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Good day Mr.Little,
I have a question on the first example. Note 4 specifically mentions “before any necessary adjustments”. So, does this not mean that before the cash in transit of $6500, Danute owed Ausra $11500, and now that we have adjusted the cash a/c and the receivable a/c for the $6500, we are only to cancel the difference of $5000 from the payable and receivable accounts? Danuta’s accountant would have accounted for the transaction $6500 in his books promptly right sir? So would’nt the current liability in Danuta’s year end would consist of the $5000 payable and not $11500?
Hi,
The key is that the cheque has been sent by Danute to Ausra and the entry already recorded, so therefore Danute will already have CR Bank DR Payables with the £6,500. The figure quoted of $11,500 in Danute’s books is therefore the amount left after the payment has been made.
When the question is referring to “before any necessary adjustment”, it is talking about any adjustments in the group accounts, such as the cash in transit and intra-group balance adjustments. Everything else has therefore been recorded and so Danute must have recorded the payment in its accounts.
Thanks
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