DEBTORS PEOPLE / BUSINESSES WHO OWE US MONEY
So far, we have only looked at buying and selling goods or services for cash. Yet businesses often buy stock or other items on credit and pay for them at a later date. As the owner of a business, you may buy goods on credit. You may also be required to sell goods on credit. But for your business to have a healthy cash flow each month, you need to make sure that enough money is received from customers before you need to pay your outstanding debts to suppliers. CREDIT SALES Credit means an arrangement that you make, with a shop or store to pay later for something you buy.
GRANTING CREDIT Cash Transactions are much easier and cheaper for the business than credit sales, because they involve less bookkeeping. Cash transactions also have less risk, because the business receives their money immediately. Yet credit sales are often necessary to increase sales – not everyone has cash readily available to buy goods, especially the more expensive items like furniture and cars. Before someone is granted credit, a business first checks whether the person is credit worthy, This means that this person will be capable to repay their debt. The credit limit or limited amount the client is allowed to spend on credit must be specified in the credit agreement, as well as the terms of credit that is, how much time the debtor is allowed for the debt to be paid pack.
Advantages and disadvantages of credit Advantages to the business • The business gains more clients, as most people want to buy on credit – not everyone has cash readily available • The business can charge more for goods bought on credit to cover the administrative costs and to allow for the risk of non payment. However, it is illegal to charge more than a very small percentage of the total selling price. • Granting credit increases sales, so more goods have to be manufactured, which encourages job creation, thus boosting the economy. • The business can use the database of debtors for marketing purposes.
Advantages and disadvantages of credit Disadvantages to the business • The business needs more operating capital to finance credit sales, in other words, it needs money to run the business until payment is received for the goods. • The administrative costs involved in screening debtors, bookkeeping and collecting outstanding payments are high. A cash only business wont have these costs to cover. • There is always the risk of bad debts or non payment, even when a business has a well planned credit policy. • A credit transaction is more time consuming than cash transactions, so more staff will probably have to be employed, leading to further costs.
Advantages and disadvantages of credit Advantages to the customer • The customer can buy more expensive goods immediately, instead of waiting until enough money has been saved. • The customer can take advantage of sales or special deals as they occur, which they would miss out on if they waited until they had enough money. • If a customer pays his account on time and in full, he / she will create a creditworthy reputation, which helps with other credit applications, such as buying a house one day.
Advantages and disadvantages of credit Disadvantages to the customer • A credit facility encourages some people to spend money they don’t have. • Clients pay more for goods as a result of credit facilities.
Recording credit sales • When a customer buys goods on credit, the goods are handed over to the customer at that point, even though payment will only be received later. • At the time of sales, the business issues an invoice to the debtor. The business hands the original invoice to the client keepings the duplicate for bookkeeping purposes.
DEBTORS • We already know that a person who owes money to a business is called a debtor. So when goods are sold on credit to customers, debtors are created. • A debtor is a current asset to the business because the money owing by the debtor to the business must be paid to the business within a short term period.
Notes COPY INTO YOUR EMS BOOK 1. The debtor will place the order in person, telephonically, by fax or via the internet. Goods are sent to the debtor together with an invoice. 2. The duplicate invoice is used to record the credit sales transaction in the Debtors Journal. 3. The Debtors Journal is posted to the Debtors Ledger (Daily) and the General Ledger (at the end of the month). 4. A Statement of account is mailed to the debtor at the end of the month. 5. The debtor will then pay his account in full settlement or in part payment. The transaction is entered in the Cash receipts Journal.
NATIONAL CREDIT ACT 34 OF 2005 • The National Credit Act came into effect on 1 June 2006. It aims to protect the consumer from being granted credit recklessly, and to create a fair credit market. The NCA makes sure that: • Credit Providers lend money in a responsible manner • Consumers are not committing themselves to more than they can repay. • Consumers are educated to make informed choices.
NATIONAL CREDIT ACT 34 OF 2005 • The NCA applies to any purchase made on credit where interest or a fee is payable. So it applies to the sale of goods on credit, as well as overdrafts, credit cards, installment agreements, leases and so on. • The NCA does not apply to credit agreements entered into with the following parties: *Government *Businesses that have an asset value or annual turnover of more than R1 million.
NATIONAL CREDIT ACT 34 OF 2005 The NCA lists several basic consumer rights: • The right to be given reasons for credit being refused or discontinued • The right to receive your contract in one of the official languages of your choice • The right to information in plain and understandable language • The right to have access to and to challenge credit records held by a credit bureau, and to be told before negative information is reported to the credit bureau.
NATIONAL CREDIT ACT 34 OF 2005 Several points in the old credit agreements had to change. Quotations must disclose the full costs of the credit applied for, including all fees. The quotation is binding on the credit provider for five days. All information relating to the agreement and the account must be reported to a credit bureau. Records of all credit applications and credit agreements must be kept for a prescribed period. A consumer may pre pay any amount owing at any time, and fully pay out the account at any time. There may be a charge of not more than three months’ interest if the transaction is more that R250 000, or if no notice is given of the early settlement. The NCA specifies the maximum interest rate that you can be charged. It is usually based on your credit rating and credit history.
DEBTORS ALLOWANCES When goods are sold on credit, it sometimes happens that the debtor is not satisfied with part or all of the goods they bought. If a business provides a returns options for its customer, it creates customer confidence. Customers feel they can buy the goods because if something goes wrong with it, they can bring it back and not waste their money. All businesses should strive for customer satisfaction.
COPY INTO YOUR EMS BOOK THE ACCOUNTING CYCLE Credit transactions follow the same process as any other transactions up to a certain point. Step 1 : Customer buys on credit Step 2 : Original invoice is issued to the debtor. Duplicate invoice is kept by the business Step 3 : Details of the duplicate invoices are recorded in the Debtors Journal. Step 4 : Receipts are recorded in the Cash Receipts Journal under the Debtors Control column..
RECORDING TRANSACTIONS IN THE DEBTORS JOURNAL (DJ) A Debtors Journal is where all the invoices issued for goods bought on credit are recorded. Each debtor has its own account, with its own special code EG: D4. This is so that invoices and receipts can be allocated to the correct debtor’s account immediately. Debtors allowances are also posted to the Debtors Ledger. The Debtors Journal shows both the sales and the cost of sales values. The balance of the Debtors Journal is posted to the Debtors Control account, which is an asset in the Balance Sheet accounts of the business. The transaction increases Debtors Control, thereby increasing the current asset.
CP = SP x 100 / (100 + mu) SP = CP x (100 + mu)/ 100 MU = 100 x (SP-CP) / CP
DEBTORS JOURNAL (DJ) Debtors Journal of Lamond Traders for June 2014 DJ6 (Trading Inventory) Doc (Debtors Control) Day Debtor FOL Cost of Sales Sales no 324 21 J Doolan D1 1 674 1 046.25 1 674 1 046.25 B13 / N1 N2 / B12 Selling Cost Name of the debtor Debtors Day Price Price Account invoice number issued The amount gets Invoice posted to the Cost of The amount gets Number Sales Column and the posted to the Sales trading Inventory Column and the Column COPY INTO YOUR EMS BOOK Debtors Control Column
Date Invoice Name of Selling Cost no. Client Price Price May 6 C56 B. Blignaut R520 R260 10 C57 BB Fashions R1300 R650 16 C58 C. Mokoena R1040 R520 23 C59 BB Fashions R1560 R780 (Trading Inventory) Doc (Debtors Control) Day Debtor FOL Cost of Sales Sales no
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