BSBADM309A

Process accounts payable

and receivable

Prepared byPrepared byMelanie LynchMelanie LynchTraining ConsultantTraining Consultant

Unit Descriptor

• This unit covers maintenance of accounts payable and accounts receivable records, processing of payments to creditors, and handling overdue accounts receivable.

Introduction to Accounting

• Assets and Liabilities

• Key Concepts in Accounting

• Debtors’ and Creditors’ Ledger Accounts

• Financial Source Documents

• The Accounting Equation

• Cash Flow and the Accounting Process

• Accounting with Journals

• Bank Reconciliation

The Purpose of Accounting

• A business wants to know its financial position

• A business needs to know if they can meet their debts and how much cash they have

• Another important measure of success is whether or not they have made a profit

Key Concepts in Accounting

• Assets are items of value owned by a business

• Liabilities are amounts owed by the business to parties outside the business

• Owner’s equity or proprietorship is the amount of the owner’s interest or investment in the business

Assets and Liabilities

Assets:

Cash

Goods or inventories

Furniture

Buildings

Land

Accounts receivable or debtors

Liabilities:

Mortgage

Bank Loan

Insurance

Accounts payable or creditors

Owner’s Equity or Proprietorship

• Owner’s Equity is the concept of worth.

• Owner’s Equity = Assets - Liabilities

• Owner’s Equity means that the amount of the owner’s interest, investment or equity in the business is calculated

The Accounting Equation

• The accounting equation is the relationship between the total assets, liabilities and owner’s equity of a business at a certain date.

• This relationship is always an equality. The source of funds given to the business will always equal the funds received by the business.

The Accounting Equation

• All events are regarded from the viewpoint of the business.

• Owner’s Equity = Assets - Liabilities

• Liabilities and owner’s equity are recorded on the same side of the accounting equation

Cash Flow in Business

Business

Inflow of cashOwners investing capitalProviding services to

clientsSelling inventories to

customersCustomers paying

outstanding accountsOther income, eg interest revenue, rent

revenue

Outflow of cashOwner’s withdrawing

cash (drawings)Purchasing supplies Purchasing inventories

from suppliersPurchasing assets other

than inventoriesPaying outstanding

accountsExpenses, eg wages,

insurance

The Accounting Process

Transactions

Source documents

Financial reports

Trial Balance

Ledgers

Journals Bank Reconciliation

JournalsSource

documents

Debtors and Creditors LedgerBusiness

Transactions

Accounting for Credit and Cash Flow in a Business

BankReconciliation

Source Documents

• A source documents is a form which provides the details of a transaction and the evidence that the transaction has occurred

• They provide the basis for entries in the accounting records

Source Documents

Source Documents

• Source documents that provide evidence of income include:

• Cash Register Rolls• Cash Receipts• Invoices to Debtors• Credit Notes from

Creditors

• Source documents that provide evidence of expenses include:

• Cheque butts• Invoices from

Creditors• Credit Notes to

Debtors

Source Documents

• All source documents must be entered into the daily journals before they can be filed away

• Source documents are entered into Journals in chronological date order

• All source documents should be checked for accuracy before they are entered into the accounts system

Journals

• A journal is sometimes referred to as a day book. It is the first place of entry for the business’ day-to-day transactions, which are entered in date order

• Journals are totalled at the end of the month after Bank Reconciliation has taken place

Journals

Types of Journals

• Cash Receipts Journal - records all the receipts of cash

• Cash Payment Journal - records all payments from the business

• General Journal - records any transaction that does not fit into any one of the other specialised journals

• Purchases Journal - records all purchases of inventories on credit

• Purchases Returns Journal - records all returns made on credit purchases

• Sales Journal - records all sales of inventories on credit

• Sales Returns Journal - records all returns made on credit sales

Accounting for Cash with Journals

• Cash Receipts and Cash Register Rolls are the financial source documents that are posted to the Cash Receipts Journal

• Cheque butts are the financial source documents that are posted to the Cash Payments Journal

Cash Receipts Journal

• The Cash Receipts Journal records all receipts of cash

• There is a source documents for every entry (a receipt or cash register roll/summary)

• There is no set number of columns in a Cash Receipts Journal. Columns are set up for the most frequent items of receipts for each particular business

Cash Receipts Journal

• Cash from cash receipts is banked daily. This means that the cash received from various sources must be added together for each day and the total amount banked and this is reflected in the Bank column of the Cash Receipts Journal

• The totals of the dissection columns should always equal the total of the Bank column (with the exception of Discount Revenue)

Cash Payments Journal

• The Cash Payments Journal records all payments from the business

• The source documents for the payment of cash is the cheque butt or cheque duplicate

• There is no set number of columns in the Cash Payments Journal

Cash Payments Journal

• If more than one cheque is drawn on one day, the amount of each cheque must be entered in the Bank column

• If more than two accounts are paid with one cheque then the total amount of the cheque is entered in the Bank column

