Business School

ACCT1501 Accounting and Financial Management 1A

Session 1 2016

Week 7
Accounts Receivable and Allowance for Doubtful Debts
Special Journal, Subsidiary & Control Accounts

Student Handout

Lecturer:
Jeffrey Knapp
School of Accounting
UNSW

QUAD 3103
j.knapp@unsw.edu.au

Moodle: https://moodle.telt.unsw.edu.au/login/index.php

ACCT 1501 s1, 2016

 WEEK 7: Special Journal, Subsidiary & Control Accounts

1. Lecturer comments
This week we begin by considering accounts receivable in more detail. Why do companies
hold receivables? What are the risks and benefits?

The accounting implications of accounts receivable are:

(1) what to do if a customer will not be able to pay their account, i.e. the debt goes bad

(2) what is the expected recoverable amount for Accounts Receivable given prior experience
with customers not paying their accounts? How do we ‘allow’ for this?

Next we examine special journals and subsidiary ledgers which are used to streamline the
recording process. Previously, our recording process has required that every single
transaction is recorded by a journal that is then posted to the relevant ledger accounts. Every
sale or purchase or cash receipt or cash payment was journalised and separately posted to the
general ledgers. In the case of an organisation with hundreds or thousands of sales that
would require a lot of postings! It is preferable to minimise the number of times that the
general ledgers are opened for postings because continuous open access is more likely to lead
to mistakes or accounting fraud. Special journals and subsidiary ledgers therefore are an
important internal control.
In the case of special journals, the idea is to record common transactions together so that
“totals” are posted to the relevant general ledgers at regular intervals. This is a more efficient
process than having a separate general journal for each transaction and posting it to the
general ledgers.
In the case of subsidiary ledgers, the idea is to provide a running record of the amounts
payable to each supplier or due from each customer. The subsidiary ledgers provide useful
information about individual suppliers and customers that may be used for management
decision-making. For example, a customer that is known to frequently settle its invoices
outside of normal credit terms may be changed to cash only status. The aggregation of the
amounts in the subsidiary ledger for each creditor should reconcile to the general ledger for
accounts payable at period end. Whilst the aggregation of the amounts in the subsidiary
ledger for each debtor should reconcile to the general ledger for accounts receivable at period
end. In this way, the general ledgers for accounts payable and accounts receivable are control
accounts for what has been recorded in the subsidiary ledgers.

ACCT1501 s1, 2016 2

Learning objectives
At the end of this topic you should be able to:
1. Describe the purpose of the contra account of allowance for doubtful debts
2. Prepare journal entries for writing off bad debts and the allowance for doubtful debts
3. Describe the function of the special journals
4. Record appropriate transactions in special and general journals and post to subsidiary
ledgers and the general ledger
5. Calculate trade discount and cash discount and record appropriately

Required Reading
Trotman, Gibbins & Carson, Chapter 8, pp. 315-337

2. Tutorial Questions Due in Week 8

Preparation Questions
Students should review the following preparation questions using the solutions available from
Moodle.
Discussion Questions DQ8.4, DQ8.5, DQ8.9
Problems P8.4, P8.13, P8.15, P8.17, P8.19

Tutorial Questions
Students should attempt the following tutorial questions before class.
Discussion Questions DQ8.7
Problems P8.6, P8.18
Case 8A

ACCT1501 s1, 2016 3

Lecture Exercise
Prepare debtors and creditors control accounts for the year ending 30 June 2015
from the following information.

Balances at 1 July 2014:

Debtors control 15 425
Creditors control 9 870

Summary of transactions to 30 June 2015

Credit sales 101 700
Cash sales 3 540
Credit purchase 71 620
Cash paid to creditors 45 280
Discount allowed by suppliers 560
Discount given to debtors 725
Cash received from debtors 61 590

ACCT1501 s1, 2016 4

 ACCT1501
Semester 1, 2016

Week 7
Special Journal, Subsidiary &
Control Accounts

Jeffrey Knapp
Quad 3103
 Topic 7: Learning Objectives (LO)

At the end of Topic 7, you should be able to:

LO1: Describe the purpose of the contra account of allowance for doubtful debts

LO2: Prepare journal entries for writing off bad debts and the allowance for
doubtful debts

LO3:Describe the function of the special journals

LO4: Record appropriate transactions in special and general journals and post to
subsidiary ledgers and the general ledger

LO5: Calculate trade discount and cash discount and record appropriately

Essential reading for Week 7

Trotman, Gibbins & Carson, Chapter 8, pp.315-337

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 Accounts receivable LO1

Current asset

Arise from sale of goods and/or services on credit.

