The Double Entry Book Keeping - Part 2

When a business buys or sells on credit, payment is not made immediately — instead, a debt is created. This must be recorded in both the relevant income/purchases account AND the personal account of the debtor or creditor.

Credit sale: Goods are sold to a customer who will pay later.

• Dr Trade Receivables (or the named customer's account) — the customer owes us money (asset increases)
• Cr Sales — income earned (income increases)

Credit purchase: Goods are bought from a supplier who will be paid later.

• Dr Purchases — goods acquired for resale (expense/purchases account increases)
• Cr Trade Payables (or the named supplier's account) — we owe the supplier (liability increases)

Personal accounts: At IGCSE, you may be required to post to named individual accounts (e.g., "A. Kumar's account" for a specific customer) as well as to the control accounts (Trade Receivables Control, Trade Payables Control). The personal accounts sit in the subsidiary ledger (also called the memorandum ledger).

Key point: Trade receivables have a debit balance (they are assets — customers owe us). Trade payables have a credit balance (they are liabilities — we owe suppliers).

Returns are goods sent back after a sale or purchase. They reduce the original income or expense, and they also affect the trade receivable or payable balance.

Returns Inwards (Sales Returns): A customer returns goods to the business.

• The original sale must be partly reversed.
• Dr Returns Inwards (or Sales Returns) — this is a contra revenue account that reduces net sales
• Cr Trade Receivables — the customer now owes less

Returns Outwards (Purchases Returns): The business returns goods to a supplier.

• The original purchase must be partly reversed.
• Dr Trade Payables — the business owes less to the supplier
• Cr Returns Outwards (or Purchases Returns) — this is a contra purchases account that reduces net purchases

Why use separate returns accounts rather than simply crediting/debiting Sales or Purchases? Using dedicated accounts allows management to monitor the volume of returns — high returns may indicate quality problems with goods sold or purchased. The net figures can easily be calculated:

• Net Sales = Sales − Returns Inwards
• Net Purchases = Purchases − Returns Outwards

The source document for returns is a credit note (issued by the seller when goods are returned or there was an overcharge).

A cash discount (also called a settlement discount) is offered to encourage prompt payment. It is different from a trade discount (which reduces the invoice price and is never recorded in the accounts).

Discount Allowed: The business allows a customer to pay less than the full invoice amount in exchange for early payment.

• The business loses revenue (discount allowed is an expense)
• The customer's debt is fully cleared (trade receivable reduces to zero)

If a customer owes $1,000 and pays $980 taking a 2% settlement discount:

• Dr Cash/Bank $980 — cash received
• Dr Discount Allowed $20 — expense (the 2% discount)
• Cr Trade Receivables $1,000 — the full $1,000 debt is cleared

Discount Received: A supplier allows the business to pay less than the full amount owed.

• The business gains income (discount received is income)
• The supplier's balance is fully cleared (trade payable reduces to zero)

If the business owes a supplier $2,000 and pays $1,940 taking a 3% discount:

• Dr Trade Payables $2,000 — full debt cleared
• Cr Cash/Bank $1,940 — cash paid
• Cr Discount Received $60 — income (the 3% discount)

Important: In both cases the full original balance in the trade receivables/payables account is cleared — the discount element is not simply left outstanding.

When no discount is involved, debt settlement is straightforward:

Customer pays their debt in full (e.g., $500 by cheque):

• Dr Bank $500 — asset increases (money received)
• Cr Trade Receivables $500 — asset decreases (customer no longer owes money)

Business pays its supplier in full (e.g., $750 cash):

• Dr Trade Payables $750 — liability decreases (debt cleared)
• Cr Cash $750 — asset decreases (money paid out)

Part payment: If a customer pays only part of their debt (e.g., $200 of a $500 balance):

• Dr Bank $200, Cr Trade Receivables $200 — only $200 of the receivable is cleared; the remaining $300 balance stays outstanding in the account.

Drawings of goods (not cash): When the owner takes goods from inventory for personal use:

• Dr Drawings — at the cost price of the goods (capital reduces)
• Cr Purchases (or Inventory) — goods are no longer available for resale

This is different from cash drawings. The cost price is used because the goods would have been recorded at cost when purchased; no profit is recognised on goods taken by the owner.