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Return Inwards

Return inwards is also called sales returns or sales allowances, it refers to the customers returning their products to the company. These returns happen when the customer is dissatisfied with the product or receives a defective product.

In layman’s language, return inwards refers to the goods returned by the buyer (customer) to the seller (i.e., selling entity) due to various issues.

The amount of return inwards (or) sales returns is deducted from the total sales of the firm. This is treated as a contra-revenue transaction meaning deducted from the revenue itself.

Why are sales returns books important to maintain?

• It helps in keeping track of the financial records and helps in ascertaining the financial accuracy.
• Maintaining sales returns books helps in understanding customers’ returns their dissatisfaction, and potential issues with the product. This will help the company in taking corrective measures.
• Tracking return inwards helps in adjusting the inventory and helps in providing the accurate amount of stocks.

Journal Entry

As per modern rules,

When there is a sales return the journal entry will be

As per modern rules, an increase in revenue is credited, and a decrease in revenue is debited. As the products are returned to the company it leads to a decrease hence, the sales return account is debited since there is a decrease in income or revenue.

This will lead to a decrease in the trade receivables account. Trade receivables is an asset account where the company needs to receive money in the future. As the goods are being returned, trade receivables decrease, leading to decreased assets.

As per traditional rules,

When there is a sales return the journal entry will be

As per traditional rules, the sales returns are debited since it is a loss for the company. Most importantly it is a contra revenue meaning a decrease from the total revenue.

The trade receivables are credited since he is returning it back to the company which makes him the giver as it is a personal account.

Example

 On 1st May, Max Ltd. (a dealer in refrigerators) sold 20 refrigerators for 5,00,000 on credit to Alexa Ltd. On 25th May they returned all the refrigerators to Max Ltd. due to the serious defects in the model of the refrigerators. Pass journal entries for the above transaction in the books of Max Ltd.
In the books of Max Ltd (Modern Approach)

a) As per traditional rules

(Being goods returned by Alexa Ltd due to serious defects)

As the goods are being returned to the firm, it is debited since it is a loss for the company. The Alexa Ltd is credited since it is a personal account and the giver is returning to the company.

b) Entry for the return of goods sold to Alexa Ltd.

(Being goods returned by Alexa Ltd due to serious defects)

Sales returns are debited since there is a decrease in revenue and Alexa Ltd is credited since there is an increase in the asset.

Placement in Trial Balance

Return inwards or sales returns hold the debit balance and are placed on the debit side of the trial balance as it will be reduced from the total sales.

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Provision for Depreciation in the Trial Balance

A trial balance shows provision for depreciation as a “credit item”. The value of most of the assets reduces over a period of time. It’s a common practice to record the assets at their historical cost but over a period of time, does the value of the asset remain the same as at the time of its purchase?

Obviously “Not”. So, if the asset has a debit balance then the provision for depreciation can not have a debit balance i.e it is bound to have a credit balance.

The below-given image would also be of great help to understand the above para.

What is Provision for Depreciation?

The fixed assets are depreciated over a period of time. Depreciation while is deducted from an income statement every year it is not deducted from an asset rather it is recorded on the liability side as accumulated depreciation or provision for depreciation. It’s a contra asset.

To find the net book value at the time of disposal of the asset or year-end or revaluation etc. one needs to subtract the provision for depreciation account balance from the historical cost of the asset. Such provision being a contra asset has a credit balance.

The illustrative example given below in the form of a problem might be of some help.

Prepare a trial balance of Ms Julie from the data given below;

Solution:

I hope that your question now has been answered.

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Cash is commonly received by the business under the following situations:

1. Receipt of payment by a debtor in cash.

2. Sale of goods by the business on a cash basis.

3. Withdrawal of cash from the bank.

4. Cash received from other income.

5. Additional capital introduced by the partner, etc.

It is important to note that the receipt of cash in any of the above-mentioned scenarios is always debited in the books of accounts because it is an asset for the business.