Dr Accounts receivable $100
Cr Sales revenue $100
To record sale of inventory on credit

Also known as debtors, trade debtors, trade receivables.

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 Sales on credit LO1

Benefits
Earn more revenue if willing to sell to customers who wish
to buy on credit

Costs
Additional record keeping
Risk of not being paid
Time value of money ̶ delaying cash inflow and lending to
customers “interest free”

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 Sales on credit – Risk of not being paid LO1

Bad Debts – part of customer’s debts to the company not

collected
i.e. An Expense to the company (Bad Debts Expense)

Current asset should not be recorded at greater than

realisable amount

Matching principle
Recognising bad debts expense at the same time as sales
revenue

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 Accounting for bad debts expense LO1

1. Direct write off method

Directly ‘writing’ off Accounts Receivable
Chances of collecting cash for all accounts is very high
Small number of credit sales, few customers

2. Allowance method
Debts may not be collected
Recognising a potential risk – part of internal control
Large number of credit sales, many customers

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 No Allowance for Doubtful Debts LO2

A customer owing $100 has entered liquidation

(bankruptcy) proceedings

1. Direct write off method

Dr Bad Debts Expense 100
Cr Accounts Receivable 100
Acc Receivable
Bal. b/d 5000 BD Exp 100
Bal. c/d 4900
5000 5000

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 Allowance for doubtful debts LO2

Allowance for Doubtful Debts is a contra asset account

Estimate accounts receivable that are ‘doubtful’, i.e.
payment may not be received.
Accounts Receivable account does not change
E.g.
Current Assets
Accounts Receivable $5,000
Allowance for DD ($ 400)
Net Accounts Receivable $4,600

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 Allowance for doubtful debts LO2

2. Allowance method
Create an Allowance for Doubtful Debts as a contra
account
Dr Bad debts expense 400
Cr Allowance for doubtful debts 400

Acc Receivable Allowance for DD

Bal. b/d 5000 Bal. b/d 0
Bal. c/d 5000 Bal. c/d 400 BD Exp 400
5000 5000 400 400

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 Allowance for doubtful debts LO2

Writing off bad debts of 100 against the Allowance

Dr Allowance for doubtful debts 100
Cr Accounts receivable 100

Acc Receivable Allowance for DD

Bal. b/d 5000 Allow DD 100 Acc Rec 100 Bal. b/d 0
Bal. c/d 4900 Bal. c/d 300 BD Exp 400
5000 5000 400 400

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 Allowance for doubtful debts LO2

Allowance for Doubtful Debts is a contra asset account

Changes with current estimate of collectability of debts
Changes with debts written off
E.g.
Current Assets
Accounts Receivable $5,000
Allowance for DD ($ 300)
Net Accounts Receivable $4,700

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 Allowance for doubtful debts LO2

Two estimation approaches:

1. income statement approach (percentage of sales method)
2. balance sheet approach (ageing of accounts method)

Estimated amount for allowance may be differ.

Allowance for doubtful debts 400 (% sales)
Allowance for doubtful debts 300 (ageing)

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 Allowance for doubtful debts LO2

1. Income Statement Approach

Based on a relationship between bad debts and credit

sales.

E.g: past experience might suggest that bad debts are

about 2% of credit sales each year.
i.e. (credit sales)×2% = bad debt expenses for the year

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 Allowance for doubtful debts LO2

Example of income statement approach

Bragg Ltd made sales of $100m on credit during the year
but, in the past, it has failed to collect 5% of its credit
sales.

