Training, Teaching and Learning Materials (TTLM)

AKAKI POLY TECHNIC COLLEGE

The Ethiopian TVET-System

ACCOUNTING AND FINANCE

Level III

Learning Guide

Unit of Competence: Administer, Monitor and Control General and

Subsidiary Ledgers

Module Title: Administering, Monitoring and Controlling General

and Subsidiary Ledgers

JULY, 2024
 Administer, Monitor and Control General and Subsidiary Ledgers

This module covers the performance outcomes, skills and knowledge required to reconcile and
monitor financial accounts receivable systems, identify bad and doubtful debts and plan à
recovery action and remit payments to sundry creditors.
At the end of the module the trainee will be able to:
LO1. Review accounts receivable process
LO2. Identify bad and doubtful debts
LO3. Review compliance with terms and conditions and plan recovery action
LO4. Prepare reports and file documentation
LO5. Distribute creditor’s invoices for authorization
LO6. Remit payments to creditors
LO7. Prepare accounts paid report and reconcile balances outstanding
LO8. Collect and record monies due

Introduction to Accounts Receivable

Imagine that a business has several thousand charge (credit) customers and shows the
transactions with these customers in only one general ledger account - Accounts Receivable.

To determine the balance owed by an individual customer at any specific time. Similarly, the
amount payable to one creditor would be difficult to locate quickly from single Account Payable
account in the general ledger. Companies use subsidiary ledgers to keep track of individual
balances.

A subsidiary ledger is a group of accounts with a common characteristic (for example, all
accounts receivable). The subsidiary ledger frees the general ledger from the details of individual
balances. A subsidiary ledger is an addition to, and an expansion of, the general ledger.
Two common subsidiary ledgers are:
1. The accounts receivable (or customers’) subsidiary ledger, which collects transaction data of
individual customers.
2. The accounts payable (or creditors’) subsidiary ledger, which collects transaction data of
individual creditors.

Receivables (often referred to as loans and receivables) are claims held against customers and
others for money, goods, or services. The term receivables includes all money claims against
other entities, including people, companies, and other organizations. The receivables that results
from sales on account are normally accounts receivable or notes receivable. Notes and accounts
receivable that result from sales transactions are sometimes called trade receivables

Accounts receivable are oral promises of the purchaser to pay for goods and services sold. They
represent “open accounts” resulting from short-term extensions of credit. A company normally
collects them within 30 to 60 days. Notes receivable are written promises to pay a certain sum
of money on a specified future date. They may arise from sales, financing, or other transactions.
 UNIT ONE
Review Accounts Receivable Process
Accounts Receivable
The most common transaction creating a receivable is selling merchandise or services on
account (on credit). The receivable is recorded as a debit to Accounts Receivable. Such
accounts receivable are normally expected to collect within a short period, such as 30 or 60 days.

They are classified on the balance sheet as a current asset.

A major issue of selling merchandise or services on account (on credit) is that some customers
will not pay their accounts. That is, some accounts receivable will be uncollectible. Companies
may shift the risk of uncollectible receivables to other companies by not accepting sales on
account.

Four Main Steps for a Typical AR Process:

1. Create Credit Practices
2. Invoicing Customers
3. Tracking Payments Received and Payments Due
4. Accounting for Accounts Receivables
0In each of these subsidiary ledgers, individual accounts are usually arranged in alphabetical
order. The detailed data from a subsidiary ledger are summarized in a general ledger account. For
example, the detailed data from the accounts receivable subsidiary ledger are summarized in
Accounts Receivable in the general ledger.

Whenever a seller decides to offer its goods or services on credit:

1) The seller boosts its potential to increase revenues since many buyers appreciate the
convenience and efficiency of making purchases on credit, and
2) The seller opens itself up to potential losses if its customers do not pay the sales invoice
amount when it becomes due.
The two methods of accounting for uncollectible receivables are as follows:

1. The direct write-off method records bad debt expense only when an account is determined to
be worthless. The direct write-off method is often used by small companies and companies
with few receivables.
2. The allowance method records bad debt expense by estimating uncollectible accounts at the
end of the accounting period.

