Creditors Debit Balances

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Monil Shah (Querist)
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22 April 2009 Suppose we are manufacturing company which have given payments for some purchases of goods as well as store items. The material were used in this financial year. But the bills are not yet come till date. The crediors are showing DR balances. We want to finalise our accounts and audit and cannot wait for the bills to come. The payments made to creditors without bill booked for the above are shown as advance s in our books. Their would be no impact on profits for goods as the same would be adjusted in Consumption of Raw material. But for stores item purchased, Profit would be shown higher due to the non booking of bills.

I wanted to Know whether the treatment of showing advances and adjusting the same in consumption of raw material is correct?

Whether purchases are to be booked on basis of arrival of bills or use of material?

Secondly is their any other way to account this purchases without bills being received for same. Please suggest for Goods as well as services separately.

CA RAMESH KUMAR AHUJA

CA RAMESH KUMAR AHUJA (Expert)
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22 April 2009 Liability on account of supplies be booked so as to maintain the accounts on mercantile basis. Otherwise, it will not depict true and fair view of accounts.

Manmohan ACA, CS

Manmohan ACA, CS (Expert)
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22 April 2009 I also faced the same problem 3 months ago.

The logic is - In the merchantile system of accounting purchases are to be booked only on the basis of on receiving the invoice i.e. Purchase A/c is debited and Creditors A.c is credited when invoice from creditors is received .Because if you do not get the invoice the contact of sale is not completed and as soon as you get the invoice- and acdcept the invoice the contact is completed and you gets right to credit the supplier in your book
But if the good has been received but invoice is not received and the purchser used the goods, the purchaser binds himself in to the contract and as soon as he used the good liability towards creditors arises in his book so he must record the entry of purchase in his book.

in short a purchase must be recorded in book of accounts
* only on received on invoice
* or when purchased goods is used
-- which ever is earlier

Hope it help you ,