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I have a situation where there is a disagreement between the company and the supplier. Lets say the initial agreed price is USD 80,000. However, the supplier decided to increase the price of the goods to USD 100,000. The company does not agree with the price but still pays the USD 100,000 with the intention to offset the USD 20,000 against the next purchase which is a very unlikely case to happen. The company recognised the USD 80,000 as trade payables when it should be USD 100,000. So how do we account for the adjustment of USD 20,000? I know the trade payables should be credited with USD 20,000. But what is the account that should be debited in the statement of profit and loss?
When they paid the 100,000, the entry is Dr Payables Cr Cash 100,000.
If they recorded the purchases initially as 80,000, then the entry for this is Dr Purchases Cr Payables 80,000.
If the price is finalised at 100,000, then you need to Dr Purchases Cr Payables 20,000
Purchases are then 100,000 in total, which would be correct.
(if instead the supplier agrees the price to be 80,000, then you do nothing. There is a debit balance of 20,000 left on payables which will reduce what is owing for the next purchase.)
Hi John,
What if the supplier does not agree with the price of 100,000 and the company decided to treat it as a loss instead of purchases. What would be the accounting entry be?But you can’t treat it as a loss!!
If you buy something for 100,000 then you have made purchases of 100,000 and it must be recorded as such. There is no choice in the matter.
(Obviously with a higher figure for purchases (100,000 instead of 80,000) then the profit will end up being 20,000 less than it otherwise would have been anyway.)
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