DEBTORS' AGE ANALYSIS The debtors' age analysis on 30 June 2023 is provided. Credit terms are 30 days. REQUIRED: 1.2.1 Explain how a debtors' age analysis can assist with internal control over debtors. Provide TWO points. 1.2.2 Calculate the percentage of total debts exceeding the credit terms. 1.2.3 State TWO internal control measures that the business can use to ensure that debtors comply with credit terms. INFORMATION: DEBTOR'S AGE ANALYSIS | Debtor | Credit limit | Amount due | June current | May 30 days | April 60 days | March 90 days | |--------------|--------------|------------|--------------|-------------|--------------|--------------| | L Oosthuizen | 20,000 | 15,200 | 15,200 | | | | | E Els | 40,000 | 50,280 | 7,900 | 16,380 | 9,000 | 17,000 | | Z Lombard | 10,000 | 11,280 | | 16,380 | 9,000 | 28,280 | | | | 76,760 | 23,100 | | | |
Answer (1)
1.2.1 Explanation of How a Debtors' Age Analysis Can Assist with Internal Control Over Debtors:
Monitoring Payment Patterns:
A debtors' age analysis helps management monitor the payment patterns of its customers. By segmenting debts according to the length of time they have been outstanding, the business can identify specific debtors who consistently pay late. This information allows the business to take timely corrective action, such as sending reminders or revising credit terms for those who have a history of late payments.
Identifying Potential Bad Debts:
The analysis helps in identifying debts that are becoming stale or are likely to be uncollectible, known as potential bad debts. This is crucial for the business's financial management, as it needs to assess whether to write off these debts, adjust credit limits, or cease providing further credit to certain customers.
1.2.2 Calculation of the Percentage of Total Debts Exceeding the Credit Terms:
To calculate the percentage of debts exceeding the credit terms:
Total Amount Due: Sum of amounts due across all debtors = $15,200 + $50,280 + $11,280 = $76,760
Amount Exceeding Credit Terms (more than 30 days):
E Els (60 days): $9,000
E Els (90 days): $17,000
Z Lombard (60 days): $9,000
Z Lombard (90 days): $28,280
Total Amount Exceeding 30-Day Terms: $9,000 + $17,000 + $9,000 + $28,280 = $63,280
Percentage Exceeding Credit Terms : Percentage = ( Total Amount Due Total Exceeding Amount ) × 100 = ( 76 , 760 63 , 280 ) × 100 ≈ 82.46%
1.2.3 Two Internal Control Measures to Ensure Debtors Comply with Credit Terms:
Regular Review and Follow-up:
Implementing a systematic review of the debtors' age analysis on a monthly or weekly basis allows the business to proactively follow up with debtors who are approaching or exceeding the credit terms. Automated reminders or calls can be used to encourage timely payments.
Adjust Credit Policies:
The business can adjust credit policies by setting stricter terms for habitual late payers, such as reducing their credit limits or requiring advance payments from repeat offenders. Additionally, offering incentives or discounts for early payments can encourage compliance with credit terms.
