In our previous lesson we covered a journal entry for accrued income using our sample business, George's Catering.
The business provided catering for funeral services to the value of $5,000 to the Smiths.
We recorded the journal entry for this as follows:
In this lesson we're going to see what the journal entry is when our debtor (accounts receivable) actually pays us.
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 cash or bank goes up.
But what happens with our debtor (the Smiths)?
Our debtor is also 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 should be decreasing (from $5,000 to $0).
Here is the journal entry to record the above payment from the debtor:
Cash or bank is an asset. And when assets increase we debit them. So we debit the business bank account (or cash).
Debtors (or accounts receivable) are also an asset. If we want to decrease this account, we must credit it.
Note that accounts receivable or debtors now amounts to zero dollars in our records – in other words, we are showing that the Smiths' debt towards George’s Catering no longer exists.
Remember, income and cash are two separate things.
We defined income as: The event that results in money flowing into the business.
In our examples, the income consisted of catering services provided on the 8th of April.
This income did eventually result in more cash for the business – as it should.
Well done for completing our lessons on the journal entries for accrued income and the subsequent payment by the debtor.
Feel free to move on to our next lesson where we'll learn the journal entry for an expense.
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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. …