Create a Sample Billing Statement Letter for Services Rendered for Businesses Effortlessly

Sample billing statement letter for services rendered for businesses

welcome to counts in this lesson we're going to be looking at trade receivables we're going to explain what it is explain how it works and how to do the entries for trade receivables so if you don't know what trade receivables is or you're confused with trade receivables and how to account for it in your books or in the annual financial statements this is the lesson for you because after this lesson you should have a pretty good understanding of trade and when you have to deal with it either for work or for your studies it should be quite clear here so let's start with the definition what is trade receivable well trade receivables are defined as amounts owed by customers for goods sold or services rendered in the ordinary course of business and that's exactly what it is it's amount owed to us by our customers for goods that we sold to them or services that we render to them in our ordinary course of business and so that's the first thing you always have to remember with receivables even from the term receivables we are due to receive the money from our customers so it's what is owed to us so when you see the term trade receivables and you see an amount next to it let's say 5,000 R then you know that we are owed 5,000 R by our customers either we sold Goods to them if we're in the business of selling Goods or we rendered a service to them if we're in the business of rendering Services trade receivables are classified as a current asset and appear in the statement of financial position and so if you want to look at the annual financial statement or the statement of financial position you will see it under the asset section specifically under the current asset section you will see trade receivables but we'll go into this in more detail shortly now remember as we have just defined what trade receivables are only credit sales not cash sales are recorded as trade receivables and so when we sell to our customers and we sold to them on cash let's say 5,000 Rand cash we know that's definitely not a receivable because the customer doesn't owe us money they bought it on cash okay once they've paid us the money on the same day that they purchase the goods or services then they don't owe us they're not a receivable only credit sales when we sell to our customers on credit and what does that mean that means that they will pay us at a later point in time then they form part of our receivables so you just have to bear that in mind that it's only credit sales which form part of trade receivables trade receivables can also be referred to as receivables datas or datas control and so maybe you are familiar with the term receivables that's the same thing as trade receivables or datas which is the same thing as trade rebles or datas control but mainly when you see the word datas control it's really referring to the general ledger account that shows you all the transactions dealing with your trade receivables but any of those terms can be used interchangeably and so if you're looking at a particular book or paper and you see any of these terms you know it's really referring to trade receivables now what are the subsidiary books related to trade receivables remember there are a few subsidiary books which relate specifically to trade receivables and I think this one here will give you a good idea of what the relationship is between subsidiary books and trade receivables and which one directly affects our trade receivables the first one we have here is the sales journal what is the sales Journal well this is where we record all credit sales of goods or services okay when we record all our credit sales of goods or services we will record it in the sales Journal remember it has to be credit sales not cash sales cash sales is not recorded in the sales journal and for every transaction that we record in our sales Journal it increases trade receivables so as you can see here this increases trade receivables so trade receivables will go up with each credit sale and it's recorded in the sales Journal so when we want to see what is the increase in our trade receivables over a specific period of time whether that is in a month in a quarter or in a year then we look at our sales journal and see what are the movements in our sales Journal so remember if you want to see how much we sold on credit to our customers you will go to the sales Journal now we have done a thorough lesson on the sales Journal you'll find the link to that lesson in the description below where we went through a complete example and showed how the sales Journal is recorded so you can check that one out after this lesson what is the other subsidiary book that is related to trade receivables well that would be the sales returns Journal otherwise known as returns inwards Journal okay that means our customers returning Goods to us and as you can see here this records Goods returned by customers who bought the goods on credit and what impact does that have on our trade receivables well you can see here it says this decreases trade receivables it reduces our trade receivables so while our sales Journal increases our trade receivables because it's recording our credit sales the sales returns Journal decreases our trade receivables because these are the customers who initially bought from us on credit but now they're returning the goods back to us that means they don't owe us for those specific Goods that they returning that reduces our trade re receivables again we've done a lesson on the sales returns Journal went through a thorough example in doing so and showed how to account for specific transactions when goods are returned to us you'll find that one as well in the link in the description below but when our customers return Goods to us this reduces our trade receivables