Contents:
7 - Credit Transactions
So far, we have looked at cash-based transactions, i.e. everything has been paid for immediately upon invoice.
In reality, most things are invoiced & then a period of credit is allowed before payment - typically one month.
What do we Dr/Cr instead of cash?
So far, there has always been an immediate cash payment (Cr Cash) or cash receipt (Dr Cash).
Now we must split it into two parts:
i. Invoice
A sale will lead to a Cr entry to the sales "T" account. The Dr entry will now go to the Debtors Control "T" account (see Section 4) upon invoice.
A purchase or expense will lead to a Dr entry to the relevant "T" account. The Cr entry will now go to the Creditors Control "T" account.
ii. Payment/Receipt
Until payment there will be a debtor (cash owed to us) or creditor (we owe cash). The payment or receipt will clear this.
Upon receipt, we will Dr Cash "T" account (as usual), but this time the Cr entry will be to the Debtors Control "T" account (removes debtor).
Upon payment, we will Cr Cash (as usual), but now we will Dr the Creditors Control "T" account (removes the creditor).
A little more about the Control Accounts
The workings of the Debtors/Creditors Control "T" accounts have now been introduced. The first we saw of them was within the Nominal Ledger in overview diagram of Section 4.
By offsetting credit (i.e. not immediate cash payment) invoices against actual cash payments/receipts, these Control accounts tell us the total outstanding debtors & creditors.
In theory (at least!) the total should equal the total of the individual Debtors or Creditors Ledgers (see overview in Section 4 again). By reconciling these, we get a further accuracy check (see later).
The next section will look at accruals & prepayments.