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Chester Co has a credit agreement with Oxford Co under which it receives goods 14 days before the supplier raises the invoice. Chester Co received goods worth $144,640 on 18 July 20X8 for which the invoice was received shortly after the year end in accordance with the agreement. Chester Co entered the transaction into its accounting records at the date of invoice.
Oxford Co
Balance per supplier statement : 296,120
Balance per payables ledger : 151,480
1. The auditor should request that the payables ledger balance is amended at the reporting date to reflect the recent invoice
2. The auditor should request that an accrual is created in respect of the goods received but not yet invoiced
maam i understand why option 2 is correct. but can you pls explain why option 1 is false?
31 July (year end) supplier’s (Oxford’s) statement indicates that Chester owes $144,640 (296,120 – 151,480) more than Chester has recorded in payables.
This is explained as $144,640 goods received 18 July 20X8 (before the y/e) and Chester only recording the invoice when received after the y/e. Goods are physically in inventory – so there must be a corresponding Dr Purchases/Cr Liability (of some sort) in the y/e 31 July – otherwise there will be a cut-off error. As you recognise Cr Accrual will achieve this.
The “goods received not invoiced” accrual is the place to record the liability when the payables ledger has been “closed” for the current year. A company does not/cannot keep its ledgers “open” indefinitely – just in case there is something else to record in it. Chester has already recorded the purchase (after the year end) – it’s not going to mess about “undoing” that and recording it at an earlier date – just imagine the chaos that would create (and increase the likelihood of errors!)
maam i understood your first part of answer, that TPs ledger is closed at the reporting date and it cannot be amended henceforth. But wha ti didnt get is this:
Chester has already recorded the purchase (after the year end) – it’s not going to mess about “undoing” that and recording it at an earlier date – just imagine the chaos that would create (and increase the likelihood of errors!)
we record the purchase transaction and increase TPs next year? i.e 31july 20X9?
for the yr ended 31july 20X8 we just increase the accruals for GRNI?
The purchase invoice is recorded in the year ending 31 July 20X9 but at the very beginning of the year – in August 20X8. It will most likely be paid in September (if the supplier gives 30 days credit) – it can’t possibly be in next Y/E trade payables (unless the supplier give a customer a year’s trade credit!)
so this is just a general question now, ma’am, but indeed a very very important for my understanding of purchases and payables system!
for goods that are received pre-yr end but not yet invoiced they are recorded in current year’s TPs and purchases?
OR for the time being they are recorded in Accruals listing and they are recorded in post yr end TPs and purchases when their invoices are received post yr end, is it so?
NOT your 1st suggestion but your OR …
i.e. the same principle as here https://opentuition.com/topic/s-d-20-hart-co-directors-bonus
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