Topic 6: Debtors & Subsidiary Ledgers

Question 1

What is a Subsidiary Ledger?

Answer 1

Group of individual ledgers that are separate but tied to the General Ledger.
* Combined total of all subsidiary ledgers will equal balance of control account in general ledger.

Question 2

What are the advantages of the subsidiary ledger system and using control accounts?

Answer 2

1. Allows for cross checking of information in the control account to the subsidiary ledgers
2. Subsidiary ledgers provide detailed individual information and assists in decision making

Question 3

What are the rules to successfully complete a Subsidiary Ledger? (Differences)

Answer 3

• Individual amounts are posted to the Subsidiary Ledger, totals are posted into Control account
• FOR TOTAL VALUES: Last day of the month in control account
• Subsidiary Ledger - NO Duality
• General Ledger - maintains Duality

Question 4

What does a ledger with the title ‘Control’ represent?

Answer 4

Means Subsidiary Ledgers are tied to it.

Question 5

What is the purpose of a Subsidiary ledger schedule?

Answer 5

Used to check against total in the control account

Question 6

What items are incorporated as a control account?

Answer 6

• Stock
• Debtors
• Creditors
• Wages (maybe)

Question 7

What is the Debtor’s Turnover Ratio? What is the Acceptable Result?

Answer 7

Definition: Looks at the time it takes for Debtors to pay back their debts.
Acceptable Result: 30 days

Question 8

What does a result above 30 days mean for the Debtor’s Turnover?

Answer 8

Debtors are paying too slow

Poor cash flow for the business and leads to bad debts

Question 9

How can the Debtor’s Turnover be improved?

Answer 9

Chase up debtors to pay quicker by sending out reminder notices, making phone calls, offer discounts.

Question 10

What is Debtors Aging Analysis?

Answer 10

List of individual debtors showing how long a debtor balance has been outstanding.

Question 11

What are the advantages of using a Debtors Aging Analysis?

Answer 11

• Prioritise which debtors need to be chased up

- Show who to charge interest to

Question 12

What are the benefits to the firm for taking control over its debtors?

Answer 12

Minimise bad debts & to maximise revenue.

Question 13

What is Screening Debtors?

Answer 13

Process in checking which customers the business will lend credit to in the future

Question 14

Name two ways a business can screen debtors?

Answer 14

• Perform a credit history check

- Ask for evidence of a job or steady income (show ability to repay outstanding debt)

Question 15

Why should a business screen future debtors?

Answer 15

• Avoid future bad debts

- Make sure customer can repay an outstanding debt