FAC3704
FAC1502
STUDY UNIT 9
TRADE AND OTHER
RECEIVABLES
Financial Accounting 1:
Financial Accounting
Concepts, Principles and
Procedures
,STUDY UNIT
9
Trade and other receivables
Learning outcome
You should know how all aspects of trade receivables are to be treated in the books of
an entity.
Contents
Page
Key concepts
9.1 Introduction 3
9.2 Settlement discount granted 3
9.3 Allowance for settlement discount granted 6
9.4 Interest charged 9
9.5 Credit losses (bad debts) 11
9.5.1 Writing off credit losses 11
9.5.2 Allowance for credit losses 12
9.5.3 Creation of allowance for credit losses 12
9.5.4 Increasing the allowance for credit losses 14
9.5.5 Decreasing the allowance for credit losses 16
9.5.6 Writing off credit losses when an allowance for credit losses exists 18
9.5.7 Recovery of credit losses written off 22
9.5.8 VAT, credit losses and credit losses recovered 23
9.6 Presentation on the statement of financial position 23
9.7 Trade receivables control account 24
9.8 Contingent assets 32
9.9 Revision exercises and solutions 32
9.9.1 Revision exercise 1 32
9.9.2 Revision exercise 2 32
9.9.3 Revision exercise 3 32
9.9.4 Revision exercise 4 32
Self-assessment 33
2
, KEY CONCEPTS
• Credit transaction
• Trade receivables
• Credit term
• Settlement discount granted
• Credit losses (Bad debts)
• Current assets
• Allowance for credit losses
• Trade receivables control
• Contingent assets
9.1 INTRODUCTION
A sale made without the buyer paying at the time of the sale is known as a credit transaction.
A person or a business that owes money to an entity as a result of a credit sale is known as
a trade debtor. A debtor accepts responsibility for paying the debt within a specific period.
The period is known as a credit term and is predetermined in accordance with the credit policy
of the entity making the sale. Because some debtors do not pay their accounts, many firms
create an allowance for credit losses.
In this study unit we will concentrate on how debtors are encouraged to pay their accounts
on time. We will also look at the writing off of credit losses and the creation and adjustment
of the allowance for credit losses.
9.2 SETTLEMENT DISCOUNT GRANTED
A discount is often offered to debtors in order to encourage the quick settlement of their debts
within the stated credit term. The credit term will be shown on the credit invoice, for example,
30 days from the date of sale.
EXERCISE 9.1
A client purchased goods worth R3 450 on credit on 1 March 20.0.
The client has one month (the credit term) in which to settle the debt. If the client pays before
31 March 20.0, a discount of 2% will be granted. If the client settles the account before
31 March 20.0, it means that the amount payable is R3 381, calculated as follows:
2
R3 450 – R(3 450 × 100)
= R(3 450 - 69)
= R3 381
3
, If value-added tax (VAT) at 15% is included in the R3 450, the VAT collected on behalf of the
South African Revenue Service (SARS) (recorded at the date of sale) will amount to
(R3 450 x 15/115)
= R450
and will be recorded in the VAT output account.
The selling price recorded in the sales account in the general ledger is
R3 450 – R450 (VAT)
= R3 000.
The fact that a discount has been granted does not affect the original selling price recorded
in the general ledger.
The discount will, however, have an influence on VAT. Although the debtor purchased the
goods for R3 450 the actual income for the business is R3 000. If a 2% discount is allowed
on the R3 000, the income for the business is as follows:
R3 000 – R(3 000 x 2/100)
= R(3 000 – 60)
= R2 940
VAT (calculated at 15%) on R2 940 (VAT exclusive) is
(R2 940 x 15/100)
= R441.
The original VAT of R450 is therefore overstated and must be reduced by
R(450 – 441)
R9
in other words, 2% x R450. Such adjustments are made in the VAT input account and NOT
in the VAT output account. The reason for this is that the net sales (sales less sales returns)
multiplied by the VAT percentage should result in the amount of VAT output.
