Contents:
12 - Other Entries
This final section will take a look at a few more advanced area - not complex, but beyond the basics.
The following items are covered:
- i. VAT
- ii. Discounts received
- iii. Discounts allowed
- iv. Suspense accounts
- v. Bad debts
- vi. Hire purchase contracts
VAT
This is only applicable if you are registered for VAT. If you are VAT registered, you must keep detailed VAT records (by law).
The big addition is that of a VAT "T" account in the nominal ledger (either one large account or separate "T" accounts for Output VAT, Input VAT & VAT liability).
When you make a sale & charge output VAT, only the net amount (before VAT) is Credited to sales. The VAT element should be Credited to the VAT "T" account.
When you are charged input VAT on purchases & expenses, only the net amount is Debited to the purchase/expense "T" account. The VAT element is Debited to the VAT "T" account.
At the VAT quarter-end date, the account should be closed off (or if separate accounts are kept, each closed off & the balance transferred to the VAT liability "T" account), & the VAT payment due will be the balance (this is what you will pay to HM Customs & Excise the following month - note that this will differ if you are on a cash accounting VAT scheme). This payment/refund is Dr/Cr to the VAT liability account to make the balance nil.
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Discounts received
When a supplier gives you a settlement discount (not a trade/bulk discount), this will cause a small problem.
The settlement discount will not be known/confirmed until you actually pay them. The creditor will have been recorded at the full amount, but the payment will be less, so part of the creditor balance will remain.
To solve this, the payment is recorded (Dr Creditors Control) along with the settlement discount (Dr Creditors Control). The discount is then also Credited to a Discounts Received "T" account.
The year-end balance of this "T" account will be a deduction from purchases.
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Discounts allowed
This is the reverse of the above problem - where you give settlement discounts to your customers if they pay by a certain date.
When Crediting the receipt to the Debtors Control "T" account, you must also Cr any discount, & then Dr the Discounts Allowed "T" account.
This is usually shown as an expense rather than a deduction from sales.
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Suspense accounts
There may be some transactions where you do not know where they should be Debited/Credited (or you need further information before you can decide).
In order to maintain the double-entry the item should be Dr/Cr to the Suspense "T" account. For example, if you do not know what a payment was for, Cr Cash "T" account, & Dr Suspense "T" account.
When you know where it should go, the entry should be reversed. In the above example, if it turned out to be a purchase of stock, you would Cr Suspense "T" account (to cancel out the previous entry) & Dr Purchases "T" account.
Suspense accounts are a very good way to test your grasp of double-entry - they can get quite confusing if your basics are not sound.
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Bad debts
i. Provisions for doubtful debts
If at the year-end, you have any doubts over the recoverability of a debt, a provision should be made for this amount.
A provision is an early recognition of a likely future expense - here offset against debtors (rather than completely removed).
The entry is as follows:
As you can see, an expense is immediately recognised in the Profit & Loss account.
The provision is an ongoing item in the Balance Sheet. An example "T" account & explanation is given below.
The opening provision (b/f) is a doubtful debt of £200 from a customer called Jones. During the year, we actually recovered this debt (Cr Bad Debt Expense - reversing the expense which would have hit the Profit & loss account last year). We also Dr Cash (the £200 received) & Cr Debtors Control "T" account as usual.
Two other debts became doubtful during the year - from customers Adams & Smith. The £450 will have been Debited to the Bad Debt Expense "T" account.
The final Bad Debt expense that will be deducted in the Profit & Loss account is £250 (i.e. that £450 less the £200 cash received from Jones - the movement in the provision). The c/f balance of £450 will be offset against total debtors in the Balance Sheet.
Note that provisions can be specific (as above) or general. That is, a provision of, say, 1% of total debtors if that is a typical amount (usually applicable where there are many small customers).
ii. Bad debts written off
If a doubtful debt is confirmed as bad, it must be written off from the books.
If no provision has previously been made, it is simply a matter of Debiting the Bad Debt Expense "T" account, & Crediting Debtors Control "T" account.
If a provision has been made in the past, the entry is to Dr Provision for Bad Debts "T" account & Cr Debtors Control "T" account.
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Hire Purchase Contracts
A common way to purchase vehicles (or machinery) is by means of HP contracts. Even though you do not legally own the asset until the final payment, it is treated as if you do own it immediately & have borrowed the money.
The full cost of the vehicle (include VAT on cars as it is not reclaimable) is Debited to the Vehicle Cost "T" account as if you had paid cash. The Cr is made to a HP Creditor "T" account (a liability).
The costs of finance (interest & other related fees) are spread over the number of repayments you are required to make. The entry for this is to Cr HP creditor "T" account & Dr Interest expense "T" account (a Profit & Loss account item).
Here is an example HP Creditor "T" account:
In the above example, a car was purchased on 5.3.x5 for £13000 (incl. VAT). On that date a deposit of £1000 was paid, followed by repayments of £400 each month thereafter. At the year-end, an adjustment for interest is made (in the journal). 9 out of the total 36 payments due have been paid, so 9/36 of the total £2400 finance costs are charged in the year.
That's the end of the tutorial. Revise back any sections which are not yet clear, Good luck!
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