now if you are doing your income statement and I'll explain this shortly as well if you're doing your income statement you know that the first line item is your sales or your revenue and so once you have your sales you have to deduct sales returns where would you get your sales returns well you'll get it in your sales returns Journal so if you go to your sales returns journal and you look at the final number there you have to deduct it from your sales CU it's no longer a sale because the customer returned it to us that is sales returns Journal but you'll have a thorough understanding if you check out the lesson I just alluded to what is the other subsidiary book related to trade receivables well it's the cash rece Journal this includes cash received from datas remember the word datas also trade receivables or people who or us money whenever they pay us money there's usually a column for trade receivables or datas and when you look at all the amounts for that specific column that would be how much we paid by the customers who owed us all right or how much we paid by our datas or our tradeables so as a result this reduces or decreases trade receivables so whenever you have trade receivables in your cash receipts journal the total there reduces our trade receivables because they're paying us money remember cash receed Journal records all the cash that the business has received one of which is money received from our datas or trade receivables which they ow us remember every time our trade receivables or our datas pay us money it reduces how much we are owed by our datas and that should be obvious because when your data pays you it reduces how much you are owed by your datas I hope this makes it clear in your mind whenever you look at any of these journals either the sales Journal where we have sold to our customers on credit or sales returns Journal where our customers to whom we sold on credit return Goods to us or cash receipts Journal customers that we sold to on credit are paying us the money they owed us I hope you see how it affects our trade receivables and if you're going to be dealing with any of these journals you know the impact on your trade receivables and by the way we've also done a lesson on the cash receipts Journal you'll find the link to that lesson in the description below we'll go through it thoroughly as with the other journals as well there's also the subsidiary ledger related to trade receivables and what would that be that would be the trade receivables Ledger and it contains individual accounts for each customer and tracks the amounts owed by them okay that would be the credit sales that we made to them the payments that we received from them the discount that we allowed to them and the returns of goods from these customers so whenever you see the trade receivables Ledger it actually contains the individual account of each of our datas or trade receivable remember we have datas in our books datas that we have an agreement with to say that we'll give them a 30-day account for instance and they will have to be paying us within 30 days and we have a list of all these datas but we also have a trade receivables Ledger for each of our data and we record any transaction relating to them and that would be a subsidiary ledger that affects your trade receivables account so these are subsidiary books and subsidiary ledger that affect our trade receivables and so I hope you're able to make the connection here which makes things quite easy especially if you have to be dealing with trade receivables on an ongoing basis now how do you generalize trade receivables how do you record the journal entries for trade receivables well as we have already mentioned trade receivables are an asset and if trade receivables are assets we know that our assets increase on the debit side as you will see just now an increase in trade receivables is recorded as a debit while a decrease is recorded as a credit okay that is a very important note to remember an increase in our trade receivables you put it on the debit side a decrease in your trade receivables you put it on the credit side why is that well that's because trade receivables is an asset and our assets increase on the debit side and decrease on the credit side and so this is one of the most important notes you can take regarding trade receivables because when you're dealing with it you see on the credit side or debit side you should be able to understand why and we've done an acronym called Dead click where we show you how you remember your debits and your credits you'll find the link to that lesson in the description below accounting for beginners lesson one but for your convenience here it is dead click you can see here d e a d and c l i c what do this letter stand for well d stands for debit what do we debit expenses assets and drawings and what is our click well for C it's credit and then L is liabilities I is income and C is capital and so if you know this AC and you memorize it or you always have it with you then you know that our trade receivables is an asset and you can see here we debit our assets that means whenever there's an increase in our trade receivables we put it on the debit side and so for everything that goes on the debit side if it's decreasing we put it on the opposite side okay the same thing is true for whatever is on the credit side if it's reducing you put it on the debit side okay I hope that has made sense and this reminds you what we looked at in accounting for beginners lesson one like I said if you want more explanation on this in examples you'll find the link to that lesson in the the description below called accounting for beginners lesson one and so how do you generalize an entry let's say a customer buys Goods on credit from our business what do we debit and what do we credit well if a customer buys goods from us on credit that is increasing our trade receivables that means