Dr Bad Debts Expense $5m

Cr Allowance for Doubtful Debts $5m

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 Allowance for doubtful debts LO2

Example of income statement approach

A/c receivable Revenue

Bal. b/d 400m Cash 390m A/c rec 100m
Revenue 100m Bal. c/d 110m

Allowance for doubtful debts Bad debts expense

Bal. b/d 5m Allowance 5m

Bal. c/d 10m BD Exp 5m

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 Allowance for doubtful debts LO2

2. Balance sheet approach

The older the account, the greater the probability that it

will not be collected

Adjust the Allowance based on an ageing analysis, i.e., how

much should it be based on prior experience of customers
and the age of defaulting accounts

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 Allowance for doubtful debts LO2

First example of balance sheet approach

Days 0-30 30-60 60-90 90+ Total

outstanding
AR $250m $150m $75m $25m $500m
Allowance % 0.5% 1% 3% 5%
Allowance $1.25m $1.5m $2.25m $1.25m $6.25m
Target
balance of
Allowance

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 Allowance for doubtful debts LO2

First example of balance sheet approach

The journal entry if the opening allowance is $5m and
the ageing analysis indicates an ending balance of
$6.25m is appropriate

Dr Bad Debts Expense $1.25m

Cr Allowance for Doubtful Debts $1.25m

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 Allowance for doubtful debts LO2

First example of balance sheet approach

A/c receivable Revenue

Bal. b/d 400m Cash 390m A/c rec 100m

Revenue 100m Bal. c/d 110m

Allowance for doubtful debts Bad debts expense

Bal. b/d 5m Allowance 1.25m

Bal. c/d 6.25m BD Exp 1.25m

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 Allowance for doubtful debts LO2

Second example of balance sheet approach

The journal entry if the opening balance is $5m and
ageing analysis indicates an ending balance of $3.25m is
appropriate

Dr Allowance for Doubtful Debts $1.75m

Cr Bad Debts Revenue $1.75m

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 Allowance for doubtful debts LO2

Second example of balance sheet approach

Allowance for doubtful debts

BD Revenue 1.75m Bal. b/d 5m
Bal. c/d 3.25m

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 LO2
Allowance for doubtful debts

Third example of balance sheet approach

The journal entry if the opening balance is $5m, bad debts
written off during the period are $2.5m and ageing analysis
indicates an ending balance of $3.25m is appropriate

Dr Bad Debts Expense $0.75m

Cr Allowance for Doubtful Debts $0.75m

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 LO2
Allowance for doubtful debts

Third example of balance sheet approach

Allowance for doubtful debts

Acc Rec 2.5m Bal. b/d 5m
BD Exp 0.75m
Bal. c/d 3.25m

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 Special journals LO3

Record the most common transactions undertaken by a

business
allow some classification and summarisation to occur in
the journal.
Advantages:
Recording efficiency: amounts posted to general ledger as
totals rather than as individual journal entries.
Used in conjunction with subsidiary ledgers.

24
 General journals LO3

Used for all other transactions including:

sales and purchase returns
purchase of equipment
credit transactions:
other than those related to inventory
adjusting entries
closing entries.

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 Special journals – Types LO3

Special journal Specific transactions recorded

A Sales journal Credit sales of inventory

B Purchases journal Credit purchases of inventory

C Cash receipts journal All cash inflows (including cash

sales)
D Cash payments journal All cash outflows (including cash
purchases)

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 A. Sales journal LO3

Record sales of inventory on credit.

Example:
(Perdisco)

27
 B. Purchases journal LO3

Record purchases of inventory on credit.

Example:
(Perdisco)

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 C. Cash receipts journal LO2

Record all cash inflows

E.g. cash sales, payments received from debtors, the sale
of fixed assets…
Includes debit and credit columns.
Example:
(Perdisco)

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 D. Cash payments journal LO2

Record all cash outflows (disbursements)

E.g. payments to creditors, cash purchase, payment of
wages…
Includes debit and credit columns.
Example:
(Perdisco)

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Subsidiary ledgers and control accounts LO3

Used for detailed records in the accounting system.

Subsidiary ledger is a set of ledger accounts that
collectively represent a detailed analysis of one general
ledger account
Relevant general ledger account is called a control
account.
Periodic reconciliation of subsidiary ledger to control
account is needed.

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 LO3
Subsidiary ledgers and control accounts – Examples

Debtors/accounts receivable
a separate account for each debtor
Creditors/accounts payable
a separate account for each creditor
Property, plant and equipment
separate records of each piece of property, plant and equipment
Raw materials inventory
separate records of each type of raw material held
Finished goods inventory
separate records of each type of finished goods held.

