Debtors allowances, the control account and the debtors list

When the goods come back

Customers return goods. The cable was the wrong gauge, the paint was the wrong colour, two of the ten light fittings arrived cracked. The business then issues a credit note, which is the opposite of an invoice. An invoice says you owe us this much. A credit note says you owe us less than we said you did.

The quick way to record that would be to simply reduce Sales. Businesses do not do that, because the size of returns is worth knowing on its own. If a fifth of everything sold comes back, that points at a supplier problem or a packing problem, and hiding it inside Sales makes it invisible. So returns are collected in an account of their own called Debtors allowances, which carries a debit balance and is subtracted from Sales at the end of the year to give net sales.

The entry is a credit sale, running backwards

A credit sale had two effects, so an allowance has two effects too.

The money side. The customer owes less, so Debtors control is credited. The business did not really earn that amount, so Debtors allowances is debited.

The goods side. If the goods can be sold again they go back on the shelf at cost, so Trading stock is debited and Cost of sales is credited. Damaged goods that cannot be resold are the exception: nothing goes back to stock, because nothing of value came back.

Credit notes are listed in the Debtors Allowances Journal (DAJ), which has the same two columns as the Debtors Journal and is posted the same way at month end.

Worked example. On 12 March, M. Pillay returns cable that was invoiced at R400. It cost the business R260 and it is undamaged, so it goes back into stock.

• Pillay owes R400 less, so Debtors control is credited R400, and his personal account in the debtors ledger is credited R400 as well.
• The business did not earn that R400, so Debtors allowances is debited R400.
• The cable is back on the shelf, so Trading stock is debited R260.
• That cost was not used up after all, so Cost of sales is credited R260.

Debits R660, credits R660. The lost profit on the return is R140, which is exactly the profit that had been recorded on the original invoice line.

The control account and the list have to agree

Every month the business does two things with the same numbers.

1. It posts journal totals to the Debtors control account in the general ledger. Opening balance, plus credit sales, less allowances, less what debtors paid and any discount allowed to them.
2. It posts individual amounts to each customer's account in the debtors ledger, then writes out a debtors list of every closing balance.

The list must add up to exactly the control account balance. It is not a coincidence and it is not luck. Both records were built from the same journals, so if they disagree, someone made a mistake in one of them. That is the whole point of the control account: it is a built-in checking device.

Core checkpoint: A credit note is an invoice run backwards. Whatever a credit sale does, an allowance undoes, at the same two prices: selling price on the debtor and income side, cost price on the stock side. And every entry that touches Debtors control must also touch one named debtor, or the control and the list will drift apart.