we put it on the debit side so we're going to debit trade receivables because trade receivables is an asset and we're going to credit sales because we've just made a sale what do we call sales well sales is an income and you can see we credit our income and of course there the narration is a customer buys Goods on credit that is how you journalize trade receivables whenever you make a sale of goods or services but what happens when they actually pay us well when the customers pay us that reduces how much they owe us it reduces our trade receivables so we're going to credit our trade receivables because we debit it when it's increasing but when it's decreasing we put it on the opposite side so we credit trade receivables but what are we going to debit well we receiving money from our customer that is Bank so we debit bank and we credit trade receivables and we can put the narration there as payment by data and so you can see here how you journalize your entries when you have trade receivables but what about in unfortunate situations where your customers can't pay you anymore you sold your goods to your customers on credit and for some reason they're not able to pay you anymore and you have to write off their account okay that would be bad debts otherwise known as credit losses so we're going to debit bad debts why are we debiting bad debts well bad debt is an expense right it's not good for us we're losing out on that money so we debit bad debt and what do we credit we credit our trade receivables and that is what it means when we are writing off a data we will always credit our trade receivables and this is how it's going to look like debit bad debts which is an expense and credit our trade receivables because it's reducing or decreasing our trade receivables remember when there's a decrease in our trade receivables is recorded on the credit site or as a credit and honor here is a bad data written off and what about when you issue a discount to your trade receivable or your data well we know there's going to be scenarios where you're going to issue discount to a lot of your datas or your trade receivables why do we issue discounts well we're encouraging them to pay on time or to pay early where they're able to take advantage of a discount that we're issuing them but we know that the discount is an expense for us because we're issuing it to our customers yes it's good for them but it's it's not good for us in terms of the of the business right whenever we issue a discount we are sort of losing out on that money okay but of course we don't think of it in those terms we are thinking of retaining the customer or encouraging customers to bring in cash more quickly but either way a discount that has been given to our customers is an expense so we're going to debit discount allowed we're also going to debit bank because they're going to pay us some of the money that they owe us that could be 95% for instance and we're issuing them with a 5% discount and then we credit our trade receivable so here's how it's going to look all right and the is payment by data with discount issued and so we've got bank here with debit it so let's say the customer owes us 100 Rand and we're issuing them with a 10% discount that means we're only going to receive 90 R from our customer but we have to write off the complete 100 Ren because we've issued them with a discount of 10% that means our bank debit is going to be 90 R the discount allowed is going to be 10 R and the trade receivables account is going to reduce by 100 Rand I hope that's clear enough on how you journalize trade receivables whenever you have any of these transactions what about provision for bad debts or allowance for doubtful debts how do we account for it we know that we have to make an allowance or a provision for bad debts that we anticipate we might be dealing with in the coming Financial year so how do we journalize that well it's easy to do that here are the journ entries that you will take account of if you're creating an allowance for doubtful debts or provision for bad debts those terms may still be used interchangeably otherwise the modern term that is used there is allowance for doubtful debts then you would have to debit provision for B debts adjustment or allowance for doubtful debts adjustment and credit provision for B debts or allowance for doubtful debts and so here's how it's going to look like okay if you're creating a provision for bed debts you will debit provision for bed debts adjustment what account is provision for bed debts adjustment well that is an expense account that is where you're putting it on the debit side and remember our expense account this account here will appear under our expenses or operating expenses in the income state statement or the statement of profit or loss and we credit provision for bad debt or allowance for doubtful debts and what is provision for bad debts well there is a negative asset account if it's a negative asset account also known as Contra asset account it goes on the credit side remember it's a negative asset account that means it will go on the opposite side because it's negative I hope that has made sense if you're creating a provision and you can see here honor is creating a provision for bad debts whenever they ask you to create a provision for bad debts at a specific big percentage of your dettas or for 500 R for instance then you're going to debit provision for bad debt adjustment and credit provision for B debts what about when you have to increase your provision for B debts well remember what happens at the end of the financial period we look at our provision for B debts that we had at the beginning of the period and then we'll make an adjustment at the end of the period so they might ask you to do it on the percentage of the new outstanding datas or they may give you the actual amount so if the old provision for bed debts is lower than the new