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Simples - recognition of income and expenses

When to recognise

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Hi all I am going round in circles with this client and it's been a long week and I'd like some outsider insight.

scenario - client has a contract to sell 100 kits at £10 each - raises a sales invoice for £1000.

the client confirms this is a non cancelleable contract and money is received for the full amount.

client buys 100 test kits at £5 each and has them delivered and pays for them.

At the year end only 50 of the test kits have so far been used up as the end user is delaying the testing (which they can do)

so - value of stock on the company balance sheet - is this assumed to have sold all 100 kits (even though technically they haven't been delivered)?

value of sales/ prepaid income - as the contract is non cancellable is all income counted or is 50% counted as income in advance?

off for a gin - thanks 

Replies (7)

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By frankfx
20th Aug 2020 21:49

Your client is holding 50 units of kit which belongs to the end customer.

Therefore not part of client stock.

If the stock was super valuable.

Prone to pilfering

Difficult to source

Difficult to store in good condition.
And so on.

He would enter into a separate contract with end customer for storage and risk.
I mention this to emphasise that there is strong argument to assert that the items are not your client's stock.

Sold and delivery ?

Place the items on a pallet, and mark them" sold awaiting collection"?

I will open another Gordon's.
You supply Ice and Lemon, please.

Thanks (1)
By Duggimon
21st Aug 2020 08:29

Agreed, your client owns no stock from this transaction, the purchase and sale have been made and should be recognised as such, they are now storing someone else's goods for them.

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By paulwakefield1
21st Aug 2020 09:24

I agree.

Have a look at FRS102 23A.3 "Example 1"

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Hallerud at Easter
By DJKL
21st Aug 2020 10:07

To be clear though am I right in thinking the answers are correct only because in your example the particular customer stock is readily identifiable?

If that were not the case, and your client say bought thousands of the widgets which were held in his warehouse at year end and only some possibly would be used with this contract or possibly none would be used, as your client might sell all those in hand and purchase more to deal with this customer in the future, in such a circumstance would not an adjustment Dr sales Cr accrued income be more appropriate?

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Replying to DJKL:
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By paulwakefield1
21st Aug 2020 10:32

I agree (although if I was being pernickety I think it would be deferred income rather than accrued income or even just a straightforward payment on account depending on the circumstances inc VAT implications).

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Replying to paulwakefield1:
Hallerud at Easter
By DJKL
21st Aug 2020 12:43

Thanks

Afraid I am now past the point of no return getting excited about accounts wording, these days if I get things roughly correct I think I have got a result.

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Replying to DJKL:
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By paulwakefield1
21st Aug 2020 13:07

:-)

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