The journal entries for receipt of cash in different scenarios as discussed above are as follows;

1. Journal entry for cash received from the debtor

When an organisation sells goods or services on credit, it becomes eligible to receive future payments. As an obligation, the debtor pays cash to the organisation. The journal entry for cash received from the debtor is as follows;

(Being cash received from the debtor)

As per the modern rules of accounting;

2. Journal entry for cash received from the sale of goods

When an entity sells goods or services on a cash basis, it receives cash at the time of sale only. The journal entry for cash received from the sale of goods is as follows;

(Being goods sold in cash)

As per modern rules of accounting;

3. Journal entry for cash received from withdrawal

When cash is withdrawn from the bank, it results in an increase in cash a/c and a decrease in bank a/c. The journal entry for cash received from withdrawal is as follows;

(Being cash received from withdrawal)

As per modern rules of accounting;

4. Journal entry for cash received from other income

Other than sales, there are other sources of income through which cash can be received such as rent received, interest income, the commission received, etc. The journal entry for cash received from other income is as follows;

(being cash received from other incomes such as commission, rent, interests, etc)

As per modern rules of accounting;

5. Journal entry for additional capital introduced by the partner

Capital is introduced by the partners or proprietors of a business, resulting in an increase in cash flow. The journal entry for additional capital introduced by the partner is as follows;

(Being additional capital introduced)

As per modern rules of accounting;

Conclusion

As a result of cash receipts by an organization, the amount of cash inflow increases, which has an impact on the cash flow statement. However, whenever cash is received, it results in a double entry on either the asset or liability side of the balance sheet.

As an example, when cash is received from the debtor, the cash will increase, while at the same time, the number of debtors will decrease.

In the case of the introduction of capital, cash will be increased but with that, the liability will also be increased.

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Purchase Order

Purchase Order is a commercial document issued by a buyer to the seller specifying the quantity, price, description, quality of goods required, the payment terms, etc. It is the first step and a very integral part of an organization’s procurement process. Purchase Order precedes the Purchase Invoice.

Now, the question arises whether a purchase order is legally binding, and once issued can it be cancelled by any of the parties to a transaction.

So, let me help you address the first question-Whether a purchase order is legally binding or not?

Purchase Order – Legally binding or not?

The issue of a purchase order by the buyer does not itself result in a legally binding contract. A legally binding contract gets executed between the parties to a transaction only on the acceptance of the purchase order by the seller. It provides legal protection to the buyer and seller.

1. From the buyer’s perspective-

So, let me help you understand how does a purchase order legally protects the buyer.

On the acceptance of the purchase order, the vendor or supplier is obligated to deliver the requested goods as stated in the order. He is also compelled to consider the other conditions in the order specifying the description, type, and quality of goods.

Example
Let’s say you order 10 computers for your company from a well-known vendor, paid for the same, but on the delivery date you end up receiving only 8 computers.

In this case, if you have an acknowledged purchase order with you, you will certainly be able to prove that you received less quantity than what you paid for. The purchase order will serve as an on-record legal document for your purchase.

Had you not possessed an acknowledged purchase order, you would have certainly landed up in big trouble.

2. From the seller’s perspective

Purchase Order can be used as a legal document in the court of law by a seller to sue the buyer in case he refuses to pay the agreed amount for the goods supplied. This is possible only because of the legally binding contract status of the purchase order.

3. Trade Finance

Banks and financial institutions facilitate domestic and international trade transactions and provide financial assistance based on purchase orders issued.

Example
To produce the goods as requested by the buyer, the supplier can approach a bank for funds based on the acknowledged purchase order.

In case the supplier does not provide credit terms for payment to the buyer and the buyer does not possess the requisite funds for payment. Then in such a situation, banks or financial institutions accept the purchase order as a legal document for providing financial assistance to the buyer.

Now, let me help you understand the next question asked – Can the Purchase Order be cancelled?

Cancellation of a Purchase Order

To help you understand, whether the cancellation of a purchase order is possible or not, we must consider various situations related to the acceptance and cancellation of the purchase order-

• Situation 1

Can a purchase order be cancelled before its acceptance?

The question to this scenario is yes. As the purchase order has not been accepted by the seller, it can be easily cancelled by the buyer, because it has not yet attained a legally binding status.

• Situation 2

Can the buyer cancel a purchase order after the goods have been delivered to him by the supplier?

–In this scenario, goods have been dispatched and delivered ie. the purchase order has already been acknowledged by the vendor. In such a case, the vendor might not accept a cancellation request as desired by the buyer. Or the vendor may accept your request but may charge some fees for the same.

• Situation 3

Can the purchase order be cancelled by the supplier or the buyer after it is acknowledged as a legal binding contract?

–The purchase order gets a legal binding status only after its acknowledgement by the seller. So, in this case, we will have to consider the terms and conditions laid out in the order.

If the purchase order allows cancellation without fulfilment of any additional terms and conditions, and both the parties mutually decide to terminate the order. Then in such a case, no party shall be liable to sue or be sued in the court of law.