provision for bed debts that means you're in increasing your provision for bed debts so the difference between the two is what you're going to journalize you're going to debit provision for bed debts adjustment with the difference and you will credit the provision for bad debts with the same amount and here the narration is increase in a provision for bad debts and you can see the journal entry is exactly the same the only difference here is that the first entry is when you're creating provision for B Deb so you put the actual amount that you're given there or the actual percentage and here is when you're increasing you only put the difference between last year's provision and this year's provision here otherwise the debit and the credit are for the exact same accounts so what about a scenario when the provision for bed debts is actually going down that means that the provision for bed debts at the beginning of the period is greater than the provision for bad debts at the end of the period which is a good thing by the way because we're anticipating that less trade receivables will be uncollectable in the coming period so what do we do in that instance well I'm sure you've already guessed it it's going to be the exact same two entries but we're going to switch them around provision for bad Debs adjustment is going to be a credit and provision for bad Deb is going to be a debit all right and here's how it's going to look provision for bed debts debited what is that in this case well we're reducing the negative asset account because it's gone down from what we had anticipated at the beginning of the period and provision for bed debts adjustment is credited now in this case this provision for bed debt is not an expense It's actually an income whenever provision for bed debt adjustment or allowance for doubtful debt adjustment is on the credit side it means that it's an income okay it's a positive thing for the business and then the narration there is decrease in provision for bad debts easy enough if you know what accounts they are and you know the acronym to your debits and your credits then you will know what you need to do now finally let's look at one more thing here how do you disclose trade receivables in your annual financial statements well let's have a look here disclosure of trade receivables in financial statements the first thing is trade receivables are shown as trade and other receivables which is part of current assets on the statement of financial position and so it goes into the statement of financial position whenever you have trade receivables or datas you know that it will go into the statement of financial position not into the income statement as is commonly mistaken it goes into the statement of financial position remember as we've already mentioned trade receivables is an asset and it's a current asset why is it a current asset well if you know your assets you know that you have non-current assets and current assets non-current assets are assets that we will utilize over a period of longer than 12 months while current assets are assets that will use up within 12 months or will use on a regular basis that would be trade receivables inventory bank and so forth but in this case you know that trade receivables goes under the statement of financial position under the current assets but you can see here what is underlined in Black trade and other receivable right it's shown as trading other receivables but that does not mean that the total amount for trading other receivables is actually for trade receivables and you'll see what I mean shortly in the next slide but just know that it goes under the statement of financial position otherwise known as the balance sheet and it goes under the current assets section sales which would be your cash sales and your credit sales remember when we make a credit sale that is trade receivables are reported in the statement of profit or loss and other comprehensive income otherwise known as the income statement so how does the trade rebles affect the income statement well whenever we make a sale that could be either cash sales or credit sales all the sales that we made both cash and credit sales are recorded under sales in the income statement that is how trade receivables features in the income statement or the statement of profit or loss it goes under sales for all the credit sales that you've made including the cash sales of course so you can see the difference here credit sales are part of your sales in the income statement while trade receivables at the end of the period will go under the statement of financial position under the current assets section okay I hope that is clear enough sales returns are subtracted from sales that should be easy remember we spoke about sales returns Journal whatever we record there whenever our customers return Goods to us that will be deducted from your sales in the income statement okay I hope you're tracking along how trade receivables or how credit sales are accounted for in the financial statements provision for bed debts otherwise known as bance for doubtful debts as I've mentioned is deducted from trade receivables to reflect the expected amount collectible okay what does that mean whenever you see trade receivables in your statement of financial position or your balance sheet it will be after the deduction of provision for bad Debs and you'll see shortly in the next slide and lastly here discounts offered to customers for early payment otherwise known as discount allowed also reduce trade receivables and I'm sure you already understand this based on the journals that we did in the previous SL slides discount allowed forms part of operating expenses in the statement of profit or loss and other comprehensive income or in the income statement so you can see here how it affects trade receivables one it reduces the trade receivables or how much your customers owe you but