IFRS or GAAP require companies with a large amount of receivables to use the allowance
method.
There are two methods of accounting to consider when accounting for receivables. They are:

1. Cash-basis accounting. In this type of accounting, revenue is considered as revenue when

cash is received. Expenses are considered an expenses when you pay for them. For cash-basis
accounting, track accounts receivable separately from revenue.
 Revenue isn’t recorded until the cash is received.
2. Accrual-basis accounting. In this type of accounting, revenue is considered revenue when
the sale is incurred. Similarly, expenses are considered expenses when a cost is incurred.
Accounts receivable are recorded under this system.
 There is a risk the customer may not pay. If they don’t pay, later you can charge these
losses to expense.

Under the accrual basis of accounting (which we will be using throughout our discussion) a sale
on credit will:
1. Increase sales or sales revenues, which are reported on the income statement, and
2. Increase the amount due from customers, which is reported as accounts receivable—an asset
reported on the balance sheet.
If a buyer does not pay the amount it owes, the seller will report:
1. A credit loss or bad debts expense on its income statement, and
2. A reduction of accounts receivable on its balance sheet.

The seller should report its estimated credit losses as soon as possible using the allowance
method. For income tax purposes, however, losses are reported at a later date through the use of
the direct write-off method.

Accounts Receivable Process

A company sells an item or a service to a buyer and extends credit to that buyer so that the total
cost of the sale can be paid later and on terms that are agreed upon by the seller and the buyer.

To determine the customers that have already paid and identify any payments those are overdue.
The process is a simple turn of events that make the Receivables traceable and manageable.

Four Main Steps for a Typical AR Process:

1. Establishing Credit Practices
2. Invoicing Customers
3. Tracking Payments Received and Payments Due
 4. Accounting for Accounts Receivables

1. Creating / Establishing Credit Practices

The first step is for the company to develop a credit application process. The company will then
decide, based on the credit-worthiness of the applicant, as to whether they will offer goods on
credit. The company might choose to offer the credit to individual customers or other businesses.
Also, the company will establish terms and conditions for credit sales. The document outlines
the client’s obligations and requirements. The firm must ensure that it complies with Federal laws
on credit, such as full disclosure of the credit practices. For example, the company has to clearly
communicate the interest rates for the credit.

2. Invoicing Customers

An invoice is a document provided to the buyer detailing the products and services that have been
rendered, the costs of those products and services, as well as the date payment is expected.

Each invoice has to have a unique invoice number for easy retrieval. The customer is then given
the chance to choose whether they want to receive electronic or physical invoices. Large firms
prefer to send both the electronic and paper invoices.

3. Tracking Payments Received and Payments Due

This step is performed by an Accounts Receivables (AR) Officer. The Officer keys out a payment
deposited into the bank account of the supplier, feeds it into the AR system, and then allocates it
to an invoice.

The officer also reconciles the AR ledger that the payments are accounted for and properly
posted, and then issues monthly statements to clients. The statement provides details for the
customers about the amounts owed as per previously sent invoices.

The tracking process differs in large and small companies. Small companies, a manual process,
companies use spreadsheets to record when they send the invoices, and when they receive
payments.

Larger companies typically invest in a team of AR Officers to conduct the tracking process, and
they use some form of an accounts tracking software system to help ensure accuracy. The system
helps the AR Officer to be more effective, because it automatically alerts the AR Officer to which
debt is outstanding.

4. Accounting for Accounts Receivable outstanding balance

Your accounts receivable are essential components to your financial statements. This means to
record and account for them correctly in your accounts receivable process. To do this, to make
sure you document your accounts receivable through your invoices which should describe the
goods or services you have provided the customer, the amount that is owed to you, and when that
amount needs to be paid

Recording Sales of Goods on Credit

When a company sells goods on credit, it reports the transaction on both its income statement and
its balance sheet.
On the income statement, increases are reported in sales revenues, cost of goods sold, and
(possibly) expenses.
On the balance sheet, an increase is reported in accounts receivable, a decrease is reported in
inventory, and a change is reported in stockholders' equity for the amount of the net income
earned on the sale.
 If the sale is made with the terms FOB Shipping Point, the ownership of the goods is
transferred at the seller's.
 If the sale is made with the terms FOB Destination, the ownership of the goods is
transferred at the buyer's.

