Trade payables and trade receivables Chapter 9

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

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

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

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

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

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

Recognition Class example 1. Buyer Entity received trade inventory and the invoice from Seller Entity on 15 Jan (ordered on 10 Jan. 20.7) for R payable on or before 15 Feb The cost of the inventory to Seller Entity is R Buyer Entity paid the outstanding amount on 10 Feb 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.

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

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

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

Partial derecognition Class example 2. Buyer Entity purchased and received trade inventory from Seller Entity on 15 Jan for R payable on or before 15 Feb The cost of the inventory to Seller Entity is R On 31 Jan. Buyer Entity returned good with a debit note of R incl. VAT as the trade inventory was of the incorrect specification. On 03 Feb. Seller Entity issued a credit note dated 03 Feb. for R The cost of the returned inventory to Seller Entity is R 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.

Buyer Entity 15 Jan. DrCr Trade Inventory (SFP) VAT Input (SFP) Payable: Seller Entity (SFP) Recognition of inventory purchased and payable to supplier 03 Feb. DrCr Payable: Seller Entity (SFP) Trade Inventory (SFP) VAT Input (SFP) Partially derecognise trade payable due to returns (out).

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

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.

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 with a normal selling price of R payable on or before 15 Feb The invoice was net of a 5% trade discount. The cost of the inventory to Seller Entity is R Buyer Entity paid the outstanding amount on 10 Feb 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.

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

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

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 with a normal selling price of R 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 R 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.

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

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)

Discounts Class Example 5: Buyer Entity receives trade inventory and the invoice from Seller Entity on 15 Jan with a normal selling price of R The invoice is payable on 15 Feb 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 R Scenario 1 : Buyer Entity paid the outstanding amount on 23 Jan Scenario 2: Buyer Entity paid the outstanding amount on 10 Feb 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.

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

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

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%) Recognise adjustment: settlement discount of 7% forfeited due to late payment 10 Feb. DrCr Payable: Seller Entity (SFP) Bank (SFP) Derecognise trade payable due to settlement

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) Recognise adjustment: settlement discount of 7% forfeited due to late payment 10 Feb. DrCr Bank (SFP) Receivable (SFP) Derecognise trade receivable due to settlement

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

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.

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

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.)

Doubtful Debts Class example 8: On 1 Jan. 20.7, the allowance for doubtful debts of Supplier Entity is R The credit manager authorized the write-off of Phantom Entity with a balance of R on 20 Aug 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 R Required: Record the above in a journal entries for Supplier Entity for the above transactions.

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

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