secondly the discount allowed portion will go into the operating expenses section of your income statement and so you can see here how trade receivables is accounted for in the financial statements one how it's accounted for in the statement of financial position but also how it affects your income statement or the statement of profit or loss and so how will it look like in our statement of financial position or the notes to the annual financial statements well as I briefly mentioned in the previous slide trade and other receivables in the statement of financial position what does it include well this includes not only trade receivables as I've mentioned previously which are amounts due from customers for credit sales as we've been mentioning but also other receivables and so when you look at the trade and other receivables line item in the statement of finan position it may not be only for the credit sales that you made to your customers or how much your customers owe you it may include other receivables which are not related to you making credit sales to customers what else could it include well the notes to the statement of financial position will give you a breakdown of what it includes and you will see that if you look at the annual financial statements for any company which is available online and you look at the statement of financial position and current assets you see trade in other receivables and it will refer you to a specific note and when you look at the notes it will tell you everything that is included under Trade and other receivables so here is an example of how it will look like notes to the financial statements and let's say it's note number two for instance trade and other receivables and it will show you what it includes exactly and the first line item you're seeing here is net datas or trade receivables remember I've put here in brackets for you to understand it's after deducting provision for bad debts that's why it's called net datas okay you've already removed the provision for bad debts okay and then you have here trade receivable so how much your customers owe you at that specific point in time but it could also include other items that I've mentioned it doesn't only include trade receivables that's why the word other is there trade and other receivables if it's just trade receivables then you know that's for the credit sales that I've made but if it says trade and other receivables it includes other receivables as well such as interest receivable okay if I've earned interest and I'm not received it as yet that would go under other receivables or trade in other receivables and then dividends receivables if I've invested in a specific company or our company has invested in a specific company and we've not yet received a dividend then it will go under Trade and other receivables what else would be included here prepayments okay so amounts paid in advance for expenses like rent insurance or subscriptions and for you to understand prepayments much better you will have to look at accounting for beginners lesson four you'll find in the link in the description below where we look at acrs and that includes prepaid expenses whenever you pay for for expenses in advance that will go under Trade and other receivables so you can see here trade and other receivables in your statement of financial position is not necessarily only trade receivables it could be okay but you have to look at the notes to the annual financial statement to see what else is included there all right but just remember it's after you've deducted your provision for bad debts okay and then of course you'll have your total of all your trade and other receivables and that would make up trade and other receivables line item under the current assets of the statement of financial position and if you want a further note and sometimes you're given a further note of the breakdown of net datas or trade receivables as I've already explained it here is how it would look not to the financial statements trade receivables so this is specifically for the credit sales that you've made and you can see it's written gross trade receivables how much we are owed by our customers and then less provision for bad debts and then you have net trade receivables now this amount here would be what would go up here like I said you get net trade receivables or net datas after you've deducted provision for bad debts and you may be given a note such as this and if you're doing the annual financial statements this is how you'd account for it in the statement of financial position but this is how you do the notes to the annual financial statements just showing the users of the financial statements how you got your amounts and what specific line items include by the way this notes to the financial statements is not limited to tradeing other receivables only it could be for any other line item in the ual financial statements for which you need to provide more clarity that's what the notes do I hope this lesson has made sense I hope you now understand what trade receivables is how we account for it when we're doing our journals how it's disclosed in the annual financial statements and how we also do the notes that affect our trade receivables now a lesson you might want to check out is one where we go through a complete example of doing the trade receivables general ledger account or the t account for trade receivables or datas you'll find the link to that lesson in the description below in fact we've done two we've done one simplified one if you're doing it for the first time and one which is more advanced which also includes vat so you'll find them in the links in the description below and I trust that they will be helpful if you have gained value from this lesson if you have learned something consider subscribing to our Channel like this video and share it to those you think it might help till next time cheers