In principle, the seller should record the sales transaction when the ownership of the goods is
transferred to the buyer. Practically speaking, however, accountants typically record the
transaction at the time the sales invoice is prepared and the goods are shipped.

FOB Shipping Point

Quality Products Co. just sold and shipped $1,000 worth of goods using the terms FOB Shipping
Point. With its cost of goods at 80% of sales value, Quality makes the following entries in its
general ledger:

FOB Shipping Point means the ownership of the goods is transferred to the buyer at the seller's
dock. This means that the buyer is responsible for transporting the goods from Quality Product's
shipping dock. Therefore, all shipping costs (as well as any damage that might be incurred during
transit) are the responsibility of the buyer.

FOB Destination
FOB Destination means the ownership of the goods is transferred at the buyer's dock. This means
the seller is responsible for transporting the goods to the customer's dock, and will factor in the
cost of shipping when it sets its price for the goods.

Let's assume that Gem Co. makes a sale to a customer that has a sales value of $1,050 and a cost
of goods sold at $800. This transaction affects the following accounts in Gem's general ledger.
Because Gem chooses to ship its goods FOB Destination, the ownership of the goods transfers at
the buyer's. Therefore, Gem Merchandise assumes all the risks and costs associated with
transporting the goods.

Assume that Gem pays an independent shipping company $50 to transport the goods from its
warehouse to the buyer's dock. Gem records the $50 as an operating expense or selling expense
(in an account such as Delivery Expense, Freight-Out Expense, or Transportation-Out Expense).

Credit Terms with Discounts

When a seller offers credit terms of net 30 days, the net amount for the sales transaction is due 30
days after the sales invoice date.
To illustrate the meaning of net, assume that Gem Merchandise Co. sells $1,000 of goods to a
customer. Upon receiving the goods the customer finds that $100 of the goods is not acceptable.
The customer contacts to return the unacceptable goods. This means that Gem's net sale ends up
being $900; the customer's net purchase will also be $900 ($1,000 minus the $100 returned). It
also means that Gem's net receivable from this customer will be$900.
 Credit Period: Has a direct proportionality with sales
 Cash Discount: Firms generally offer cash discounts to induce customers to make prompt
payments.
 Collection Effort: aimed at timely collection of the receivable consists of:
• Monitoring the state of receivables,
• Dispatch of letters to customers whose due date is approaching,
• Electronic and telephonic advice to customers around the due date,
• Threat of legal action to overdue accounts,
• Legal action against overdue accounts.
The discount is referred to as a sales discount, cash discount and the shorter period of time is
known as the discount period. For example, the term 2/10, net 30allows a customer to deduct 2%
of the net amount owed if the customer pays within 10 days of the invoice date. If a customer
does not pay within the discount period of 10 days, the net purchase amount (without the
discount) is due 30 days after the invoice date.

The credit term of 2/10, net 30 work. Gem Merchandise Co. ships $1,000 of goods and the
customer returns $100 of unacceptable goods to Gem within a few days. At that point, the net
amount owed by the customer is $900. If the customer pays Gem within 10 days of the invoice
date, the customer is allowed to deduct $18 (2% of $900) from the net purchase of $900.

In other words, the $900 amount can be settled for $882 if it is paid within the 10-day discount
period.

Subsidiary and General Ledger

A subsidiary ledger is a group of accounts with a common characteristic (for example, all
accounts receivable). The subsidiary ledger the details of individual balances. A subsidiary ledger
is an addition to, and an expansion of, the general ledger.

Two common subsidiary ledgers are:

1. The accounts receivable (or customers’) subsidiary ledger, which collects transaction data
of individual customers.
2. The accounts payable (or creditors’) subsidiary ledger, which collects transaction data of
individual creditors.

In each of these subsidiary ledgers, individual accounts are usually arranged in alphabetical order.
The detailed data from a subsidiary ledger are summarized in a general ledger account.
For example, the detailed data from the accounts receivable subsidiary ledger are summarized in
Accounts Receivable in the general ledger.

A subsidiary ledger contains the details to support a general ledger control account. For instance,
the subsidiary ledger for accounts receivable contains all of the information on each of the credit
sales to customers, each customer's remittance (a payment to a remote recipient), return of
merchandise, discounts, and so on.