But, if the purchase order does not allow cancellation after its acceptance, it becomes legally binding on the parties to fulfil the requirements stated in the order. If one party does not obey the terms detailed in the order, the other party certainly has the right to sue. The order will be considered to be an on-record legal document if such a situation arises.

Conclusion

As discussed with examples, it is evident that;

1. A purchase order is legally binding.
2. It can be cancelled considering the terms and conditions listed in the order.

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Introduction

There are certain accounts that are not closed at the end of an accounting year and their balances are carried forward to the next year. These may be Permanent accounts or Real accounts depending on the approach of accounting being followed. To understand the concept better, both Traditional and Modern approaches are explained below:

• Traditional Approach- According to the traditional accounting perspective, personal accounts (say- creditors, debtors, capital, etc) and real accounts (say- land, machinery, patents, etc) are not closed and their balances are carried forward for the next accounting period.
• Modern Approach– According to the modern accounting perspective, permanent accounts (say- Land, Machinery, Creditors, etc.) are not closed and their balances are brought forward to the next accounting year.

The purpose behind classifying accounts as Permanent and Temporary accounts is the process of closing the accounts at the end of the accounting period. Permanent accounts are not closed as they help in providing a consistent and continuous financial position of the business.

On the other hand, temporary accounts are closed at the end of the period and their balances are not carried forward to the next accounting period.

Permanent Accounts

Permanent accounts are those accounts that appear at the time of preparation of the Balance Sheet. These accounts are measured cumulatively and their balances never get closed until the organization is legally wound up. These accounts include asset accounts, capital account, and liabilities accounts.

Permanent or real accounts provide a historical perspective which is crucial in presenting the organization’s true financial position. These help in providing consistency in the financial reporting of the organization from one accounting period to the next

Example – As of 31st March, YYYY if ABC and Co. had Cash amounting to 500,000, then that amount will be carried forward (c/f) as the opening cash balance in the next accounting year. If the cash balance increased by 400,000 during the year, then at the end of the accounting year Cash balance would become 900,000. This amount will be again carried forward onto the next accounting period and the cycle keeps going on.

A snippet of the cash account given below will help to develop a better understanding of all personal and real accounts whose balances are carried forward to the next accounting period.

For an enhanced insight, accounts that get closed at the year-end are also explained below:

Accounts that get closed at the year-end

• Traditional Approach – According to the traditional accounting perspective, Nominal accounts (say- factory expenses, salary & wages, depreciation, discount received, interest received, etc.,) get closed at the end of the accounting year.
• Modern Approach – According to the modern accounting perspective, the temporary account gets closed at the end of the accounting period. They are closed so that the previous year’s income and expenses do not get mixed with the current year’s income and expenses. This would help the users of financial statements to know the true net profit.

Temporary Accounts

Temporary accounts are those accounts that appear at the time of preparation of the Income Statement (i.e., trading and profit & loss account). These accounts get settled by either debiting or crediting them yielding Gross profit/loss and Net profit/loss. The temporary account includes expense accounts, income accounts and withdrawals.

Example- Salary paid to the employees amounting to 200,000 for the previous year gets closed in the previous accounting period itself and their balances are not carried forward in the next accounting year as the Salary account is a temporary account. 

Conclusion

On a concluding note, we may say the following:

• There are certain accounts that are not closed at the end of an accounting period.
• The balance at the end of the accounting period of such accounts is carried forward as opening balance for the next period.
• As per the Modern approach of accounting, permanent accounts are not closed and their balances are brought forward to the next accounting year.
• Permanent accounts include Accounts receivable, Accounts payable, Investments, Liabilities, and Capital account among others.
• As per the traditional accounting perspective, personal accounts and real accounts are not closed and their balances are carried forward for the next accounting period.
• Personal accounts include creditors, debtors, capital accounts, etc., and real accounts are Land, Plant and machinery, etc.
• Permanent or Real accounts help in providing a better perspective of the financial position to all the stakeholders of the organisation.

Profit and Loss Suspense Account

An entity prepares a profit and loss suspense account when either the partner is retired or in case of the death of a partner at any time before the end of the reporting period. It is a temporary account created to record the estimated profit for the current financial year during the ‘Reconstitution of the Partnership firm’.

It is used to record some fictitious profits during the year. The profit of the current year is calculated either on the basis of the last year’s profit or the average profit. The proportionate profit thus found is recorded in the Profit and Loss Suspense A/c.

