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Mrs. Kim,
When there is a goods in transit, there is a risk of understatement of inventory, depending on the contract terms.
Does the same logic applies to property, plant and equipement like a machine as well?
I read a statement saying that machinery should only be recognised when you PHYICALLY have it by the year end, and relevant deposit should be recognised as prepayment.
Not really – a busines trades in goods (current assets) so there are goods in and out every day. “Goods in transit” are are likely to be audited as an aspect of cut-off e.g. if you processed a purchase invoice before the year end (i.e. Dr Purchases/Cr Payables), you need those purchases to be included in y/e inventory (even if you didn’t physically possess them on the reporting date).
For capital expenditure, it is unlikely that a company would want to process the acquisition of an asset and record it in the non-current asset register before it is received. So it would “hang onto” and not process an invoice but wait until the asset was received and inspected. However, it is quite common for suppliers of equipment to require some sort of advance payment of deposit before dispatching expensive items. In this case the company has no choice but to process the payment … Cr Cash/Bank (because it has spent an amount) but rather than Dr PPE, recognise a prepayment (a current asset). If, for any reason, the supplier then failed to deliver the equipment, the company would demand repayment of the deposit.
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