JOURNAL ENTRY FOR ADJUSTMENT FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Usually in some cases the debtor and creditor will be same party .At the time of settlement the balance payable or receivable will be adjusted against balance receivable or payable. So,for better understanding I am giving illustration below.

Company name: Tat chemicals CO.
Transactions are:Sale of Rs.100000/-
                         Purchase of Rs.125000/-
Here for sale to Tat chemicals separate account will be maintained by name Tata chemicals (Sale)                       
Here for Purchase from Tat chemicals separate account will be maintained by name Tat chemicals (Purchase)

Journal Entry for Sale

           Tat chemicals (Sale) A/c Dr  100000/-
                   To Sales A/c                              100000/-


(Narration: - Being goods sold to Tat chemicals)
The rules for passing Journal entry
Debit                   
Here we are selling goods on credit and the party who buys goods will become debtors. Debtor is receiving goods.
So, as per personal account rule(Tat chemicals) "debit the receiver account"(Current asset)
Credit
When we are selling goods, they are going out of business.
So, as per real account rule(sales) “credit what goes out of business"(Revenue Account)
                            
Journal Entry for Purchase

Purchase A/C      Dr                       125000/-
               To Tat Chemicals (purchase) A/C.          125000/-

 (Narration:- Being goods Purchased on credit)
The rules for passing Journal entry
Debit
Due to purchase goods are coming into business. Goods are treated as asset.
As per Real account rule (Purchase) “Debit what comes into business"
Credit
Due to credit purchase we are liable to him. And he is giving us the goods on credit. The creditors balance will increase.
As per personal account rule(Tat chemicals) "Credit the giver account"(Current Liabilities)


Journal entry for adjustment at due date
  
              Tat Chemicals (purchase) A/C   Dr  100000/-
                        To Tat Chemicals (sale) A/C               100000/-

(Narration:- Being AP-AR adjusted against invoice no:xx)
The rules for passing Journal entry
Debit
The Tata chemicals (purchase) account (Creditor) will be debited up to proportion of receivable amount. So the credit balance sitting in Tata Chemicals (purchase) account will be setoff against debit balance in Tata Chemicals (sale).
Credit
The Tata chemicals (sales) A/C (Debtor) will be credit to setoff the credit balance in Tat Chemicals (purchase) account.

Layman view: -
In the above case the creditor A/C shows credit balance. So, Instead of paying to him the debit balance in the debtor A/c will be adjusted proportionately as required and the due date must be considered before passing the adjustment.    

Journal entry for payment of balance amount in creditor a/c
                   
                    Tat Chemicals (purchase) A/C Dr  25000/-
                                 To Bank A/C                                 25000/-

(Narration:- Being balance amount in Tata chemicals (purchase) A/C paid)
The rules for passing Journal entry
Debit
Payment to the Tat Chemicals (purchase) will lead to decrease in account balance. So, the account will be debited.
As per personal account rule(Tat Chemicals[purchase]) "debit the receiver account"(Current asset)
Credit
Bank is treated as asset. The real account rule is applicable:-Credit what goes out of business, here cash is going out of business. So, it is credited.

As per Real account rule(sales) “credit what goes out of business"(Current asset)


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