For example,
(a) Shannon Trading buys inventory on credit from Daniel Trading.
Prepare Daniel Trading’s account in the books of Shannon Trading for the month ended 31 January 2021
(b) Thet Oo Trading sells inventory on credit to Joshua Trading.
In the ledger of Thet Oo Trading, prepare Joshua Trading’s account for the month ended 31 March 2021
Step 1: Identify the business
Look for the phrase “in the books of XXX” or “in the ledger of XXX”.
XXX is the business.
According to the Accounting Entity Theory, transactions must be recorded from the point of view of the business.
Example (a): Business is Shannon Trading
Example (b): Business is Thet Oo Trading
Step 2: Identify the account title
The name other than the business is the account title
Example (a): Account title is Daniel Trading
Example (b): Account title is Joshua Trading
Step 3: Check if account title is TP or TR
Check if business will be paying to or receiving from the account title.
(a) Business will be paying to Daniel Trading since it buys on credit from Daniel Trading. Hence “Trade Payable: Daniel Trading”.
(b) Business will be receiving from Joshua Trading since it sells on credit to Joshua Trading. Hence “Trade Receivable: Joshua Trading”
A Trade Payable is a credit supplier to the business.
Business is going to pay to a Trade Payable because the business owes the Trade Payable $, due to purchasing on credit.
Trade Payable is a Liability account, hence Dr (-) and Cr (+).
Amount in Bal column represents the amount that the business owes the Trade Payable (thus the amount that the business is going to pay).
If biz owes credit supplier MORE (i.e. biz going to pay more), place the amount under Cr (+).
If biz owes credit supplier LESS (i.e. biz going to pay less), place the amount under Dr(-).
If question asked for Trade Payable account for
one month, close the account by bal b/d to the 1st day (i.e. beginning) of the next month
one year, close the account by bal b/d tot the 1st day (i.e. beginning) of the next year.
A Trade Receivable is a credit customer to the business.
Business is going to receive from a Trade Receivable because the Trade Receivable owes the business $, due to the business selling on credit.
Trade Receivable is an Asset account, hence Dr (+) and Cr (-).
Amount in Bal column represents the amount that the Trade Receivable owes the business (thus the amount that the business is going to receive).
If credit customer owes biz MORE (i.e. biz going to receive more), place the amount under Dr (+).
If credit customer owes biz LESS (i.e. biz going to receive less), place the amount under Cr (-).
If question asked for Trade Receivable account for
one month, close the account by bal b/d to the 1st day (i.e. beginning) of the next month
one year, close the account by bal b/d tot the 1st day (i.e. beginning) of the next year.
Click here to recap on the differences between trade discount and cash discount.