Trade debtors is the amount customers owe you for goods and services sold on credit. In the nominal ledger it is one account, the debtors control account. Behind it sits the sales ledger: an account for each customer showing their invoices, credit notes and payments. The control account is the total; the sales ledger is the detail. The two are useful only while they agree.
Two ledgers, one figure
In current accounting software you rarely post to the control account yourself. Raising a sales invoice debits the customer’s account in the sales ledger and the control account in the nominal ledger at the same moment; allocating a receipt credits both. That automatic link is the whole point. A manual journal posted to the control account without naming a customer breaks it, because the control account moves and no customer does.
Most software protects the account for this reason, or warns before letting a journal through. Leave that protection switched on.
What belongs in trade debtors, and what does not
Belongs:
- sales invoices to customers, at the gross amount including VAT
- credit notes, refunds and receipts from customers
- write-offs of individual customer balances
- foreign currency revaluations of customer invoices
Does not belong:
- loans to staff or directors, which are other debtors or the director’s loan account
- VAT repayments due from HMRC
- insurance claims, rent deposits and grants receivable
- amounts owed by a group company, which have their own heading
- deposits you have paid to suppliers
Mixing these in makes the aged debtors report disagree with the control account, and it overstates the figure lenders and credit insurers look at.
Reconciling the control account to the aged debtors report
Run the aged debtors report and the trial balance at exactly the same date. The report total should equal the control account balance. When it does not, the difference is almost always one of a few things.
Suppose the control account shows £48,912.40 at 30 June and the aged debtors report shows £48,412.40. Working through June’s postings to the control account, one manual journal stands out: a customer’s bounced payment of £500 was reinstated by journal straight to the control account, without selecting the customer. The reconciliation then reads:
| £ | |
|---|---|
| Balance on the debtors control account | 48,912.40 |
| Less: bounced payment journal with no customer attached | (500.00) |
| Total of the aged debtors report | 48,412.40 |
The fix is to reverse the journal and reinstate the debt against the customer, through the bank side of the transaction, so both ledgers move together.
Other usual culprits:
- Opening balances entered as a single nominal total when changing software, while customer balances were imported separately and do not match
- Report dates: an aged report run by due date instead of transaction date, or including transactions after the cut-off
- Currency: the report shown in invoice currency while the ledger is in pounds
- Deleted or voided invoices that the software handled differently in the two reports
Do this every month. A difference that is a month old takes minutes to trace; one that has been carried for a year can take days. The wider month-end check of customer accounts is set out in the credit control routine.
Reading the aged report
Once the totals agree, the report tells you about collection. Look at the share of the balance more than 60 days old, the customers who make up most of it and any account where receipts have stopped. Those are inputs to your credit control routine and, at the year end, to deciding whether any amount needs a provision. How to provide for and write off a customer who cannot pay is covered on the bad debts page.
Customers in credit
An individual customer account can go into credit through an overpayment, a duplicate receipt or a credit note issued after the invoice was paid. The control account still shows the net total, so a £400 credit on one customer quietly reduces the debtors figure. At the year end, if credit balances add up to a material amount, they should be moved to creditors for the accounts: you owe that money. The causes and the choice between refunding and offsetting are covered in old customer credit balances.
In the published accounts
Under the Companies Act formats, trade debtors appear within current assets, under the heading debtors. The balance shown is net of any provision for doubtful debts. Amounts due after more than one year, such as a long instalment arrangement, must be shown separately. Abridged accounts show debtors as a single figure and micro-entity accounts fold them into current assets, but your working papers still need the breakdown.
Sub-accounts worth having
Usually one control account is enough. Add a second only when it does a job:
- a separate control account for debts sold to an invoice finance provider, so the factored and unfactored balances reconcile to different statements
- separate control accounts per currency, if your software requires it
- a retentions account for construction customers who hold back part of each payment
Anything finer than that, such as one control account per customer type, is better done with reporting tags.