I think I understand from various books that the credit balances in a Purchases Ledger are totalled and then classified under Creditors in a Trial Balance. These would be outstanding balances that a business owes to its suppliers. Its figure is then finally transferred to a Balance Sheet under the heading, Current Liabilities. In a similar way, the debit balances in a Sales Ledger are totalled and classified under Debtors in a Trial Balance. These would be customers with outstanding balances owed to a business. Its figure is also finally transferred to a Balance Sheet under the heading Current Assets.
Purchases Ledger:
Supplier A
Db
Cr
50
Supplier B
Db
Cr
100
Sales Ledger:
Customer A
Db
Cr
70
Customer B
Db
Cr
120
Part of Trial Balance:
Db
Cr
Creditors
150
Debtors
190
Part of Balance Sheet:
CURRENT ASSETS
Debtors
190
CURRENT LIABILITIES
Creditors
150
My question is what happens when the balances are in the reverse? I cannot seem to find any book that explains this scenario ie, having debit balances in a Purchases Ledger and credit balances in a Sales Ledger.
Hi Starfish, If the balances are reversed, then you simply reverse it on the balance sheet; so a debit on the creditors would be a debit on the Balance Sheet; technically, you would then list it as a current asset but in reality this very rarely happens as you would generally have more than one creditor so the overall creditors balance would still be cr (and same for debtors).
In the real world, any debit on creditors (and credit on debtors) should be looked into before finalising accounts and resolved. If, on creditors, it is simply an overpayment, then I would request this money back. If it was a credit note that is waiting to be offset against future purchases, I would let it sit there. The same for debtors (although I probably would not pay a debtors overpayment until requested). But as I mentioned, this scenario is very rare and as you usually have credits that outweigh debits (on creditors and reverse on debtors) there really is no action that needs to be taken.
Thank you David for your response. I brought the scenario up because there are a couple of books that allows the debiting of the Purchases Ledger and the Crediting of the Sales Ledger from the Cash Book. I understand the common purpose of this in order to pay off cash for a credit purchase and receiving cash for a credit sale, which usually results in a zero balance in the relevant Purchases and Sales Ledgers accounts respectively, indicating that debts has been cleared.
However, there seems to be payments and receipts from the Cash Book on top of its common use, which results in debit balances in the Purchases Ledger and vice versa. This confuses me because I thought that the purpose of the Purchases and Sales ledgers were for holding the accounts of credit suppliers/customers ONLY (with a credit transaction entry from one side on the relevant Purchases/Sales Ledger account and the other entry on the relevant Nominal Ledger account), with the Cash Book recording the actual payments and receipts of those credit transactions (an entry in the Cash Book and an entry on the other side of the relevant Purchases/Sales Ledger accounts) as mention earlier.
Any other immediate cash transactions would be handled by the Cash Book/Nominal Ledger combination. But from a couple of the accounting books, it seems possible for the Purchases and Sales Ledgers to contain entries for both credit suppliers/customers and immediate ones. Is this correct? Can they contain both?
I could be wrong but I think your suggestion could have been based on the assumption that debits and credits were made without any goods/services yet. However, goods/services have been exchanged immediately.
-- Edited by Starfish on Saturday 11th of June 2011 03:37:10 PM
-- Edited by Starfish on Saturday 11th of June 2011 06:08:42 PM
