-30 days past due.
Any unpaid invoices in March are classified as 31-60 past due and so on.
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
17. Accounting for debts
The aging of accounts receivable is used to calculate the estimation of allowance for
uncollectable bad debts like;
The estimated amount of uncollectable is recorded in ledger by debiting allowance for
uncollectable bad debt and crediting accounts receivable.
The individual account will also affect.
In case of collection some part of uncollectable amount, the balance of accounts
receivable and allowance for doubtful accounts will increase by reversing the entry
above.
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>
Accounting for debts
18. NOTES PAYABLE AND NOTES RECEIVABLE
In order to enjoy maximum benefit from the business, firms or persons
borrow money from banks, financial institutions, friends or relative and
mostly against notes which may be interest bearing or non interest bearing
depends upon the receiver or payer. Interest bearing notes will be paid on
the due date of the note along with the actual amount.
A promissory note is an instrument in writing unconditional undertaking,
signed by the maker to pay a certain amount only to, or to the order of, a
certain person, or to the bearer of the instrument.
The firm or person who gave amount on promissory note would enjoy the
interest at the rate specified on the notes which called interest income and
the firm or person who took the amount on promissory notes would pay
the interest on notes payable called interest expense.
The note is treated as an asset by the holder and liability by the payer.
NOTE PAYABLE
The note payable is current liability taken in any of the following cases;
- To receive cash as a loan
- To clear the liabilities
- To purchase assets
- To pay for expenses
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19. Accounting for debts
Suppose that;
- To receive cash as loan;
Cash xxxx
Notes Payable xxxx
- To clear the liability by notes for 90 days at 5% interest;
Accounts payable xxxx
5% Notes payable xxxx
- Purchase machinery against notes for 60 dyas
Machine xxxx
Notes payable xxxx
- The payment of expenses;
Advertising expenses xxxx
Notes Payable xxxx
At the time of maturity or due date, the money lender pays the liability, if the note is
non-interest bearing as;
Notes Payable xxx
Cash/Bank xxxx
If the note is interest bearing means face value of note along with interest for the cost
of furniture Rs.10000 issued a note for 3 months @ 6% p.a. interest;
Furniture 10000
6% Notes payable 10000
6% notes payable 10000
Interest expense 150
Cash/bank 10150
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20. Accounting for debts
NOTES RECEIVEABLE
The principal amount of notes receivable is current asset and the interest
on interest bearing notes is interest income under calculation; principal
amount x interest rate x time period = interest earned.
The payee is the party who receives the amount of the note and the maker
is the party who give notes to the payee. The principal amount is to be paid
on the maturity date of the note.
The notes receivable is given on the following cases;
- To pay cash as loan
- To receive acceptance of note in payment of an account
- To sale assets
- A loan provided to others against a note
Notes receivable
Cash/bank
- Received a note in payment of an account
Notes receivable
Account receivable (customer)
- A sale of asset/merchandise against a note
Notes receivable
Sales
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21. Accounting for debts
A note can be endorsed to others in payment of his liabilities, it means that
the holder can transfer /endorse notes to others, the entry will be;
Account payable (party)
Notes receivable
The holder of the note may keep it till maturity, and collect the amount on
the due date
1- In cash of non interest bearing note t
a. Cash
i. Notes receivable
In case of interest bearing note;
Cash/bank
Notes receivable
Interest income
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Accounting for debts
22. THE BILL OF EXCHANGE
A bill of exchange is an unconditional duly written and
signed order form given one to another directing to pay
the certain sum of money to a person or firm, either on
demand or at a fixed or future date and time.
The bill of exchange is similar to cheque and promissory
note drawn able by individual or bank and/or transferable
by endorsement. If the bill is issued by the bank, it can be
referred to as bank draft and by individual as trade draft.
BILLS RECEIVABLE/PAYABLE
Like account receivable and account payable, the account
of bill of exchange is maintained as exampled below;
On May 1, 2015 – Hameed sold goods to Karim on credit for
Rs.3000/= and sent him a draft of a bill for 3 months after date.
Karim accepted the bill and returned duly singed it to Hameed on
May 10. Hameed presents the bill for payment and met the bill.
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23. Accounting for debts
JOURNAL ENTIRES OF HAMEED - RECEIVER
May 1, 2015 – Hameed sold goods on credit to Karim for Rs.3, 000/=
Accounts Receivable (Karim) 3,000
Sales 3,000
May 10, Hameed received a bill for Rs.3, 000/=
Bills Receivable 3,000/=
Accounts Receivable (Karim)
July 10, 2015 – Hameed received cash against bill
Cash
Bills receivable
JOURNAL ENTRIES OF KARIM (PAYER)
May 1, 2015 – Karim goods on credit from Hameed for Rs.3, 000/=
Purchases 3,000
Accounts Payable (Hameed) 3,000
May 10, Karim paid a bill for Rs.3, 000/=
Account payable (Hameed) 3,000/=
Bills payable 3000/=
July 10, 2015 – Karim paid cash against bill
Bills payable
Cash
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24. The accounting for debts involves two parties receiver and payer
wherein who gives money will receive and who takes it will pay
with or without interest as agreed mutually. The receiver will
maintain account receivable and payer account payable.
In trade, the debt is given to increase sales volume in shape of
goods and services as well as for paying liabilities and purchasing
assets against negotiable instruments with or without interest.
The business man is forced to work more and more to gain profit
to pay debt against borrowed money. One side the debt increases
the volume of business and other side opens the door of
employment but sometime caused the trouble in business due to
mismanagement.
WRITER’S VIEW
WRITTEN BY:
SYED AQEEL RAZA
MASTER OF COMMERCE & POLITICS