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Hello!
I am having an issue with the answer of TUI 1 of chapter 19 in the Kaplan study text.
My query is this.
Why in the book the contra between payables and receivables of 230 is subtracted twice from the trade receivables balance? (1st as recognition of earlier ommision and then from the balance c/f)
Is it not double counting?I am posting a question here for the first time, I hope my query will be answered soon.
Thank you.
Pasting question and its solution here.
Q:
The following information relates to Flute, an entity.
Statement of financial position for the year ended 30 September –
extracts
20X8 20X7
$ $
Trade receivables 31,250 35,633
Trade payables 14,195 13,750
Accrued wages expense 1,015 835
Interest payable 350 300
Income tax payable 1,250 1,075
––––––– –––––––
Statement of profit or loss for the year ended 30 September 20X8 –
extracts
20X8
$
Sales 427,915
Purchases 165,000
Wages 52,750
Interest expense 325
Income tax charge 1,515
–––––––
Note: At 30 September 20X8, Flute had agreed to, but not yet
accounted for, a contra between trade receivables and trade payables
amounting to $230.Excerpt of the solution worrying me:
Receivables’ ledger control account
$ $
Balance b/f 35,633 Cash receipts (ß) 432,298
Contra with payables 230
Sales revenue 427,915Balance c/f ( 31,250 – 230)
31,020––––––– –––––––
463,548 463,548The answer is correct and there isn’t any double counting.
If initially you ignore the contra (because it hasn’t yet been entered) the the missing figure (i.e. the cash receipts) are 35,633 + 427,915 – 31,250 = 432,298. Making the contra entry will not affect the cash received.
When they do put through the contra entry, they credit the receivables account with 230 (as explained in my free lectures on this) and as a result the final receivables balance becomes 31,020 (31,250 – 230).
(I prefer to do it without writing up the t-account – obviously you cannot be asked to write up any t-accounts in the exam – but the t-account in the answer is correct.)
Very well explained, I see it now. The final receivables balance reduction is basically a reflection of the recognition of contra earlier omitted in the receivables account.
And thank you so much for replying!
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