1. Trade payables and trade receivables Chapter 9

2. Contents Recognition, measurement and derecognition Discounts Payables reconciliation Doubtful debts Impairments of trade receivables

3. Trade receivable – financial asset (settlement will contractually result in cash received) Trade payable – financial liability (settlement will contractually result in cash paid) Initial measurement at historical cost (invoice price) Subsequent measurement at amortised cost – outstanding invoice amount Recognition

4. Purchasing entity: Recognises trade inventories Recognises trade payable (assuming credit sale) Note: Must meet the definition and recognition criteria (Cha. 2) i.e.: Probable the econ benefits will flow in or out Cost or value that can be measured reliably Recognition

5. Selling entity: Recognises trade receivable (if credit sale) Recognises sale (income) Note: Must meet the definition and recognition criteria i.e. (Cha.2): Probable the econ benefits will flow in or out Cost or value that can be measured reliably Recognition

6. VAT treatment: Seller and buyer VAT vendors: Trade payable and trade receivable at invoice amount Trade inventories and sales (income) excluding VAT Recognition

7. Periodic vs perpetual inventory system: Seller: Perpetual system – credit Trade inventories Periodic system – no entry Buyer: Perpetual system – debit Trade inventories Periodic system – debit expense (Purchases) Recognition

8. Recognition Class example 1. Buyer Entity received trade inventory and the invoice from Seller Entity on 15 Jan. 20.7 (ordered on 10 Jan. 20.7) for R114 000 payable on or before 15 Feb. 20.7. The cost of the inventory to Seller Entity is R65 000. Buyer Entity paid the outstanding amount on 10 Feb. 20.7 Both entities are VAT vendors and use the perpetual inventory system. Show the journal entries in the books of both Buyer Entity and Seller Entity.

9. Buyer Entity 15 Jan. DrCr Trade Inventory (SFP)100 000 VAT Input (SFP)14 000 Payable: Seller Entity (SFP) 114 000 Recognition of inventory purchased and payable to supplier 10 Feb. DrCr Payable: Seller Entity (SFP)114 000 Bank (SFP) 114 000 Derecognise trade payable due to settlement

10. Seller Entity 15 Jan. DrCr Receivable: Buyer Entity114 000 VAT Output (SFP) 14 000 Sales (P&L) 100 000 Recognition of inventory sold and receivable from buyer 15 Jan. DrCr Cost of Sales (P&L)65 000 Trade Inventory (SFP) 65 000 Recognise cost of sales 10 Feb. DrCr Bank (SFP)114 000 Receivable (SFP) 114 000 Derecognise trade receivable due to settlement

11. Partial derecognition Order Goods Goods and Invoice Received Inspected/co mpared to Order Record Purchase Identify defects Returns (Out) Debit Note Credit Note (Supplier)

12. Partial derecognition Class example 2. Buyer Entity purchased and received trade inventory from Seller Entity on 15 Jan. 20.7 for R114 000 payable on or before 15 Feb. 20.7. The cost of the inventory to Seller Entity is R65 000. On 31 Jan. Buyer Entity returned good with a debit note of R34 200 incl. VAT as the trade inventory was of the incorrect specification. On 03 Feb. Seller Entity issued a credit note dated 03 Feb. for R34 200. The cost of the returned inventory to Seller Entity is R10 000. Both entities are VAT vendors and use the perpetual inventory system. Show the journal entries in the books of both Buyer Entity and Seller Entity.

13. Buyer Entity 15 Jan. DrCr Trade Inventory (SFP)100 000 VAT Input (SFP)14 000 Payable: Seller Entity (SFP) 114 000 Recognition of inventory purchased and payable to supplier 03 Feb. DrCr Payable: Seller Entity (SFP)34 200 Trade Inventory (SFP) 30 000 VAT Input (SFP) 4 200 Partially derecognise trade payable due to returns (out).

14. Seller Entity 15 Jan. DrCr Receivable: Buyer Entity114 000 VAT Output (SFP) 14 000 Sales (P&L) 100 000 Recognition of inventory purchased and payable to supplier 15 Jan. DrCr Cost of Sales (P&L)65 000 Trade Inventory (SFP) 65 000 Recognise cost of sales 03 Feb. DrCr Returns (In) (P&L) Why P&L?30 000 VAT Output (SFP)4 200 Receivable: Buyer Entity 34 200 Partial derecognition of payable due to returns (in). 03 Feb. DrCr Trade Inventory (SFP)10 000 Cost of sales (P&L) 10 000 Recognise write back in cost of sales

15. Discounts and initial recognition Trade inventories: At invoice price (as reduced by trade and similar discounts), excl. VAT. Sales: At invoice price (as reduced by trade discount and similar discounts), excl. VAT. Trade receivable/Trade payable: At invoice price (as reduced by trade discounts and similar discounts), incl. VAT.

