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.
I would have thought the only reason this should happen is if you have paid an invoice to a supplier without entering the purchase invoice first . ie the invoice is missing then it would be a negative amount
It is highly unlikely that this would happen in practice unless as Lyn said there are payments made without entering invoices first....or indeed overpayments made on either Creditor or Debtor Ledgers. I suppose it could happen if the company was very small with very few invoices.
If it did happen to be the case though I personally would put Debtors under Current Assets still, but as a negative figure (in brackets) and the same with Creditors under Current Liabilities but as a positive figure (in brackets). Hope this makes sense.
Thanks Lyn and Pauline for your responses. 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?
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?
In reality it's quite common, particularly in computerised bookkeeping. Take the sales ledger for example, when an invoice is raised it's posted to the Sales ledger account as a debtor. The receipt would then be recorded via the cash account or the bank account as appropriate.
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
Yes. That's the common usage that I was trying to explain earlier, which is that of getting a receipt from a customer, who is paying of an outstanding debt. However, what if there are receipts from a customer, paying for goods straight away without an invoice. Is that allowed from the Cash Book/Sales Ledger transaction? Would that not result in credit balances in the Sales Ledger account? would that customer still be considered a debtor? What would happen to the final figures? This is what I'm unsure about?
-- Edited by Starfish on Sunday 12th of June 2011 04:52:51 PM
A customer is really only considered a debtor if they owe the company money....i.e. they have bought goods, receive an invoice and will pay for it later (hopefully within the Company's credit terms!).
If the customer pays for goods straight away without an invoice then they would be considered cash sales (as opposed to sales on credit). I would debit the cash book and credit cash sales nominal in the General Ledger. You could if you wish create a dummy invoice for them to record the sale and put them through the sales ledger, but as this would then be paid off immediately they would not be considered debtors. You could create a Customer account called cash sales and post them to this, but they would not be included in the Balance Sheet as debtors as at the end of the year the account would be zero.
Pauline
-- Edited by Stardoe on Sunday 12th of June 2011 06:00:57 PM
