Debtors’ Collection Schedule Revision Notes for Grade 12 NSC Matric Accounting

Debtors' Collection Schedule

What is a debtors' collection schedule?

A debtors' collection schedule is a financial planning tool that shows when a business expects to receive cash payments from customers who have bought goods or services on credit. This schedule is essential for cash flow planning as it helps businesses predict when money will actually come into the business, which may be weeks or months after the original sale.

Understanding when debtors will pay is crucial because businesses need cash to pay their own expenses, and poor cash flow management can lead to serious financial problems, even for profitable companies.

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Critical Concept: A debtors' collection schedule shows when cash will be received, not when sales are made. This timing difference is essential for effective cash flow management.

Understanding actual vs budgeted sales

When preparing a debtors' collection schedule, you need to distinguish between two types of sales:

Actual sales are sales that have already happened in previous months (before the budget period starts). Some of the money from these credit sales will still be collected during the budget period, as customers often take time to pay their accounts.

Budgeted sales are the estimated sales figures for the upcoming budget period. These are forecasted amounts that the business expects to achieve in future months.

Both types of sales impact the debtors' collection schedule because cash will be received from both past sales (actual) and future sales (budgeted) during the budget period.

Key concepts you need to know

Credit sales vs cash sales

Not all sales generate debtors. Sales are typically divided into:

Cash sales: Customers pay immediately, so no debt is created
Credit sales: Customers pay later, creating a debtor until payment is received

Only credit sales appear in the debtors' collection schedule, as cash sales generate immediate cash flow.

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Remember: Only credit sales create debtors that need to be tracked in a collection schedule. Cash sales provide immediate cash flow and don't require collection planning.

Collection patterns

Businesses typically collect debts over several months according to predictable patterns. For example:

50% might be collected in the same month as the sale
30% in the following month
17% in the second month after the sale
3% might never be collected (bad debts)

Early settlement discounts

Some businesses offer discounts to encourage quick payment. For example, customers might receive a 10% discount if they pay within the same month as the credit sale. When calculating collections, you must account for this discount by reducing the amount collected.

Steps to prepare a debtors' collection schedule

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Four-Step Process:

Step 1: Calculate and enter the credit sales First, determine the credit sales for each month by calculating: $\text{Credit sales} = \text{Total sales} \times \text{Credit sales percentage}$

If total sales are R150,000 and 40% are credit sales, then credit sales = $150,000 \times 40\% = \text{R}60,000$ .

Step 2: Insert collection percentages for each month Set up your schedule with columns for each month in the budget period. For each month's credit sales, show the percentage that will be collected in the current month, next month, and subsequent months according to the business's collection pattern.

Step 3: Calculate collection amounts Use the credit sales figures and collection percentages to calculate the actual rand amounts to be collected: $\text{Collection amount} = \text{Credit sales} \times \text{Collection percentage}$

Remember to account for any early settlement discounts by first calculating the base collection amount, then subtracting the discount.

Step 4: Total the columns for each month Add up all collections for each month to show the total cash expected from debtors in that month. This gives you the monthly cash flow from debtors.

Worked example

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Worked Example: Preparing a Debtors' Collection Schedule

Given information:

60% of total sales are cash sales
40% of total sales are credit sales
Collection pattern: 50% in same month (with 10% discount), 30% in following month, 17% in second following month, 3% bad debts

Sales figures:

June 2011 (actual): R160,000
July 2011 (budgeted): R150,000
August 2011 (budgeted): R180,000
September 2011 (budgeted): R200,000

Step-by-step calculation:

Credit sales calculation:

June: $160,000 \times 40\% = \text{R}64,000$
July: $150,000 \times 40\% = \text{R}60,000$
August: $180,000 \times 40\% = \text{R}72,000$
September: $200,000 \times 40\% = \text{R}80,000$

Collections in July:

From June credit sales: $64,000 \times 30\% = \text{R}19,200$
From July credit sales: $60,000 \times 50\% = \text{R}30,000$ , less 10% discount = $\text{R}30,000 - \text{R}3,000 = \text{R}27,000$
Total July collections: R46,200

Collections in August:

From June credit sales: $64,000 \times 17\% = \text{R}10,880$
From July credit sales: $60,000 \times 30\% = \text{R}18,000$
From August credit sales: $72,000 \times 50\% = \text{R}36,000$ , less 10% discount = $\text{R}36,000 - \text{R}3,600 = \text{R}32,400$
Total August collections: R61,280

Collections in September:

From July credit sales: $60,000 \times 17\% = \text{R}10,200$
From August credit sales: $72,000 \times 30\% = \text{R}21,600$
From September credit sales: $80,000 \times 50\% = \text{R}40,000$ , less 10% discount = $\text{R}40,000 - \text{R}4,000 = \text{R}36,000$
Total September collections: R67,800

Important points to remember

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Critical Points - Avoid These Common Mistakes:

Bad debts are excluded: The 3% expected bad debts are written off and don't appear in the collection schedule since no cash will be received from these sales.
Discount calculations: When customers receive early settlement discounts, calculate the gross collection amount first, then subtract the discount. Don't simply multiply by 40% (50% - 10%) - this is incorrect.
Timing matters: Sales from previous months (actual sales) can still generate cash collections in the budget period, so don't ignore them.
Be systematic: Always follow the four steps in order to avoid errors and ensure you don't miss any collections.

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Key Points to Remember:

A debtors' collection schedule shows when cash will be received from credit sales, not when sales are made
Only credit sales create debtors - cash sales generate immediate cash flow
Collection patterns typically spread over 2-3 months with some bad debts expected
Early settlement discounts reduce the cash collected but encourage quicker payment
Both actual sales (from previous months) and budgeted sales contribute to cash collections during the budget period

Exam Success Tips:

Set up your table clearly with months as column headings and credit sales as row headings
Show all working for calculations, especially discount calculations
Double-check that your collection percentages add up correctly (excluding bad debts)
Remember that June actual sales still generate collections in July and August
Always total your columns at the end

Debtors’ Collection Schedule (Grade 12 NSC Matric Accounting): Revision Notes