16. Discounts 1) Trade discount: For selected customers, already included on the invoice. Class Example 3: Buyer Entity receives trade inventory and the invoice from Seller Entity on 15 Jan. 20.7 with a normal selling price of R114 000 payable on or before 15 Feb. 20.7. The invoice was net of a 5% trade discount. The cost of the inventory to Seller Entity is R65 000. Buyer Entity paid the outstanding amount on 10 Feb. 20.7 Both entities are VAT vendors and use the perpetual inventory system. Show the journal entries in the books of both Buyer Entity and Seller Entity.

17. Buyer Entity 15 Jan. DrCr Trade Inventory (SFP) (R108.3k*100/114) 95 000 VAT Input (SFP) (R108.3k*14/114) 13 300 Payable: Seller Entity (SFP) (R114k*95%) 108 300 Recognition of inventory purchased and payable to supplier after trade discount 10 Feb. DrCr Payable: Seller Entity (SFP)108 300 Bank (SFP) 108 300 Derecognise trade payable due to settlement

18. Seller Entity 15 Jan. DrCr Receivable: Buyer Entity (SFP)108 300 VAT Output (SFP) 13 300 Sales (P&L) 95 000 Recognition of inventory purchased and receivable 15 Jan. DrCr Cost of Sales (P&L)65 000 Trade Inventory (SFP) 65 000 Recognise cost of sales 10 Feb. DrCr Bank (SFP)108 300 Receivable: Buyer Entity (SFP) 108 300 Derecognise trade receivable due to settlement

19. Discounts 2) Cash discount: To encourage cash purchases. Class Example 4: Buyer Entity receives trade inventory and the invoice from Seller Entity on 15 Jan. 20.7 with a normal selling price of R114 000. The terms of the order were COD. The invoice was net of a 5% cash discount. The cost of the inventory to Seller Entity is R65 000. Buyer Entity paid the outstanding amount on delivery. Both entities are VAT vendors and use the perpetual inventory system. Show the journal entries in the books of both Buyer Entity and Seller Entity.

20. Buyer Entity 15 Jan. DrCr Trade Inventory (SFP) (108 300*100/114)95 000 VAT Input (SFP)13 300 Bank (SFP) (R114 000*95%) 108 300 Recognition of inventory purchased after cash discount Seller Entity 15 Jan. DrCr Bank (SFP)108 300 VAT Output (SFP) 13 300 Sales (P&L) 95 000 Recognition of cash sale after discount 15 Jan. DrCr Cost of Sales (P&L)65 000 Trade Inventory (SFP) 65 000 Recognise cost of sales

21. Discounts 3) Settlement discount: To encourage early payment of outstanding amount. If it is probable that the customer will use the settlement discount (evidenced by previous experience), the transaction is reduced by the settlement discount (both buyer and seller). If it is not likely that the customer will use the settlement discount (evidenced by previous experience), the transaction is not reduced by the settlement discount (both buyer and seller)

22. Discounts Class Example 5: Buyer Entity receives trade inventory and the invoice from Seller Entity on 15 Jan. 20.7 with a normal selling price of R114 000. The invoice is payable on 15 Feb. 20.7. However Seller Entity offers a settlement discount of 7% if payment is made within 10 days. Buyer Entity always takes advantage of the early settlement discount. The cost of the inventory to Seller Entity is R65 000. Scenario 1 : Buyer Entity paid the outstanding amount on 23 Jan. 20.7. Scenario 2: Buyer Entity paid the outstanding amount on 10 Feb. 20.7 Both entities are VAT vendors and use the perpetual inventory system. Show the journal entries of both scenarios in the books of both Buyer Entity and Seller Entity.