By having the details a subsidiary ledger, a company can better control its financial information.
For example, the credit manager and others in the credit department of a company will have
access to any and all of the credit sales information through the subsidiary ledger without having
access to any other account in the company's general ledger.

The general ledger account that summarizes subsidiary ledger data is called a control account.
The general ledger control accounts and subsidiary ledger accounts are shown in

 A subsidiary ledger contains the details to support a general ledger control account
 The general ledger account that summarizes subsidiary ledger data is called a control
account.
A special journal is used to record similar types of transactions. Examples would be all sales of
merchandise on account, or all cash receipts. The special journal a company uses depends largely
on the types of transactions that occur frequently.

Figure
General Ledger

Cash Account Receivable Account Payable Stock holder

equity

Subsidiary Ledger

Creditor X Creditor Y
Customer A Customer C
Customer B Creditor Z

EXAMPLE OF SUBSIDIARY LEDGER

Most merchandising enterprises use the journals shown in Illustration.

1. Sales Journal: All sales of merchandise on account:

2. Cash Receipts Journal: All cash received (including cash sales)
3. Purchases Journal: All purchases of merchandise on account
4. Cash Payments Journal: All cash paid (including cash purchases)
5. General journal: Transactions that cannot be entered in a special journal, including
correcting, adjusting, and closing entries.

Sales Journal
 The sales journal is used to record sales of merchandise on account.
 Cash sales of merchandise are entered in the cash receipts journal. Credit sales of assets other
than cash sales.

An example of a control account and subsidiary ledger for XYZ WHOLESALE SUPPLY is
provided in Illustration.

WHOLESALE SUPPLY
 Sales Journal SJ1
Date Account Invoic P.R Accts. Receivable Cost of Goods Sold Dr.
debited e no. Dr. Merchandise Inventory Cr.
Sales Cr.
May 2020 -3 Abbot Sisters 101 SJ1 10,600 6,360
7 Babson Co 102 SJ1 11,350 7,370
14 Carson Bros. 103 SJ1 7,800 5,070
19 Deli Co 104 SJ1 9,300 6,510
21 Abbot Sisters 105 SJ1 15,400 10,780
24 Deli Co 106 SJ1 21,210 15,900
27 Babson Co. 107 SJ1 14,570 10,200
90,230 62,190

Posting the Sales Journal

Postings from the sales journal are made daily to the individual accounts receivable in the
subsidiary ledger. Posting to the general ledger is made monthly. Illustration shows both the daily
and monthly postings.
Subsidiary ledger
Abbot Sisters
Date P.R Debit Credit Balance
May 2010 3 S1 10600 10600
21 S1 15400 26,000

Babson Co
Date P.R Debit Credit Balance
May 2010 3 S1 11,350 11,350
27 S1 14,570 25,920

Carson Bros.
Date P.R Debit Credit Balance
May 2010 14 S1 7,800 7,800

Deli Co
Date P.R Debit Credit Balance
May 2010 19 S1 9,300 9,300
24 21,210 30,510
GENERAL LEDGER
Accounts Receivable Account No.12
Date P.R Debit Credit Balance
May 2010 31 90,230 90,230
GENERAL LEDGER
Merchandise inventory Account No
Date P.R Debit Credit Balance
May 2010 31 62,190 62,190

GENERAL LEDGER
SALES Account No. 41
Date P.R Debit Credit Balance
May 2010 31 90,230 90,230
GENERAL LEDGER
Cost Of Goods Sold Account No.
Date P.R Debit Credit Balance
May 2010 31 62,190 62,190

Subsidiary ledger account

 Abbot Sisters 26,000
 Babson Co. 25,920
 Carson Bros. 7,800
 Deli Co. 30,510
$90,230
Journalizing credit sales
Wholesale Supply uses a perpetual inventory system. Under this system, each entry in the sales
journal results in one entry at selling price a debit to Accounts Receivable (a control account)
and a credit of equal amount to Sales and another entry at cost.

The entry at cost is a debit to Cost of Goods Sold and a credit of equal amount to Merchandise
Inventory (a control account).