The discount of R69 thus includes VAT of R9, which may be calculated as follows:
69 15
x 115
1
= R9
4
FAC1502
STUDY UNIT 9
TRADE AND OTHER
RECEIVABLES
Financial Accounting 1:
Financial Accounting
Concepts, Principles and
Procedures
,STUDY UNIT
9
Trade and other receivables
Learning outcome
You should know how all aspects of trade receivables are to be treated in the books of
an entity.
Contents
Page
Key concepts
9.1 Introduction 3
9.2 Settlement discount granted 3
9.3 Allowance for settlement discount granted 6
9.4 Interest charged 9
9.5 Credit losses (bad debts) 11
9.5.1 Writing off credit losses 11
9.5.2 Allowance for credit losses 12
9.5.3 Creation of allowance for credit losses 12
9.5.4 Increasing the allowance for credit losses 14
9.5.5 Decreasing the allowance for credit losses 16
9.5.6 Writing off credit losses when an allowance for credit losses exists 18
9.5.7 Recovery of credit losses written off 22
9.5.8 VAT, credit losses and credit losses recovered 23
9.6 Presentation on the statement of financial position 23
9.7 Trade receivables control account 24
9.8 Contingent assets 32
9.9 Revision exercises and solutions 32
9.9.1 Revision exercise 1 32
9.9.2 Revision exercise 2 32
9.9.3 Revision exercise 3 32
9.9.4 Revision exercise 4 32
Self-assessment 33
2
, KEY CONCEPTS
• Credit transaction
• Trade receivables
• Credit term
• Settlement discount granted
• Credit losses (Bad debts)
• Current assets
• Allowance for credit losses
• Trade receivables control
• Contingent assets
9.1 INTRODUCTION
A sale made without the buyer paying at the time of the sale is known as a credit transaction.
A person or a business that owes money to an entity as a result of a credit sale is known as
a trade debtor. A debtor accepts responsibility for paying the debt within a specific period.
The period is known as a credit term and is predetermined in accordance with the credit policy
of the entity making the sale. Because some debtors do not pay their accounts, many firms
create an allowance for credit losses.
In this study unit we will concentrate on how debtors are encouraged to pay their accounts
on time. We will also look at the writing off of credit losses and the creation and adjustment
of the allowance for credit losses.
9.2 SETTLEMENT DISCOUNT GRANTED
A discount is often offered to debtors in order to encourage the quick settlement of their debts
within the stated credit term. The credit term will be shown on the credit invoice, for example,
30 days from the date of sale.
EXERCISE 9.1
A client purchased goods worth R3 450 on credit on 1 March 20.0.
The client has one month (the credit term) in which to settle the debt. If the client pays before
31 March 20.0, a discount of 2% will be granted. If the client settles the account before
31 March 20.0, it means that the amount payable is R3 381, calculated as follows:
2
R3 450 – R(3 450 × 100)
= R(3 450 - 69)
= R3 381
3
, If value-added tax (VAT) at 15% is included in the R3 450, the VAT collected on behalf of the
South African Revenue Service (SARS) (recorded at the date of sale) will amount to
(R3 450 x 15/115)
= R450
and will be recorded in the VAT output account.
The selling price recorded in the sales account in the general ledger is
R3 450 – R450 (VAT)
= R3 000.
The fact that a discount has been granted does not affect the original selling price recorded
in the general ledger.
The discount will, however, have an influence on VAT. Although the debtor purchased the
goods for R3 450 the actual income for the business is R3 000. If a 2% discount is allowed
on the R3 000, the income for the business is as follows:
R3 000 – R(3 000 x 2/100)
= R(3 000 – 60)
= R2 940
VAT (calculated at 15%) on R2 940 (VAT exclusive) is
(R2 940 x 15/100)
= R441.
The original VAT of R450 is therefore overstated and must be reduced by
R(450 – 441)
R9
in other words, 2% x R450. Such adjustments are made in the VAT input account and NOT
in the VAT output account. The reason for this is that the net sales (sales less sales returns)
multiplied by the VAT percentage should result in the amount of VAT output.
The discount of R69 thus includes VAT of R9, which may be calculated as follows:
69 15
x 115
1
= R9
4
