Some definitions are a useful introduction to aid understanding
A receivable is any amount due to a business. Examples of receivables include amounts due from customers, repayments due of sales tax or successful claims made against insurance policies where the proceeds have not yet been received.
A trade receivable is a customer who owes money to the business as a result of buying goods or services on credit.
The accounting entries required to record a credit sale are:
Receivables
(to record the gross amount due from the customer)
Sales
(to record the net income earned)
Sales tax on outputs
(if relevant)
Cash at bank
(to record receipt from the customer)
Receivables
(to clear the amount which is no longer due from the customer)
Sales returns
(or Returns inwards)
(to record the reduction in net income)
Sales tax on outputs
(if relevant)
Receivables
(to clear the gross amount which is no longer due from the customer)
There are other transactions relating to receivables that will be recorded in the general ledger over a period of time which will be considered in this chapter.
The receivables' general ledger account normally includes the following entries:
Numbered items above can be clarified as follows:
If a payment from a credit customer has been declined by their bank, the trade receivables and cash at bank ledger accounts must be corrected to reflect the fact that the payment has not, in fact, been received and that the amount is still outstanding.
If a customer made an overpayment to settle an amount due, the overpayment should be returned to the customer. This will require a bank payment and adjustment in the trade receivables' general ledger account.
Some businesses may try to charge their customers interest on overdue amounts. If that is done, this will increase the amount owing from that customer and also increase interest received in the statement of profit and loss.
A business may both sell to, and buy from, another business on credit terms. If that is the case, each business will have amounts owing both to and from each other. This is explained further in the following section.
The closing balance at the end of an accounting period is the balance which will be included in the statement of financial position compiled at that date.
As the general ledger accounts are updated, the memorandum-only receivables ledger account for each customer will also be updated simultaneously using the same information. Therefore, there will be no differences between the trade receivables general ledger account and the total of the memorandum-only individual receivables' ledger customer account balances.