Help needed in accounting Asap please ?
Jim Yule runs a retail outlet and usually prepares the annual accounts himself on 31 July each year. He’s discovered you are studying accounting and has the following questions for you “A new customer is asking me for 60 days credit on a large purchase order. This means that the account won’t be due for settlement until August, after the end of the current financial year. How do I account for this – and what are the dangers of extending credit in this way?â€
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Answer 1 :
Presumably, this order was meant to be delivered before 31 July. The entry: Dr Accounts receivable xxx Cr Sales xxx Dangers of extending credit - the customer doesn't pay up, and the debt becomes a bad debt. Since the customer is new, Yule needs to conduct a thorough background check on this new customer. Check with debt agencies, accounts (if available), visit his business premises - note the volume of business going on, etc. If in doubt, ask for full or partial deposit upfront but note that doing this might mean losing the customer. Or instead of giving credit, ask for payment to be by letter of credit with a bank. That might mitigate the risks of incurring a bad debt.
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