General ledger
Accounts Receivable $90,230
Sales revenue $90,230
(To record sales on account)

Cost of Goods Sold 62,190

Merchandise Inventory 62,190

Cash Receipts Journal

All receipts of cash are recorded in the cash receipts journal. The most common types of cash
receipts are cash sales of merchandise and collections of accounts receivable. Many other
possibilities exist, such as receipt of money from bank loans and cash proceeds from disposal of
 equipment. A one- or two- column cash receipts journal would not have space enough for all
possible cash receipt transactions.

Journalizing Cash Receipts Transactions

To illustrate the journalizing of cash receipts transactions, we will continue with the May
transactions of Wholesale Supply. Collections from customers relate to the entries recorded in
the sales journal in Illustration.

The entries in the cash receipts journal are based on the following cash receipts.

May 1 Stockholders invest $5,000 in the business in common stock.

7 Cash sales of merchandise total $1,900 (cost, $1,240).
10 A check for $10,388 is received from Abbot Sisters in payment of invoice No. 101 for
$10,600 less a 2% discount.
12 Cash sales of merchandise total $2,600 (cost, $1,690).
17 A check for $11,123 is received from Babson Co. in payment of invoice No. 102 for
$11,350 less a 2% discount.
22 Cash is received by signing a note for $6,000.
23 A check for $7,644 is received from Carson Bros. in full for invoice No. 103 for $7,800
less a 2% discount.
28 A check for $9,114 is received from Deli Co. in full for invoice No. 104 for $9,300 less
a 2% discount.
Wholesale Supply
CASH RECEIPTS JOURNAL
Date Amount debited P.R Cash Dr. Sales Account Sales Other Cost of G. Sold Dr.
discount Dr. Receivable Cr. cr. account cr. Mdse. Inventory Cr
May Common 31 5,000 5000
2010 1 Stock
7 S1 1,900 1900 1240
10 Abbot Sisters 10,388 212 10,600
12 2,600 2600 1690
17 Babson Co. 11,123 227 11,350
22 Notes Payable 22 6,000 6000
23 Carson Bros. 7,644 156 7,800
28 Deli Co. 9,114 186 9,300
Total 53,769 781 39,050 4500 11000 2930
General Ledger
Cash $53,769
Accounts Receivable 51,180
Sales Discounts 781
Cost of Goods Sold 65,120
 Notes Payable $6,000
Common Stock 5,000
Sales 94,730
Merchandise Inventory 65,120

Purchases Journal

All purchases of merchandise on account are recorded in the purchases journal. Each entry in this
journal results in a debit to Merchandise Inventory and a credit to Accounts Payable.

Journalizing Credit Purchases of Merchandise

Entries in the purchases journal are made from purchase invoices. The journalizing procedure is
similar to that for a sales journal.
XYZ Wholesale Supply
Purchases Journal
Date Account Credited Terms Ref. Merchandise Inventory Dr.
Accounts Payable Cr.
2010 May 6 Jasper Manufacturing Inc. 2/10, n/30 PJ1 11,000
10 Eaton and Howe Inc. 3/10, n/30 PJ1 7,200
14 Fabor and Son 1/10, n/30 PJ1 6,900
19 Jasper Manufacturing Inc. 2/10, n/30 PJ1 17,500
26 Fabor and Son 1/10, n/30 PJ1 8,700
29 Eaton and Howe Inc. 3/10, n/30 PJ1 12,600…………… $ 63,900

Account payable subsidiary ledger

Eaton and Howe Inc.
Date P.R Debit Credit Balance
May 2010 10 PJ1 7200 7200
29 PJ1 12,600 19800
Fabor and Son
Date P.R Debit Credit Balance
May 2010 14 PJ1 6900 6900
26 PJ1 8700 15600
Jasper Manufacturing Inc.
Date P.R Debit Credit Balance
May 2010 6 PJ1 11000 11000
19 PJ1 17500 28500
GENERAL LEDGER
Merchandise inventory Account No:13
Date P.R Debit Credit Balance
May 2010 31 SJ1 62,190 62,190
31 SJ1 2,930 65,120
31 PJ1 63,900 1,220
GENERAL LEDGER
Account payable Account No: 21
Date P.R Debit Credit Balance
May 2010 31 P1 63,900 63,900

Postings to General Ledger

Merchandise Inventory (debit) ………….. $63,900
Accounts Payable (credit) ………………………. $63,900

Credit Postings to Accounts Payable Ledger

Eaton and Howe Inc $19,800

Fabor and Son 15,600
Jasper Manufacturing Inc. 28,500
$63,900
Cash Payments Journal
All disbursements of cash are entered in a cash payments journal. Entries are made from pre-
numbered checks.
Journalizing Cash Payments Transactions

The procedures for journalizing transactions in this journal are similar to those described earlier
for the cash receipts journal. Each transaction is entered on one line, and for each line there must
be equal debit and credit amounts.

