Recap: The journal

The narrative is the note under a journal entry. It lets anyone who reads the books later see what was done and why.

• What the entry is for
• A reference to the evidence, such as an invoice number
• Who authorised it, if the business asks for that

A narrative of one vague word, such as Adjustment, explains nothing.

The general ledger shows trade receivables as one total. Each customer also has an account of their own in the sales ledger.

A write-off is entered in both: a credit to Trade receivables, and a credit to the customer's own account. That account then shows nothing owed.

A book of prime entry is where a transaction is first written down, before it reaches the ledger.

Sales and purchases day books

goods sold and bought on credit

Cash book

money paid into and out of the bank

Journal

anything that fits in neither

Marlow Cycles is a bike repair shop owned by Dev Marlow. Tasha keeps its books. She uses the journal for:

• The opening entries of a new business
• Writing off a debt that will not be paid
• Correcting an error
• One-off transactions, such as equipment bought on credit

An irrecoverable debt is an amount a customer owes that will never be paid. The customer may be insolvent, or cannot be traced.

The debt is no longer an asset. It is taken out of trade receivables and becomes an expense.

Debit

Irrecoverable debts, an expense

Credit

Trade receivables, an asset that goes down

Rider Hire owes Marlow Cycles £350 and has closed down. Dev tells Tasha to write the debt off. Ignore VAT on this one.

Ask two questions. Did money move through the business bank? Was it goods bought or sold on credit? If both answers are no, use the journal.

Capital brought in raises what the business owes its owner. Drawings lower it.

When the invoice had VAT on it, the business owes that VAT to HMRC even though the customer never paid. If the business can claim the VAT back, the VAT account is debited. A question will always say when it can.

Pedal Couriers owes £720, which includes VAT at 20%. Marlow Cycles can claim the VAT back. VAT at 20% is one sixth of the gross amount.

• Debit Irrecoverable debts with the net amount
• Debit VAT with the VAT
• Credit Trade receivables with the gross amount