Sign inGet started

Trade and Other Receivables

FAC1502 - Financial Accounting Principles, Concepts, and Procedures · ACCOUNTABILITY FOR CURRENT AND NON-CURRENT ASSETS

Trade and Other Receivables

A trade receivable is a customer who owes money to a business due to a credit sale. When a business sells goods on credit, it records the transaction as a trade receivable. This process involves several accounting principles and procedures that help manage and report these debts accurately.

Credit Transactions

A credit transaction occurs when a sale is made without immediate payment. The buyer is expected to pay within a specified time, known as a credit term. For example, if a customer purchases goods worth R1,000 on credit with a credit term of 30 days, they must pay within 30 days to avoid penalties.

Remember: Credit terms are essential for managing cash flow and ensuring timely payments.

Settlement Discounts

Businesses often offer settlement discounts to encourage early payment. For instance, if a customer pays within 10 days, they might receive a 2% discount. If the customer pays R1,000 within the discount period, the calculation for the amount payable is as follows:

Amount payable = R1,000 - (2/100 * R1,000) = R1,000 - R20 = R980

This discount reduces the income recorded from the sale. The accounting entries for this transaction would be:

Dr Trade receivables control R1,000
Cr Sales R1,000

Allowance for Credit Losses

It is important to recognise that not all debtors will pay their debts. To account for this uncertainty, businesses create an allowance for credit losses. This allowance estimates the amount of debt that may not be collectible.

Creating an Allowance

Suppose a business has trade receivables of R50,000 and estimates that 5% may not be collected. The allowance for credit losses would be:

Allowance for credit losses = 5/100 * R50,000 = R2,500

The accounting entry to create this allowance is:

Dr Credit losses R2,500
Cr Allowance for credit losses R2,500

Adjusting the Allowance

At the end of the financial year, businesses may need to adjust the allowance for credit losses based on updated estimates. If the estimated allowance increases from R2,500 to R3,000, the adjustment entry would be:

Dr Credit losses R500
Cr Allowance for credit losses R500

Watch out: Always ensure that the allowance for credit losses reflects the most accurate estimate to avoid overstating assets.

Writing Off Bad Debts

When it is determined that a specific debt will not be paid, it must be written off. For example, if a debtor named John owes R1,200 and is declared insolvent, the accounting entries would be:

Dr Credit losses R1,200
Cr Trade receivables control R1,200

Recovering Bad Debts

If a debt that was previously written off is later recovered, it must be recorded. For instance, if John pays R300 after being written off, the entries would be:

Dr Bank R300
Cr Credit losses recovered R300

VAT and Credit Losses

When a debt is written off, the VAT portion can also be claimed back from the South African Revenue Service (SARS). If the original sale included R150 VAT, this amount can be claimed back when the debt is written off.

Presentation on the Statement of Financial Position

Trade receivables are classified as current assets on the statement of financial position. They are presented as follows:

Trade receivables: R50,000
Less: Allowance for credit losses: R2,500
Net trade receivables: R47,500

Tip: Ensure that the allowance for credit losses is deducted from the total trade receivables to reflect the net amount accurately.

Trade Receivables Control Account

The trade receivables control account summarises all transactions related to debtors. It ensures that the total of all individual debtor accounts matches the control account total. For example, if the following transactions occurred:

  • Opening balance: R30,000
  • Sales on credit: R20,000
  • Payments received: R15,000
  • Bad debts written off: R1,000

The trade receivables control account would be:

Dr Trade receivables control
Cr Trade receivables control
Balance b/d: R30,000
Sales: R20,000
Payments: R15,000
Bad debts: R1,000
Balance c/d: R34,000

Summary

  • Trade receivables represent amounts owed by customers.
  • Settlement discounts encourage early payments.
  • An allowance for credit losses estimates uncollectible debts.
  • Bad debts must be written off when deemed uncollectible.
  • Recoveries of bad debts must be recorded separately.
  • VAT can be claimed back on written-off debts.
  • Trade receivables are current assets presented on the statement of financial position.

Check your understanding

  1. What is a trade receivable?
  2. How do you calculate the allowance for credit losses?
  3. What entries are made when a bad debt is recovered?
  4. How should trade receivables be presented on the statement of financial position?