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 Control Account – An example LO3

GENERAL LEDGER

Debtors control

1 July 2015 900 000

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Subsidiary ledger – An example LO3

Debtor - M. Andrews
1 July 2015 100 000

Debtor - T. Blake
1 July 2015 300 000

Debtor - A. Crawford
1 July 2015 500 000

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 Genera ledger and Subsidiary ledgers (Perdisco) LO3

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 A. Sales journal – Credit sales LO4

Procedure:
Enter date of sale, invoice number, customer name and
amount of sale (from sales invoice) to sales journal.
Post information to related customer account in subsidiary
ledger daily.
Post totals to General Ledger at the end of the period
(monthly).
Check regularly total of subsidiary ledger against accounts
receivable control account.

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 A. Sales journal – Credit sales LO4
SALES JOURNAL
Post Cost of Accounts
Date 2012 Invoice No. Customers
Ref. Goods Sold Receivable
Jul 5 0001 M Andrews 50,000 100,000
5 0002 T Blake 150,000 300,000
5 0003 A Crawford 250,000 500,000
450,000 900,000
Post Ref. (104/400) (102/350) Post
ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER
daily
M Andrews
Post
Date Debit Credit Balance
Ref.
Jul 5 S1 100,000 100,000
GENERAL LEDGER
Account Receivable Control 102
Post monthly Post
Date Debit Credit Balance
Ref.
Jul 31 S1 900,000 900,000

Sales 350
Post
Date Debit Credit Balance
Ref.
37 Jul 31 S1 900,000 900,000
 B. Purchases journal – Credit purchases LO4

Procedure:
Enter invoice date, supplier’s name, credit terms and
amount of purchase (from sales invoice) to Purchases
Journal.
Post information to related supplier’s account in subsidiary
ledger daily.
Post totals to General Ledger monthly.
Check regularly total of subsidiary ledger against accounts
payable control account.

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B. Purchases journal – Credit purchases
PURCHASES JOURNAL
LO4
Accounts
Date 2012 Suppliers Post Ref. Terms
Payable
Jul 2 P Renton n/30 1,400
4 J Quincy n/30 320
5 R Lemon 2/10,n/30 3,500
5,220
Post Ref. (104/200)
Post
ACCOUNTS PAYABLE SUBSIDIARY LEDGER daily
P Renton
Post
Date Debit Credit Balance
Ref.
Jul 2 P1 1,400 1,400
GENERAL LEDGER
Account Payable Control 200
Post monthly Post
Date Debit Credit Balance
Ref.
Jul 31 P1 5,220 5,220
Inventory 104
Post
Date Debit Credit Balance
Ref.
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Jul 31 P1 5,220 5,220
 C. Cash receipts journal – Cash receipts LO4

Procedure:
Enter the details of cash receipt to Cash Receipts Journal.
Amounts in accounts receivable column posted to
subsidiary ledger daily .
Post column totals to General Ledger at regular intervals
(monthly).

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 C. Cash receipts journal – Cash receipts LO3
CASH RECEIPTS JOURNAL
Date Post Cash at Discount Accounts
Description Cash Sales
2012
2009 Ref. Bank Allowed Receivable
Debit Debit Credit Credit
Jul 3 Sales ➼ 50,000 50,000
14 M Andrews ➼ 100,000 100,000
28 A Crawford ➼ 490,000 10,000 500,000
640,000 10,000 50,000 600,000
Post Ref. (101) (478) (350) (102)

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER Post daily

M Andrews
Post
Date Debit Credit Balance
Ref.
Jul 5 S1 100,000 100,000
Jul 14 CR1 100,000 -

Post monthly GENERAL LEDGER

Cash at Bank 101
Post
Date Debit Credit Balance
Ref.
Jul 31 CR1 640,000 640,000

Sales 350
Post
Date Debit Credit Balance
Ref.
Jul 31 S1 900,000 900,000
Jul 31 CR1 50,000 950,000

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 D. Cash payments journal – Cash payments LO4

Procedure:
Enter the details of cash payment to Cash Payments
Journal.
Amounts in accounts payable column posted to subsidiary
ledger daily.
Post column totals to General Ledger at regular intervals
(monthly).