• The totals of the dissection columns should add up to the total of the Bank column (with the exception of Discount Expense)

Accounting for credit with Journals

All goods and services purchased or sold and paid for at a later time (usually on a statement at the end of the month) are recorded in the following Journals:

• Purchases Journal (source doc – Invoices from Creditors)

- records all purchases of inventories on credit• Purchases Returns Journal (source doc – Credit Notes from Creditors

- records all returns made on credit purchases• Sales Journal (source doc – Invoices to Debtors) - records all sales of inventories on credit• Sales Returns Journal (source doc – Credit Notes to Debtors)

- records all returns made on credit sales

Purchases Journal

• records all purchases on credit• the source documents for entries in the

Purchases Journal are the invoice received for goods purchased on credit

• suppliers who the company owes money to are known as Creditors

• creditors are considered liabilities, since we owe them money

• Creditors accounts are Credit in nature

Purchases Returns Journal

• records all returns made on credit purchases

• the source documents for entries in the Purchases Returns Journal are the credit notes received for goods purchased and returned to the supplier

Sales Journal

• records all purchases of goods on credit• the source documents for entries in the Sales

Journal are the invoices dispatched for goods sold on credit

• customers who owe the company money are knows as Debtors

• debtors are considered assets, since they owe us money

• Debtors accounts are Debit in nature

Sales Returns Journal

• records all returns made on credit sales

• the source documents for entries in the Purchases Returns Journal are the credit notes duplicates dispatched for goods sold on credit and returned by the customer

Debtors and Creditors Ledger Accounts

What is a Ledger Account?

• A device is needed where changes to a particular debtors or creditors account can be kept account of. Such a device is called an account

• An account is a record where all changes to a particular item are shown

• A ledger is a book, set of loose cards, or file of all the accounts

Purpose of Debtors’ and Creditor’s Ledger Accounts

• The purpose of keeping debtors’ and creditors’ ledgers is so that at any point in time the business can check to whom it owes money (Creditor’s accounts) and who owes money to the business (Debtor’s accounts)

• When statements are sent to debtors at the end of the month they are drawn up from the Debtors’ Ledger

• When statements are received at the end of the month they can be checked against the Creditors’ Ledger

Debtors’ and Creditors’ Ledger Accounts

• Ledger accounts keep a record of what happens to a Debtor or Creditor

• A Debtor is someone to whom the business has sold goods and services. A Debtor is considered an asset, because they bring income to the business.

• A Creditor is someone from whom the business has purchases goods and services. A Creditor is considered a liability, because they are an expense to the business.

Accounting Rules

• Asset accounts have a debit nature. Therefore increases to asset accounts are recorded on the debit side and decreases to asset accounts are recorded on the credit side

• Liability and Owner’s Equity accounts have a credit nature. Therefore increases to liability accounts are recorded on the credit side and decreases to liability accounts are recorded on the debit side

Preparation of ledger accounts

• There is usually a large number of ledger accounts for a business

• The procedure for entering details into the ledger is called posting

• Posting is usually done at the end of the month and entries are posted from the daily journals (CRJ, CPJ, SJ, SRJ, PJ, PRJ, GJ)

Posting from the Journals

• Entries from the following journals are usually posted to the debtors accounts:– Sales Journal

– Sales Returns Journal

– Cash Receipts Journal

• Entries from the following journals are usually posted to the creditors accounts:– Purchases Journal

– Purchases Returns Journal

– Cash Payments Journal

To post to a ledger account

• Identify the account and the account number and open an account if one is not already in existence

• Show the date of the transaction• Fill in the Particulars column with the name of the

other account/s affected• Place the relevant amount in the debit or credit

columns according to the rules of accounting• Calculate the running balance and place this in the

balance column (indicating a dr or cr balance)

Balancing a ledger account

• If it is the first entry in the ledger account the balance is the same as the entry (debit or credit)

• If there is an existing balance in the ledger account (debit or credit), add a like entry and subtract an opposite entry

• Keep a running balance showing whether the account is in debit or credit

Debtors’ and Creditors’ Schedules

• At the end of the month a Debtors’ Schedule and Creditors’ Schedule is drawn up

• The debtors’ schedule list all the Debtors’ names and total amounts that they owe with a grand total

• The creditors’ schedule list all the Creditors’ names and total amounts that the business owes with a grand total

Bank Reconciliation

Why reconcile?

• We need to make sure that the money recorded in the Cash Receipts book has made it to the bank

• We need to make sure that the money recorded in the Cash Payments book has come out of the bank

What books and forms do we need to reconcile?

• Bank Reconciliation Statement from the previous month

• Cash Receipts Book• Cash Payments Book• Bank Statement• Cash at Bank Ledger Card• To produce a new Bank Reconciliation for

the end of month

What is the process of Bank Reconciliation?