The balance of the Profit and Loss Suspense account is transferred to the balance sheet of the new firm i.e. after the reconstitution of the partnership.

Why do we Prepare the Profit and Loss Suspense Account?

Generally, an organization prepares its financial statements at the end of its reporting period. The financial statements of a partnership firm typically include the following –

• Trading and Profit and Loss Account or
• Income and Expenditure account
• Balance Sheet

As stated above these financial statements are prepared at the end of an accounting period. The partner may die or decide to retire on any given date. In the case of the retirement or death of a partner in the middle of the year or on any given date, it shall be a tedious task for an entity to distribute the profits.

Hence to eliminate the hardships, the “Profit and Loss Suspense Account” is created and the share of profit of such deceased or retired partner is calculated through the Profit and Loss Suspense Account.

Calculation of Profit and Loss Suspense A/c

Proportionate profit for the part of the year is calculated from the date of the opening Balance Sheet to the date of retirement or death. Share of Retiring/Deceased partner is calculated on the basis of proportionate profit.

Proportionate profit can be calculated on the basis of the previous year’s profit or average profits in the past years. The estimated profit for the entire year is proportioned till the date of retirement/death of the partner and their share of the profit is settled in cash, loan, or their current account.

Let us understand this better with the help of an example:

Mr. Alex, Ms. Anna, and Mr. John are in partnership sharing profits and losses in the ratio of 2:2:1. Mr. Alex died on 15th April, YYYY. The firm closes its books of account on 31st December every year. So the executor of Mr. Alex is entitled to 3 and 1/2 months’ profit. Ms. Anna and Mr. John decided to pay the profit immediately to the executor of Mr. Alex. The profit of the previous accounting period was 1,20,000.

Here, The proportionate profit for 3 and 1/2 months

= 1,20,000 x 3.5months/12months

= 35,000

Mr. Alex’s share of the profit

= 35,000 x  2/5 (his share in the partnership)

= 14,000 (for 3 and 1/2 months)

For the transfer of such Profit or Loss the following journal entries are drafted in the books of the firm:

Extract of Balance Sheet as of 15th April YYYY is given below:

Profit and Loss Appropriation Account vs Profit and Loss Suspense Account

A Profit and Loss Appropriation Account is prepared to show the distribution of profits or losses of a partnership firm. It is an extension of the Profit and Loss Account. It shows the share of each partner in the profits and losses of a partnership firm during the financial year.

On the other hand, the Profit and Loss Suspense account is prepared to ascertain the profits or losses when either the partner retires or in case of the death of a partner at any time before the end of the financial year.

Conclusion

The following points may be concluded from the above discussion:

• A Profit and loss suspense account is prepared in order to distribute the profits and losses for a period shorter than the reporting period in a case where a partner is leaving the firm.
• It is a temporary account prepared during the ‘Reconstruction of the firm.’
• The Current year’s profit is calculated either based on the last year’s profit or the average profit.
• Share of Retiring/Deceased partner is calculated on the basis of the proportionate profit.

Overview of Rent Paid in Advance

Rent paid in advance means the payment of any rent obligation prior to the rental period in which it is due. It is an example of prepaid expense. Since the prepaid rent does not relate to the current accounting period, it is recorded on the asset side of the balance sheet.

Rent paid in advance is a current asset, thus the Rent Paid in Advance A/c is debited in the financial books of the organization. It is to be charged as an expense later when the benefit is received i.e. during the respective period to which the rent relates.

Journal entry as per Modern Rules of Accounting

When such rent is paid in advance it can be called an asset since it will generate some economic value for an organization or an entity in the future. According to the modern rules of accounting, an increase in an asset is debited in the books of accounts.

Cash and bank are current assets and when an entity makes an advance payment of rent, the cash-in-hand balance with an entity reduces. Hence, as per the Modern Rules of Accounting, we credit the decrease in cash balance.

The journal entry for recording Rent paid in Advance is provided below: (Rule Applied: Debit the increase in asset, Credit the decrease in asset)

The journal entry for recording Rent expenses incurred is provided below: (Rule Applied: Debit the increase in expenses, Credit the decrease in assets)

Example

Mr. Max pays a rent of 10,000 every month. Thus, the landlord and Mr. Max entered into an agreement that Mr. Max will pay rent at the beginning of each quarter for the entire quarter. So, Mr. Max pays at the beginning of every quarter the amount of 30,000.