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 LO4
D. Cash payments journal – Cash payments
CASH PAYMENTS JOURNAL
Post Cash at Discount Other Accounts
Date 2009 Description Cheque No. Salaries
Ref. Bank Received accounts Payable
2012 Credit Credit Debit Debit Debit
Jul 3 Salaries ➼ 501 2,500 2,500
14 Telephone 424 502 270 270
28 R Lemon ➼ 503 3,430 70 3,500
6,200 70 2,500 270 3,500
Post Ref. (101) (351) (420) (-) (200)

ACCOUNTS PAYABLE SUBSIDIARY LEDGER Post daily

R Lemon
Post
Date Debit Credit Balance
Ref.
Jul 5 P1 3,500 3,500
Jul 28 CP1 3,500 -

Post monthly GENERAL LEDGER

Cash at Bank 101
Post
Date Debit Credit Balance
Ref.
Jul 31 CR1 640,000 640,000
Jul 31 CP1 6,200 633,800

Salaries Expense 420

Post
Date Debit Credit Balance
Ref.
Jul 31 CP1 2,500 2,500

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 Trade discount LO4

Trade discount is given by businesses for customers that

are expected to purchase large volumes.

This discount is not recorded in the books. The purchases

amount is recorded net of the discount.

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 Trade discount – An example LO5

On November 13, Glomobile made a cash sale of 17 Magic

Magenta Glow Mobile Phone Covers for a list price of $20
each. A trade discount of 10% applies.

Record the transaction in the Cash Receipts Journal.

Debit Credit
Post
Date Account
Ref. Cash at Discount Accounts Other
Cash Sales
Bank Allowed Receivable Accts

Nov. 13 sales √ $306 $306

45 17×$20× (1-10%)=$306
 Cash or settlement discount LO5

offered if payment is made or given within a specified

date from the transaction
No. of days in Net (Total sales
E.g. discount period less returns)

Discount Maximum
percentage 2/10, n/30 credit period

These discounts are recorded only when received

‘discount allowed/expense’ (for the seller) or
‘discount received/revenue’ (for the buyer)

part of the company’s cash management policy

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 Cash discount – An example LO5

ABC Ltd made a sale of $1000 to a customer, DDD Ltd, on

terms of 2/10, n/30 on 1 July.
The account was paid on 6 July.
Record the transaction in the Cash Receipts Journal.

Debit Credit
Post
Date Account
Ref. Cash at Discount Accounts Other
Cash Sales
Bank Allowed Receivable Accts

July 6 DDD √ $980 $20 $1000

$1000× 2%=$20
47
 Lecture exercise

Prepare debtors and creditors control accounts for the year

ending 30 June 2015 from the following information.
Balances at 1 July 2014:
Debtors control 15 425
Creditors control 9 870
Summary of transactions to 30 June 2015
1. Credit sales 101 700
2. Cash sales 3 540
3. Credit purchase 71 620
4. Cash paid to creditors 45 280
5. Discount allowed by suppliers 560
6. Discount given to debtors 725
7. Cash received from debtors 61 590

48
 Lecture exercise
Debtors control
Bal. b/d 15 425 Discount expense 725

Sales 101 700 Cash 61 590

Bal. c/d $ 54 810

$ 117 125 $ 117 125

Balances at 1 July 2014:

Debtors control 15 425
Summary of transactions to 30 June 2015
1. Credit sales Debtors, DR 101 700
6. Discount given to debtors Debtors, CR 725
7. Cash received from debtors Debtors, CR 61 590

49
 Lecture exercise

Creditors control
Cash 45 280 Bal. b/d $ 9 870

Discount revenue 560 Purchases 71 620

Bal. c/d $ 35 650

$ 81 490 $81 490

Balances at 1 July 2014:

Creditors control 9 870
Summary of transactions to 30 June 2015
3. Credit purchase Creditors, CR 71 620
4. Cash paid to creditors Creditors, DR 45 280
5. Discount allowed by suppliers Creditors, DR 560

50
 Revision Question 1

‘Accounts payable’ is a debit column in the:

A. sales journal
B. purchase journal
C. cash receipts journal
D. cash payments journal.

51
 Revision Question 2

Honey Ltd made a sale of $1000 to a customer on terms

of 1.5/10, n/30 on 1 August. The account was paid on 8
August. Honey Ltd would make which of the following
postings to the ledger on 8 August?

A. DR Discount expense $15

B. DR Accounts receivable $1000
C. CR Discount revenue $15
D. CR Cash $15.

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 Next Lecture…

• Introduction to Inventory and Non-current Assets

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