The entries in the cash payments journal in Illustration E-15 are based on the following
transactions for XYZ Wholesale Supply.

May 1 Check No. 101 for $1,200 issued for the annual premium on a fire insurance policy.
3 Check No. 102 for $100 issued in payment of freight when terms FOB shipping point.
8 Check No. 103 for $4,400 issued for the purchase of merchandise.
10 Check No. 104 for $10,780 sent to Jasper Manufacturing Inc. in payment of May 6
invoice for $11,000 less a 2% discount.
19 Check No. 105 for $6,984 mailed to Eaton and Howe Inc. in payment of May 10
invoice for $7,200 less a 3% discount.
23 Check No. 106 for $6,831 sent to Fabor and Son in payment of May 14 invoice for
$6,900 less a 1% discount.
28 Check No. 107 for $17,150 sent to Jasper Manufacturing Inc. in payment of May 19
invoice for $17,500 less a 2% discount.
30 Check No. 108 for $500 issued to stockholders as a cash dividend.
XYZ Wholesale Supply
Cash Payment Journal
Date Amount debited Check P.R Other Acc. Payable Merchandise. Cash
no. account Dr. Dr. Inventory Cr Cr.
May 2010 Prepaid Insurance 101 14 1200 1200
1
3 Mdse. Inventory 102 13 100 100
8 Mdse. Inventory 103 13 4400 4400
10 Jasper Manuf. Inc 104 11000 220 10780
19 Eaton & Howe 105 7200 216 6984
23 Fabor and Son 106 6900 69 6831
28 Jasper Manuf. Inc 107 17500 350 17150
30 Dividends 108 500 500
6200 42600 855 47,945

Account payable subsidiary ledger

Eaton and Howe Inc.
Date P.R Debit Credit Balance
May 2010 10 PJ1 7,200 7,200
19 CPJ1 7,200 0
29 PJ1 12,600 12,600
Fabor and Son
Date P.R Debit Credit Balance
May 2010 14 PJ1 6,900 6,900
23 CPJ1 6,900 0
26 PJ1 8,700 8,700
Jasper mfg co.
Date P.R Debit Credit Balance
May 2010 6 P1 11,000 11,000
10 Cp1 11,000 0
19 P1 17,500 17,500
28 P1 17,500

General Ledger
Cash Account No: 11
Date P.R Debit Credit Balance
May 2010 31 CPJ1 53,769 53769
CPJ1 47945 5,824

GENERAL LEDGER
Merchandise inventory Account No: 13
Date P.R Debit Credit Balance
May 2010 31 Cp1 100 100
31 Cp1 4,400 4,500
31 S1 62,190 (57,690)
31 Cp1 2,930 (60,620)
 31 P1 63,900 3,280
31 Cp1 855 2,425

GENERAL LEDGER
Prepaid insurance Account No: 14
Date P.R Debit Credit Balance
May 2010 31 Cp1 1200 1200

GENERAL LEDGER
Account payable Account No: 21
Date P.R Debit Credit Balance
May 2010 31 Cp1 63,900
31 Cp1 42,600 21,300

GENERAL LEDGER
Dividend Account No: 32
Date P.R Debit Credit Balance
May 2010 31 Cp1 500 500

Posting the Cash Payments Journal

The procedures for posting the cash payments journal are similar to those for the cash receipts
journal. The amounts recorded in the Accounts Payable column are posted individually to the
subsidiary ledger and in total to the control ac- count.
Journal entries
Cash $5,824
Accounts Receivable 51,180
Merchandise Inventory 2,425
Prepaid Insurance 1,200
Dividends 500
Sales Discounts 781
Cost of Goods Sold 65,120
Notes Payable $ 6,000
Accounts Payable 21,300
Common Stock 5,000
Sales 94,730