• First, obtain the Bank Reconciliation Statement from the previous month which shows any outstanding deposits and unpresented cheques from the previous month

• These amounts should be checked against the new Bank Statement – if they appear tick them off on the Bank Statements and the Bank Reconciliation Statement from the previous month

• They then have been ACCOUNTED for

Step 2 in the Bank Reconciliation Process

• Next obtain the Cash Receipts Journal and look at the Bank column, and the Bank Statement

• Tick off all the entries in the Cash Receipts Journal against the CREDIT column on the Bank Statement

• For any entries that DO NOT appear on either the Bank Statement or the Cash Receipts Journal, you should circle them to be ACCOUNTED for in the reconciliation process

Step 3 in the Bank Reconciliation Process

• Next obtain the Cash Payments Journal and look at the Bank column, and the Bank Statement

• Tick off all the entries in the Cash Payments Journal against the DEBIT column on the Bank Statement

• For any entries that DO NOT appear on either the Bank Statement or the Cash Payments Journal, you should circle them to be ACCOUNTED for in the reconciliation process

Some CPJ entries not accounted for on the Bank Statement

• Most commonly some entries in the Cash Payments Journal are not accounted for on the bank statement because we have sent out cheques to pay our creditors and/or expenses and the parties have not yet banked those cheques

• These are called unpresented cheques and will have to be ACCOUNTED for (Step 6)

Some CRJ entries not accounted for on the Bank Statement

• Most commonly some entries in the Cash Receipts Journal are not accounted for on the bank statement because we may have deposited cash/cheques near the end of the month and they have not been captured in the current Bank Statement

• These are called outstanding deposits and will have to be ACCOUNTED for (Step 6)

Some Bank Statement entries not accounted for in the CPJ Journal

• Some items may appear on the Bank Statement that may be an expense that will have to be ACCOUNTED for by writing them into the Cash Payments Journal (Step 4) before you total the columns at the end of the month

• For example, Bank and government charges and fees

Some Bank Statement entries not accounted for in the CRJ Journal

• Some items may appear on the Bank Statement that may be an expense that will have to be ACCOUNTED for by writing them into the Cash Receipts Journal (Step 5) before you total the columns at the end of the month

• For example, Direct Deposits, Interest earned on the account

Step 4 in the Bank Reconciliation Process

• Write any expenses from the Bank Statement (eg. Bank or government fees/charges) from the DEBIT column of the Bank Statement into the Cash Payments Journal

• These items on the Bank Statement can then be ticked off as they are ACCOUNTED for

• Total the columns in the CPJ

Step 5 in the Bank Reconciliation Process

• Write any expenses from the Bank Statement (eg. Direct deposits, interest earned) from the CREDIT column of the Bank Statement into the Cash Receipts Journal

• These items on the Bank Statement can then be ticked off as they are ACCOUNTED for

• Total the columns in the CRJ

Step 6 in the Bank Reconciliation Process

• It is now time to construct the new Bank Reconciliation for the end of the month

• This will ACCOUNT for the outstanding deposits that are circled in the Cash Receipts Journal and the unpresented cheques as circled in the Cash Payments Journal

• It should be set out in the following manner

Structure of Bank Reconciliation Statement

Bank Reconciliation Statement Of Acme Trading Company

As at 31 March 2002

Credit Balance as per Bank Statement 8,335.00 Add Outstanding Deposits 2,345.00

10,680.00 Less Unpresented Cheques No. 201 645.00

No. 203 350.00 995.00Debit Balance as per Bank Ledger Card 9,685.00

Explanation of Bank Reconciliation Statement

• The Credit Balance as per Bank Statement is the final balance as shown on the bank statement for the month

• The outstanding deposits are taken from any entries circled in the CRJ

• The unpresented cheques are taken from any entries circled in the CPJ

• These entries can now be ticked in the CRJ and the CPJ, as they have been ACCOUNTED for

Step 7 in the Bank Reconciliation Process

• Finally we have to ensure that the Debit balance as per the Bank Ledger Card actually balance with the final amount on the Bank Reconciliation Statement

• To do this we obtain the Bank Ledger Card which will usually show a Debit balance

Cash at Bank Ledger Account is an Asset account

• We take the total amount for the month from the Cash Receipts Journal and transfer it to the Bank Ledger Card, posting the amount to the Debit column and adding it to the balance

• We take the total amount for the month from the Cash Payments Journal and transfer it to the Bank Ledger Card, posting the amount to the Credit column and subtracting it from the balance

Structure of Bank Reconciliation Statement

Cash at Bank_____________________________________Date Particulars Debit Credit Balance28.02.02 Balance 8,335.0031.03.02 Cash Receipts J. 2,150.00 10,485.0031.03.02 Cash Payments J. 800.00 9,685.00

• The Cash at Bank balance on the Ledger Card is now reconciled with the amount on the final Bank Reconciliation Statement

Final Reconciliation

• You will know that your books are balanced and reconciled if the bank balance on the Bank Ledger Card equals the bank balance on the end of month Bank Reconciliation Statement