The journal entries for the above shall be:

(Being rent paid in advance)

And at the end of every month, the journal entry to be passed shall be –

(Being rental expense incurred at every month’s end)

Journal entry as per the Golden Rules of Accounting

Payment towards rent is classified as a “nominal account”. A nominal account represents any accounting event that involves expenses, losses, revenues, or gains. It is what you would call a profit and loss or an income statement account. As per the golden rule of accounting for a nominal account, rent expenses are debited to the books of accounts.

When nominal accounts (expenses and incomes) become prepaid or outstanding, they are classified as Representative persons and the golden rule of personal accounts is applied. Thus, prepaid rent is debited as per the golden rules of accounting.

The journal entry for recording Rent paid in Advance is provided below: (Rule Applied: Debit the receiver)

The journal entry for recording Rent expenses incurred is provided below: (Rule Applied: Debit all expenses and losses)

Example

Ms. Jane rented office space and she paid 4 months of rent to the landlord in advance. Therefore, ‘Prepaid rent A/c’ is debited and when the rent is incurred, the balance of prepaid rent is written off. The journal entry for the same is given below.

(Being rent paid in advance)

And at the end of every month, the journal entry to be passed shall be –

(Being rental expense incurred at every month’s end)

Rent paid in Advance in Trial Balance

The rent paid in advance shows a debit balance. A trial balance example showing a debit balance for prepaid rent is provided below.

Overview of Sales Return

When the customer returns the goods purchased back to the seller, the transaction is referred to as a sales return. It is also known as Return Inwards. The buyer may return the goods to the seller due to excessive purchases, defective goods, or any such reason. For recording this transaction, adjustments can be made to the Sales A/c or a separate Sale Return A/c can be created in the books of the business.

The sales account has a credit balance, so when a sales return occurs, it decreases the sales, which is why the sales return account is debited and the respective accounts receivable are credited.

When the customer returns the goods to the business, it reduces the Accounts Receivable and is a ‘loss’ or ‘expense‘ for the organization, hence sales return is a nominal account and is debited in the books of the organization.

As per Modern Rules

Sales Return is Debited (Dr.) when increased & credited (Cr.) when decreased.

Why is it like this?

This is a rule of accounting that is not to be broken under any circumstances.

How is it done?

For example, ABC Corporation sold goods to their customer on credit. Upon delivery of the goods, the customer found a few defective items which they returned to the organization. In the financial books, the Sales return account will be debited since it is an increase in expense for the organization.

Given below is the timeline of how it would be recorded in the financial books.

Step 1 – The following journal entry is recorded in the books of accounts when the defective items are returned. (Rule Applied – Dr. the increase in expense)

(Goods returned by the customer.)

Step 2 – To transfer the expense to “Trading A/c”.

(Goods returned by the customer are transferred to the trading account)

As per the Golden Rules of Accounting

Sales Return (Expense) is Debited (Dr.)

As per the golden rules of accounting for (nominal accounts) expenses and losses are to be debited.

The account of expenses, losses, incomes, and gains are called Nominal accounts. The balance of these accounts is always zero at the beginning of the financial year. Since the sales return is an expense for the business, it is to be debited.

Example

For example, XYZ Corporation sold goods to their customer on credit. Upon delivery of the goods, the customer found a few defective items which they returned to the organization. In the financial books, the Sales return account will be debited since it is an expense for the organization.

Step 1 – For the above example, the journal entry for the goods returned, “Sales Return A/c” is debited. ( Rule Applied – Dr. all incomes and gains)

(Goods returned by the customer.)

Step 2 – To transfer the expense to the “Trading Account”

(Goods returned by the customer are transferred to the trading account)

Sales Return Inside Trial Balance

Sales returns show a debit balance in the trial balance. A trial balance example showing a debit balance for sales return is provided below.

Read

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Return Outwards

In layman’s language, return outwards refers to the goods returned by the customer to the supplier (or) manufacturer due to various issues found in the goods (say- quality, defects, or damages). Return outwards is also known as purchase returns.

The amount of return outwards (or) purchase returns is deducted from the total purchases of the firm. It is treated as a contra-expense transaction. A Contra expense account is a ledger account where the expenses are deducted from gross revenue or sales.

Return outwards holds the credit balance and is placed on the credit side of the trial balance.

