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Hi,
I was wondering if you could help. I’ve been racking my brain on how to understanding the movement of debit and credits when it comes down to cash in transit/ goods in transit and both.
Cash in Transit question:
P owes S £25,000 at reporting date
At year end P sends cheque to S for £5,000 but it hasn’t been received by year endCash in Transit and Goods in transit
P has Receivables at £30,000
S has payables at £40,000near year end S sends P cheque for £4,000 but P didn’t receive it till after year end
P dispatches goods to S for £6,000 but S didn’t receive them by year end.From the notes I understand that you are DR CASH 4,000 and CR Receivables 4,000, aswell as DR Invt £6,000 and CR Payable £6,000
My issue is to do with the last double entry CR Receivables 4,000 and DR Payables 6,000 . Why does this need to be done?
Thanks,
ZaraHi,
For the cash in transit, the receiving company has not received the cash which is paying off the amounts due from its customer. Once the cash is recorded the receivable is no longer due and is eliminated, hence the credit entry to receivables.
For the inventory in transit, the receiving company has not received the inventory and so will not have recognised the amounts it owes from the company it purchased the goods from, hence the credit entry to payables.
The easiest way to think of both is to think of the cash as a normal cash receipt from a credit customer, and the inventory as a credit purchase of goods.
Thanks
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