- This topic has 5 replies, 2 voices, and was last updated 11 years ago by
.
- Posts
I’d like to ask about the case when a buyer bought goods for example he paid 1000$. Seller gave him incentive to pay as soon as possible but the buyer is not sure whether he can pay within specified time. Because of that, buyer accounted the inventory at initial price: Dr inventory Cr payables of 1000$. Then the buyer paid the seller within time thus he paid less for example 900$ instead of 1000. Ultimately from buyer’s point of view:
Dr inventory Cr Payables 1000$ – \\ initial purchase
Dr Paybles Cr bank – 900 $ \\ payment
Dr Payables Cr purchase saving 100 $ \\ discount
Dr Purchase saving Cr inventory 100 $ \\ inventory adjustmentis it ok? eventually I have inventory at adjusted cost 900$, at the same time purchase saving is disclosed but cancelled by inventory adjustment. If it is accounted Dr payables Cr inventory of 100$, it might be confused with credit note entry, that is why I used purchase saving account.
“Dr Purchase saving Dr inventory 100 $ \\ inventory adjustment”
Hmm! Not sure about “Debit and debit”
I suggest the correct entry is Dr Payables and Credit Discounts received – and show the discount as a sundry income within the Statement of Income.
I wouldn’t go anywhere near the Inventory Account
yes sorry I meant there Dr Purchase saving Cr inventory 100 $ \\ inventory adjustment, I thought that it is obligatory to adjust Inventory, because the price was changed. As long as I adjusted inventory, I cancelled discount received in order NOT to show it as income because I adjusted inventory. As you think inventory shouldn’t be adjusted but income should be disclosed.
When teaching F3 level bookkeeping, back in the UK, we always used to say “Stock is its own double entry”
OK, let me explain.
Whatever figure you put in for inventory, the financial statements will still balance – it doesn’t matter if you value closing inventory at $30,000 or $50,000 – the financial statements will still balance.
That’s because, in arriving at cost of sales, we calculate it as “Opening inventory + purchases – closing inventory” so the larger the closing inventory, the less the profit figure and therefore the greater the profit figure.
So, that increases the equity section of the Statement of financial position and, to balance that increase, the asset side has also gone up by the increased value of the inventory
So there is NEVER a double entry which hits the inventory account and at the same time affects another account. It’s always Debit Inventory on the balance sheet and credit Cost of sales in the trading account within the statement of income
If you go back to your F3 days ( or university days if you were exempt ) you’ll find that a CASH DISCOUNT for early settlement is shown as sundry income whereas a TRADE DISCOUNT ( because the buyer happens to be buying from a wholesaler eg a plumber buying from a builders’ merchants wholesaler ) is not shown anywhere – it’s used to reduce the recorded value of the purchase and sale
- You must be logged in to reply to this topic.