When your business sells some goods or
services to your customer, but the customer takes these goods or
services without actually paying for them at the time of sale and
they are due to pay for them at a later date this creates a debtor
within the business. Using simple double entry bookkeeping theory we
know we debit assets and a debtor is an asset of the business. Sales
(or income) is a credit in double entry bookkeeping.
Our double entry bookkeeping would be
to credit the sales account and debit the debtors control account.
The Sales account is shown in the
profit and loss account and the debtors control account is shown as a
current asset on our balance sheet and this sale increases the value
of our debtors control account, because a debit to an asset increases
the value of that asset.
The sale is shown as income on our
profit and loss account and shows instantly as an increase to profit
but as the customer has not paid our debtors control account has got
larger but as a business we do not have this money to pay our
expenses so if left unpaid we can end up with our business being
adversely affected by a lack of cash-flow.
We must monitor our debtors control
account on a regular basis and quite vigorously because the longer
debtors remain unpaid the more likely that they will turn into a bad
debt. In addition, you need to understand that the sale is taxable to
the businesses in the period of account that the sale is made even if
the customer has not paid.
Most businesses that allow customers to
buy now and pay later in this way will obtain a credit reference for
the customer and should use this to establish a credit limit that you
wish to allow your customer to go up to. If you have doubts about the
customer not being able to pay my strong recommendation would be to
consider putting this account on hold, don’t fall into the trap of
letting your customers cash-flow problems becoming your one of your
cash-flow problems. Sales are of absolutely no use to you if they are
going to be written off as a bad debt.
Some businesses use invoice financing
(or factoring) to help the businesses cash flow. With Invoice
financing the lender will advance to your business a percentage of
the value of your debtors control account while either your business
or the finance provider collects the debt in from your customer. This
type of funding is available to some businesses and can be useful to
help fund the gap between your business making a sale and your
customer paying what they owe your business.
This video shows the double entry bookkeeping entries for dealing with debtors