Recognizing Goods or Assets Purchased

Thinking in practical terms – a business will not record a purchase (whether for goods or other assets or services) until the invoice is received (with the $ amount to be recorded).

Also, a business will generally want to ensure that it has received the goods/other assets/services before it recognises the liability/pays for them. So, for example, the invoice may be held in a pending file until the receipt is confirmed (e.g. by a goods received note from the warehouse) before it is recorded (in the purchase day book).

The exact date is only really important at the year end – this is where the cut-off assertion on transactions comes into play. Transactions must be recorded in the correct accounting period to which they relate.

So if goods/other assets/services are received (or consumed) before the end of the year – but the invoice has not yet been received – it must be accrued. (For goods or an asset, the exact amount can be accrued by referring to the invoice received after the year end. For a service such as a utility – electricity, internet, water, etc – it may have to be estimated.)

See page 87 of the notes for more details on purchases cut-off.

If the asset had been paid for – so CR Cash – I think it would be correct to DR Asset as the company has the right to the future benefits of owning the asset even though it did not physically possess the asset at the end of the year.

If it hasn’t paid for it – then I think it is arguable whether there is a genuine liability for it at the end of the year. If the seller is delaying delivery on the customer’s instruction it could be argued that there is a liability and the asset is the company’s but held by a third party – so again should be recognised. But if the seller has invoiced the asset in advance of despatching it, as at the year end the customer isn’t obliged to pay for it and so should not recognise it.

Bearing in mind what is affected here – total non-current assets and total current liabilities (unless the purchase is financed with a long-term loan), I think it unlikely that the company would want to recognise a current liability for which the asset has not been received – because that would cause the current ratio and quick ratio to fall (i.e. suggest a deterioration in liquidity). As it has no bearing on profit, as long as there isn’t a cut-off error (i.e. both sides of the purchase transaction are recorded in the same reporting period), I think it would have to be a very material amount for an auditor to express any concern about which side of the year end it is recorded.

You are most welcome!