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Recognizing Goods or Assets Purchased

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › Recognizing Goods or Assets Purchased

  • This topic has 5 replies, 2 voices, and was last updated 6 years ago by Kim Smith.
Viewing 6 posts - 1 through 6 (of 6 total)
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  • May 14, 2019 at 8:39 am #515868
    manirak
    Member
    • Topics: 24
    • Replies: 24
    • ☆

    Dear Lecturer,

    I would like to ask you a question related to the recognition of goods or assets purchased ?

    Should we recognize the goods or fixed assets purchased based on the invoice date that we received or based on when we received those goods or fixed assets (receiving date) ? Why ? Please help to provide me with the detailed explanation.

    Thank you in advance, lecturer.

    May 14, 2019 at 9:41 am #515873
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8280
    • ☆☆☆☆☆

    Thinking in practical terms – a business will not record a purchase (whether for goods or other assets or services) until the invoice is received (with the $ amount to be recorded).

    Also, a business will generally want to ensure that it has received the goods/other assets/services before it recognises the liability/pays for them. So, for example, the invoice may be held in a pending file until the receipt is confirmed (e.g. by a goods received note from the warehouse) before it is recorded (in the purchase day book).

    The exact date is only really important at the year end – this is where the cut-off assertion on transactions comes into play. Transactions must be recorded in the correct accounting period to which they relate.

    So if goods/other assets/services are received (or consumed) before the end of the year – but the invoice has not yet been received – it must be accrued. (For goods or an asset, the exact amount can be accrued by referring to the invoice received after the year end. For a service such as a utility – electricity, internet, water, etc – it may have to be estimated.)

    See page 87 of the notes for more details on purchases cut-off.

    May 14, 2019 at 4:28 pm #515907
    manirak
    Member
    • Topics: 24
    • Replies: 24
    • ☆

    Excuse me, lecturer

    For example, if a company purchases a fixed asset before the year end and the invoice is received before the year end, but the fixed asset is received after the year end,
    is it correct if the company already capitalized the fixed asset based on the invoice date before the year end but not receiving date after the year end ?

    May 14, 2019 at 4:53 pm #515910
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8280
    • ☆☆☆☆☆

    If the asset had been paid for – so CR Cash – I think it would be correct to DR Asset as the company has the right to the future benefits of owning the asset even though it did not physically possess the asset at the end of the year.

    If it hasn’t paid for it – then I think it is arguable whether there is a genuine liability for it at the end of the year. If the seller is delaying delivery on the customer’s instruction it could be argued that there is a liability and the asset is the company’s but held by a third party – so again should be recognised. But if the seller has invoiced the asset in advance of despatching it, as at the year end the customer isn’t obliged to pay for it and so should not recognise it.

    Bearing in mind what is affected here – total non-current assets and total current liabilities (unless the purchase is financed with a long-term loan), I think it unlikely that the company would want to recognise a current liability for which the asset has not been received – because that would cause the current ratio and quick ratio to fall (i.e. suggest a deterioration in liquidity). As it has no bearing on profit, as long as there isn’t a cut-off error (i.e. both sides of the purchase transaction are recorded in the same reporting period), I think it would have to be a very material amount for an auditor to express any concern about which side of the year end it is recorded.

    May 15, 2019 at 4:32 am #515943
    manirak
    Member
    • Topics: 24
    • Replies: 24
    • ☆

    Ok ! Lecturer

    I got it. Thank you so much for your explanation.

    May 15, 2019 at 7:33 am #515955
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8280
    • ☆☆☆☆☆

    You are most welcome!

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  • The topic ‘Recognizing Goods or Assets Purchased’ is closed to new replies.

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