Accrued Income
(Part 2)


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g) The Smiths pay the full amount owed to George’s Catering on the 30th of April. What do we do?

Well, the easiest part of this transaction is that we receive cash of $5,000. So bank goes up. And so we debit the business bank account.

But what happens with our debtor? Our debtor is an asset. It exists currently in our records at $5,000. If the Smiths are now paying us, it means that they owe us less. Debtors are decreasing (from $5,000 to $0).

Debtors Decreasing, Bank Increasing

And the accounting entry is thus: 

The debtor now amounts to zero dollars – in other words, we are showing that the debt towards George’s Catering no longer exists.

Remember, we defined income as: The event that results in money flowing into the business.

Well, the income did (eventually) result in more cash for the business – as it should.

We also said that income is different to cash received. That should be quite apparent in this example.




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Questions Relating to This Lesson

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Journal Entry Question:
Settlement of Debtors Account, Bad Debts or Discount Allowed
 
Q: Prepare the journal entry or entries for the following transaction: Issued a receipt for R105 to B. Baloyi in settlement of his account of R126. …


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