Journal Entry for Return Outwards

As per modern rules, 

a) Entry for the purchase of goods

This journal entry is passed when the goods are being purchased. The purchases account is debited since it is an increase in expenses. The supplier’s account is credited since this is leading to an increase in liability.

b)Entry on the return of goods purchased

This journal entry is passed for purchase returns or return outwards. As there is a returns taking place, it is reducing the expenses hence the purchases account is credited. The supplier’s account is debited since there is decrease in liability as he is returning the goods.

As per traditional rules, 

a) Entry for the purchase of goods

As purchases are an expense it is a nominal account, hence it is debited. The supplier’s account is a personal account, hence the account is credited since he is the giver.

b)Entry on the return of goods purchased

As the purchases are being sent back to the supplier, the supplier account is debited as per the personal account rule. The purchase account is credited since it is being sent back to the supplier.

Example

Mr Alex purchases 10 washing machines for 1,00,000 from Amazon on a credit period of 30 days. On 20th April he returns all the washing machines to Amazon due to the serious defects in all of its models. Pass journal entries for the above transaction in the books of Mr. Alex.

In the books of Mr Alex 

a) As per traditional approch

(Being goods returned to Amazon due to serious defects)

b) As per modern approch

(Being goods returned to Amazon due to serious defects)

Placement in Trial Balance

Return outwards appears on the credit side of the trial balance because it will be used to decrease total purchases (contra expense). Secondly, this will reduce inventory leading to a decrease in current assets.

A trading account consists of direct expenses and revenue. As purchases are a direct expense for the company, the purchase returns or returns outwards will be subtracted from the total purchases on the debited side.

Benefits of Returns Outwards subsidiary book

• It helps in keeping track of purchase returns accurately and shows better inventory management.
• This shows the company’s transparency while maintaining the books and their accountability to clear disputes related to returns. This also shows the company’s responsibilty.

Overview of Sales Ledger Control Account

A sales Ledger Control Account (SLCA) is a summarized ledger of all the trade debtors of the entity. This Control Account typically looks like a “T-account” or a replica of an Individual Trade Receivable (Debtor) account. But instead of containing transactions of invoices, returns, and receipts, etc related to one debtor, it contains summarized transactions of invoices, returns, and receipts, etc related to all the debtors of the business.

A sales Ledger Control Account is also referred to as a “Trade Debtors Control Account”. It indicates the total amount the debtors owe to the business entity at a particular point in time. Therefore, it is a “short-term asset” for the business entity and forms part of the balance sheet.

Thus, the Sales Ledger Control Account is debited if its balance increases & credited if its balance decreases. The balance of the SLCA should equal the sum of the balances of the individual customer accounts. If discrepancies arise, then they should be investigated.

As per the Modern Rules of Accounting

Sales Ledger Control Account (asset) is Debited (Dr.) when increased & Credited (Cr.) when decreased.

Why is it like this?

Since it indicates the total trade receivables, it shows a debit balance and the modern rule of accounting cannot be broken under any circumstances.

How is it done?

Suppose the following were during the year transactions with the Debtors Sugar Inc. & Chocolate Inc. along with the outstanding balance as of 31/12/20×2.

Sales Ledger Control Account for the year 01/01/20×2 to 31/12/20×2 will be presented as follows-

The balance of SLCA ie. 535,000 is equal to the sum of the balance of individual outstanding debtors ie. 265,000 + 270,000 = 535,000.

You can see that the transactions which increase the balance of SLCA are debited & decrease the balance are credited. Also, it is depicting a debit balance.

As per the Golden Rules of Accounting

The Sales Ledger Control Account (asset) is debited as per the Golden Rules.

The individuals and other organizations that have direct transactions with the business are called personal accounts. SLCA indicates total trade receivables at a given point in time, and since trade receivables are personal accounts, SLCA also operates according to the golden rule for personal accounts.

As per the golden rules of accounting (for personal accounts), assets are debited. In other words, the giver of the benefit is a liability to the one who receives it.

Example

Suppose the following were during the year transactions with the Debtors Tea Inc. & Coffee Inc. along with the outstanding balance as of 31/12/20×2.

Sales Ledger Control Account for the year 01/01/20×2 to 31/12/20×2 will be presented as follows-

The balance of SLCA ie. 565,000 is equal to the sum of the balance of individual outstanding debtors ie. 275,000 + 290,000 = 565,000.

You can see that SLCA is depicting a debit balance.

Sales Ledger Control Account in Trial Balance

SLCA shows a debit balance in the trial balance. A trial balance example showing a debit balance for SLCA is provided below.