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Dear Sir,
Can you help to give comments on this situation:“In January 20X5, a business records $500 refund from one of its suppliers as a result of exceeding the agreed level of custom during 20X4. The treatment in 20X4 is:
Dr Accrued income $500
CR Purchases $500The reverse entry in 20X5 is:
Dr Trade payables $500
Cr Accrued income $500”Can you help to clarify:
1- Is the treatment in 20X4 reasonable as “Accrued income is income that was owing to us at the start of the year” but here Purchases is an expense item? Is it possible here to treat the refund simply as an over-paid amount?
2- If the treatment in 20X4 is reasonable, why is the debit entry in 20X5 to Trade payables but not to Purchases?Thank you very much!
Best regards,
PhuongSeveral things here. I don’t know where you are quoting this from, but a refund is a repayment of cash (not a reduction in what is owed).
It is income and should therefore be recorded as ‘other income’ not as a reduction in purchases in 20X4. This will not make any difference to the final profit, but would be better presentation.
Even if we did treat it as a reduction in purchases in 20X4 (which is what you have typed), then we certainly will not Dr Purchases in 20X5 – this would be increasing purchases, which is not what was happening.
Strictly, since a refund is a payment of cash, the entry in 20X5 should be Dr Cash and Cr Accrued income.
If, instead of paying us the cash, the supplier is simply reducing what we otherwise owe them, then the entry is Dr Payables (to reduce what is owed) and Cr Accrued income.
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