Manager - Finance & Accounts
58399 Points
Joined June 2010
Q1: Credit Invoice for Returned Sale
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Sale amount: INR 1,200,000
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Contribution margin: 40% (means variable cost is 60%)
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Customer returned goods due to rust; sale needs to be credited.
Accounting treatment:
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Debit Sales Return (or Sales) by INR 1,200,000 (reduce revenue)
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Credit Accounts Receivable by INR 1,200,000 (reverse amount receivable)
Regarding Cost of Goods Sold (COGS) and Inventory:
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Since contribution margin is 40%, cost = 60% of sales = 0.6 × 1,200,000 = INR 720,000
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Reverse COGS: Debit Inventory by 720,000
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Credit COGS by 720,000
Summary Journal Entries:
Q2: Goods Ordered but Partial Shipment Received
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Order amount: INR 50,000,000
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Three shipments: each ~16,666,667
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Two shipments received; third shipment at sea expected May 5, 2022
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Payment on receipt of all goods.
Presentation in April 2022 Monthly Report:
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Record only goods physically received (two shipments):
Inventory and Purchase expense = 2 × 16,666,667 = INR 33,333,334
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Third shipment is in transit, so under Goods-in-Transit, it should be disclosed in notes, not yet recorded in inventory or purchases.
Summary:
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Inventory includes two shipments only.
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Disclosure of third shipment under transit assets or notes.
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No liability recorded since payment is only on receipt of all goods.
Q3: Recovery from Bad Debts after Bankruptcy
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Overdue receivable: INR 1,000,000
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Provision for bad debts made earlier: INR 1,000,000
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Received INR 400,000 from bankruptcy estate.
Accounting treatment:
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When the receivable was written off:
Debit Bad Debt Expense 1,000,000
Credit Provision for Bad Debts 1,000,000 (assuming provision was already created)
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Now receiving 400,000:
Debit Cash/Bank 400,000
Credit Bad Debt Recovery (Other Income) 400,000
Presentation:
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Net bad debts in monthly report reflect only 600,000 loss (original 1,000,000 less 400,000 recovery)
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Cash inflow of 400,000 reported as income.
Q4: Steps to Calculate Inventory for Monthly Report
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Physical Stock Counting:
Conduct a physical count of goods at month-end or use reliable perpetual inventory system data.
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Valuation:
Apply the chosen inventory valuation method (FIFO, LIFO, Weighted Average, etc.).
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Include Goods in Transit:
Include goods shipped to you and in transit if legal ownership has passed.
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Exclude Consignment Goods:
Do not include goods held on consignment.
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Check for Obsolescence:
Adjust inventory for damaged, obsolete, or slow-moving items.
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Apply Lower of Cost or Net Realizable Value (NRV):
Inventory should be valued at the lower of cost or NRV as per accounting standards.
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Prepare Inventory Valuation Summary:
Summarize quantity × unit cost for all inventory items.
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Disclosure:
Mention the valuation method and any significant adjustments in notes.