Trade debtors are an important financial indicator in business accounting. In this guide, you’ll find the meaning of trade debtors (also known as trade receivables), how they appear on the balance sheet and see an example to help you understand how they fit in the accounting process.
Table of contents
- 1. What are Trade Debtors?
- 2. Another Word for Trade Debtors
- 3. Are Trade Debtors an Asset or Liability?
- 4. Aged Debtors Reports Explained
- 5. Where Do Trade Receivables Appear on the Balance Sheet?
- 6. Why are Trade Debtors Important?
- 7. What is a Trade Debtors Reconciliation?
- 8. Does Trade Debtors Include VAT?
- 9. What is the Double Entry for Trade Debtors
- 10. Example of a Trade Debtor
- 11. Accrued Income v Trade Debtors
1. What are Trade Debtors?
It’s common for businesses to sell products/services on credit. A trade debtor is defined as a customer who has bought goods or services from a business and been sent a sales invoice but they have not yet paid that invoice. It is similar to trade creditors where a business buys goods on credit and owes money to a supplier.
Commonly trade debtors are given a certain period of time to settle the invoice, this is known as payment terms. An example of payment terms of an invoice is 30 days or 60 days but they vary business to business. Whatever payment terms the businesses choose, they will be shown as part of the details on the sales invoice.
2. Another Word for Trade Debtors
In accounting, trade debtors are also commonly referred to as:
- Trade accounts receivable
- Accounts receivable
3. Are Trade Debtors an Asset or Liability?
Trade debtors are an asset in accounting because it represents money owed to the business. When the invoice is finally paid, the invoice will disappear from the aged debtors list, with the money appearing in the bank account.
4. Aged Debtors Reports Explained
In accounting, aged debtors reports are a list of individual customers that owe the business money at any point in time, along with lists of outstanding invoices, grouped by customer name. Aged debtors reports are also referred to as trade debtors listing, aged receivables or debtors ledgers.
Computerised accounting systems run aged debtors reports. But where manual accounting systems are used the sales day book is firstly updated when sales invoices (source records) are sent out. The Individual sales ledgers would then be updated separate, which is a record kept for each customer logging invoices raised and payments made. That way it is clear how much money each customer is owed.
5. Where Do Trade Receivables Appear on the Balance Sheet?
In the example financial accounts below, trade debtors are included in ‘Current assets’.
6. Why are Trade Debtors Important?
It is important for a business to monitor how much their customers owe them but have not paid:
- To aid cash flow forecasting;
- Ensure customers pay on time and avoid disruption to cashflow;
- Monitor which customers have exceeded the payment terms so appropriate action can be taken.
7. What is a Trade Debtors Reconciliation?
A trade debtors reconciliation is a cross-check that the trade debtors control account and aged debtors listing agree. And if they do not agree, differences must be identified to understand why the two numbers do not match.
8. Does Trade Debtors Include VAT?
Trade debtors must include VAT if the business is VAT registered. If they are registered for VAT then the sales invoice will include VAT and the VAT-inclusive amount will be the total amount owed.
9. What is the Double Entry for Trade Debtors
The double entry for trade debtors for a business that is not registered for VAT (or equivalent sales tax):
- Dr Trade Debtors
- Cr Sales
The double entry for trade debtors for a business that is registered for VAT (or equivalent sales tax):
- Dr Trade Debtors
- Cr VAT
- Cr Sales
10. Example of a Trade Debtor
On 12 April 2022, Eddie Ltd sents it’s customer, Penny Ltd, an invoice for £450 including VAT. Penny Ltd settles the invoice on 12 May 2022. The invoice will be recorded as a trade debtor from 12 April 2022 until the point it gets paid. Once paid on 12 May 2022 Penny Ltd will no longer appear on the trade debtors listing.
11. Accrued Income v Trade Debtors
Accrued income is a provision for income that has been earned but not year been invoiced. For example, your financial year-end is 31 December 2021. On this date, you have completed work amounting to £500 but will not send the invoice to your customer until January 2022.
As at 31 December 2021, you can record accrued income of £500 in the balance sheet to log the income. This provision will then be removed when the invoice is raised in January 2022 so that the invoice is not double counted in business turnover.