23. Scenario 1 Buyer Entity 15 Jan. DrCr Trade Inventory (SFP)93 000 VAT Input (SFP)13 020 Payable: Seller Entity (SFP) (R114k*93%) 106 020 Recognition of inventory purchased and payable to supplier after settlement discount 23 Jan. DrCr Payable: Seller Entity (SFP)106 020 Bank (SFP) 106 020 Derecognise trade payable due to settlement

24. Seller Entity 15 Jan. DrCr Receivable: Buyer Entity106 020 VAT Output (SFP) 13 020 Sales (P&L) 93 000 Recognition of inventory purchased and receivable 15 Jan. DrCr Cost of Sales (P&L)65 000 Trade Inventory (SFP) 65 000 Recognise cost of sales 23 Jan. DrCr Bank (SFP)106 020 Receivable (SFP) 106 020 Derecognise trade receivable due to settlement

25. Scenario 2 Buyer Entity Initial entry will be the same on 15 Jan. 25 Jan. DrCr Trade Inventory (SFP)7 000 VAT Input (SFP)980 Payable: Seller Entity (SFP) (R114k*7%) 7 980 Recognise adjustment: settlement discount of 7% forfeited due to late payment 10 Feb. DrCr Payable: Seller Entity (SFP)114 000 Bank (SFP) 114 000 Derecognise trade payable due to settlement

26. Buyer Entity Initial entry will be the same on 15 Jan. 25 Jan. DrCr Receivable: Buyer Entity (SFP)7 980 VAT Output (SFP) 980 Sales (P&L) 7 000 Recognise adjustment: settlement discount of 7% forfeited due to late payment 10 Feb. DrCr Bank (SFP)114 000 Receivable (SFP) 114 000 Derecognise trade receivable due to settlement

27. Payables Reconciliation Only by purchasing entity. Purchasing entity keeps a record of the payable amounts to supplier Supplier also send a statement monthly to confirm and alert the purchasing entity of, the outstanding amount. Differences may occur: o Timing differences, and o Errors Reconcile the payable amount with the statement from the supplier – “complete” the suppliers statement. Starting point of the reconciliation: Balance per supplier’s statement Errors made by purchasing entity are corrected (pass correct journals) Differences not recorded by the supplier are included in the payables reconciliation

28. Doubtful Debts 1). Write-off of receivables: Credit risk – Risk that customer will not pay the outstanding amount Derecognise receivable when it no longer satisfies definition and recognition criteria. (i.e. it is no longer probable that econ benefits will flow into the entity). Write-off must be approved in writing by the business owner or credit manager – derecognize as soon as write-off approved.

29. Doubtful Debts Class example 7: On 30 Sept. 20.7, the credit manager of Seller Entity authorized the write-off of the debt owed by Crooks Entity as they are not traceable and it is not probable that the amount will be recovered. The outstanding debt is R17 1000. Seller Entity is a registered VAT vendor. On 20 Dec. 20.7, with the assistance of debt collectors, the owner of Crooks Entity was located and “convinced” to pay the outstanding amount. He did so immediately. Record the transactions in journal entries.

30. 30 Sep. DrCr Doubtful debts (P&L)15 000 VAT Input (SFP)2 100 Receivables: Crooks Entity (SFP) 17 100 Derecognition of receivables as per credit manager authorisation 20 Dec. DrCr Bank (SFP)17 100 Doubtful debts (SFP) 15 000 VAT Input 2 100 Doubtful debts recovered from Crooks Entity.

31. Doubtful Debts 2). Impairment of receivables: At each reporting date – consider objective evidence that value of financial asset or group of financial assets has decreased. (Examples: Account in arrears, customer facing financial difficulty, etc.) If objective evidence exists, impair the receivables. Impairment loss: Carrying value less estimated cash that would be received from the customer. Recognise an allowance for doubtful debts (credit bal.)

32. Doubtful Debts Class example 8: On 1 Jan. 20.7, the allowance for doubtful debts of Supplier Entity is R186 500. The credit manager authorized the write-off of Phantom Entity with a balance of R21 204 on 20 Aug. 20.7 as they have been liquidated. On 31 Dec. 20.7, after an analysis of the individual receivables, it was established that the allowance for doubtful debts should be R207 000. Required: Record the above in a journal entries for Supplier Entity for the above transactions.

33. 20 Aug. DrCr Doubtful debts (P&L)18 600 VAT Input (SFP)2 604 Receivables: Phantom Entity (SFP) 21 204 Derecognition of receivables as per credit manager's authorisation 30 Dec. DrCr Doubtful debts (P&L) (207 000-186 500)21 000 Allowance for doubtful debts (SFP) 21 000 Recognise allowance for doubtful debts for which recoverability is doubtful.

34. Additional issues Disclosure: Credit Balances for Accounts Receivable (eg. received a deposit from a customer) – disclose under Accounts Payable at year end Debit balances for Accounts Payable (eg. we paid a deposit to a supplier) – disclose under Accounts Receivable at year end. Note: Only for disclosure purposes