XTOL June 2014 Note 1

“Is the agent included in the syllabus for exam December 2016?”

This has nothing to do with accounting for agents!

This is simply an entity recording as a sale a transaction that is just a commission transaction and only commission income should be recognised

“Why did we credit Payable?”

If you were to write down the debits and credits that had been posted and then write next to them the entries that should have been posted, you will see that there needs to be a $3,000 credit balance within the Trade Payables account

The entries listed out above may be clearer if you were to write them down side by side:

Have done ……… Should have done

And then you may be able better to see the entries necessary to get from the incorrect position to the correct position

Let me know how you get on

“Revenue includes an amount of $20M for cash sales made through Xtl’s retail outlets during the year on behalf of Francais. Xtol, acting as agent, is entitled to a commission of 10% of the selling price of these goods. By 31 March 2004, Xtol had remitted to Francais $15M (of the $20M sales) and recorded this amount in cost of sale.”

What the entity HAS done (wrongly) is treated the transaction as a purchase and a sale, bought for $15,000 and sold for $20,000

That’s this bit:

Dr Cash 20,000
Cr Revenue 20,000
Dr Cost of sale 15,000
Cr Cash 15,000

But that’s not correct because the goods were never purchased and the revenue doesn’t belong to the entity – we’re only selling the goods to earn a commission

So try this as an alternative approach – reverse these entries and get back to a clean slate by the following (in your workings)

Dr Revenue 20,000
Cr Cash 20,000
Dr Cash 15,000
Cr Cost of sale 15,000

Now that leaves us in the position where NO entries have been made to record this transaction

So we are in the position to put through the correct figures

We have received cash of $20,000, we have earned commission of $2,000 and we owe the principal $18,000 that needs to be paid over

So let’s reflect this by putting through some proper entries:

Dr Cash 20,000
Cr Commission Income 2,000
Cr Payables 18,000

Now, we’re told that we have already paid 15,000 of that 18,000 so reflect that payment

Dr Payables 15,000
Cr Cash 15,000

Is that any better for you?

You’re welcome