Credit sales and current accounts: who owes whom

Hasan Abi's notebook

Hasan Abi is a haulier. With a small lorry he carries goods for furniture makers and supermarkets. Some customers pay straight away once the load is off. Some say, "We'll settle up at the end of the month." Hasan Abi writes these down in a small notebook he keeps in his pocket:

• Kemal the furniture maker: 3,000 lira
• Zeynep's supermarket: 1,500 lira
• Ali the scrap dealer: 800 lira

In the old way of speaking, this notebook is a credit book (veresiye defteri). In accounting it is called a current account (cari hesap).

What is a current account?

A current account is an account showing what is owed and receivable between you and a particular person or business. The word "cari" means "running, ongoing": as long as the relationship continues, the account keeps moving.

A separate current account is opened for every customer and every supplier. That way, the answer to "Where do things stand between Kemal and me?" sits in one place.

Receivable and payable

Two ideas, two directions:

• Receivable (alacak): What someone else owes you. The 3,000 lira Hasan Abi is owed by Kemal. You supplied the goods or service; the money has not arrived yet.
• Payable (borç): What you owe someone else. If Hasan Abi bought tyres for the lorry on credit from the tyre dealer, the 2,000 lira is what he owes the tyre dealer.

A customer current account is the account of those who owe you in return for goods or services. A supplier current account is the account of the people whose goods or services you bought.

Credit sales are income too

When Hasan Abi carried a load for Kemal, he did not get paid yet. But the work was done; this is income. Even if the money comes later, the invoice is issued within 7 days at the latest and it is recorded as income. For self-employed professionals such as doctors, lawyers and architects the rule is different: they issue a self-employment receipt (serbest meslek makbuzu) when they receive the money, and they record the income at that point (Income Tax Law, Gelir Vergisi Kanunu, art. 67). If you do not know which group you fall into, ask your mali müşavir (certified public accountant). For this, you can look again at the lesson How money moves: income, expenses and what is in between (in Turkish).

The trap here is this: a credit sale looks like profit, but there is no money in the cash box. If you are a VAT payer, you also pay the VAT (KDV) included in the invoice before the money arrives, with the return for the month in which you issued the invoice. As your receivables grow, your cash box can run empty. That is why you should review your list of receivables every week.

Don't forget your payables either

If you owe a supplier, plan the payment before the due date arrives. Late payment damages trust; next time you buy, you may be asked to pay up front.

Look at Hasan Abi's accounts this way too: his receivables are 4,500 lira and his payables are 2,000 lira. On paper he is 2,500 lira ahead. But if his receivables are due on the 30th of the month and his payable is due on the 15th, he has to pay the debt first, and on that day there may be no money in the cash box. Look at the due dates of receivables and payables separately.

What happens when receivables grow?

For a whole month, Hasan Abi carried loads for everyone who said "We'll pay at the end of the month." He looked at his notebook: he had done 20,000 lira of work, and 2,000 lira had come into the cash box. Fuel, maintenance and the driver's wages, meanwhile, came out of his own pocket. A good month on paper; but no money in his pocket.

This is where the real benefit of keeping current accounts in order lies: you can clearly see which customer has not been paying, and for how long. If a customer keeps paying late, ask for the old debt before giving new credit. This is not rude; it is protecting your business.

Reconciliation: matching the accounts

At the end of the month, Hasan Abi and Kemal sat down together. Hasan Abi had written 3,000 lira in his notebook. In Kemal's books, however, the debt showed as 2,500 lira. There is a difference of 500 lira.

When the two sides compare the same account and agree on the same figure, this is called reconciliation (mutabakat). If there is a difference, the reason is found: an invoice may not have been recorded, a payment may have been forgotten, or there may have been a return.

Reconciliation is not only for big companies. Comparing accounts every three to six months with customers or suppliers you work with regularly catches mistakes that would otherwise be carried along for a long time. Your accountant also checks whether these accounts are up to date, especially at the end of the year.

A practical routine

• Write everyone you give credit to on a list: who, how much, since what date.
• Every month, send a payment reminder to customers who owe you.
• Put the due dates of your debts to suppliers in your calendar.
• When you see a difference, don't wait; call the other side straight away.

An example on paper

Let's say that at the end of a month Hasan Abi's current account summary looks like this: Kemal the furniture maker owes 3,000, Zeynep's supermarket 1,500 and Ali the scrap dealer 800 lira. Total receivables are 5,300 lira. Of this, 800 lira has been unpaid for six months.

Hasan Abi felt embarrassed to ask for that 800 lira. But once the notebook was open and clear, the conversation became easier: "Ali, my notebook shows 800 lira, shall we settle it this month?" Someone with the figure in hand can speak politely but clearly. Without the notebook, he could not have said that sentence.