Net income.


M

Mike Richards

If you don't "record" a purchase you've made in December 2003 but the amount
is included it in your ending inventory for 2003, what's the effect on net
income for that year? I don't understand how it could not be recorded yet
still be in your ending inventory.

Michael
 
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M

MASON

Mike Richards said:
If you don't "record" a purchase you've made in December 2003 but the amount
is included it in your ending inventory for 2003, what's the effect on net
income for that year? I don't understand how it could not be recorded yet
still be in your ending inventory.

Michael
Hello Mike

If you do not record a purchase the entry that is missing is a
dr to purchases or
to inventory then a credit to accounts payable . It could still be in
your ending inventory
because perhaps at year end they did a physical inventory count and
realized they had an extra unit or units on hand . At this point my
assumption would have been that we
had not recorded all the vendor invoices for the year . So my entry
would be an accrual
DR. Inventory or Purchases then CR Accounts Payable Accrued .THis
entry would
reverse in the following year when you finaly book the vendors
invoices and the two
entries would wash each other out for no effect. So in conclusion if
you do not
record a purchase and do not adjust ending inv. upwards with a credit
to an income
statement account the net effect on income is zero . I hope this helps

Regards Mason
 
C

Chris Luper

If you don't "record" a purchase you've made in December 2003 but the
amount

Hello Mike

If you do not record a purchase the entry that is missing is a
dr to purchases or
to inventory then a credit to accounts payable . It could still be in
your ending inventory
because perhaps at year end they did a physical inventory count and
realized they had an extra unit or units on hand . At this point my
assumption would have been that we
had not recorded all the vendor invoices for the year . So my entry
would be an accrual
DR. Inventory or Purchases then CR Accounts Payable Accrued .THis
entry would
reverse in the following year when you finaly book the vendors
invoices and the two
entries would wash each other out for no effect. So in conclusion if
you do not
record a purchase and do not adjust ending inv. upwards with a credit
to an income
statement account the net effect on income is zero . I hope this helps
This answer is correct. It is an error to not record the accrued purchase of
goods you have received. Purchasing inventory is a non-income statement
activity.
 
M

Mike Richards

"So in conclusion if
you do not
record a purchase and do not adjust ending inv. upwards with a credit
to an income
statement account the net effect on income is zero . I hope this helps"

I'm still not quite getting it. I didn't record a purchase in the books to
inventory (perpetual), but the amount is reflected by the physical count.
I'm all right here.

But, I still don't understand how this would effect my net income for the
current year and the next year. If I don't record the purchase, wouldn't my
cost of goods available be understated and therefore my cost of goods sold
understated, which overstates my net income for the year? The
counterbalancing effect is hard for me to visualize.

sincerely Michael
 
W

Wolfgang Rochow

Mike Richards said:
"So in conclusion if
you do not
record a purchase and do not adjust ending inv. upwards with a credit
to an income
statement account the net effect on income is zero . I hope this helps"

I'm still not quite getting it. I didn't record a purchase in the books to
inventory (perpetual), but the amount is reflected by the physical count.
I'm all right here.

But, I still don't understand how this would effect my net income for the
current year and the next year. If I don't record the purchase, wouldn't my
cost of goods available be understated and therefore my cost of goods sold
understated, which overstates my net income for the year? The
counterbalancing effect is hard for me to visualize.

sincerely Michael
Perpetual inventory refers to a bookkeeping method in that the accounting
records "show" what you out to find in your warehouse or storage facility.
When you actually take a physical inventory and document what you really
have, it is not uncommon to come up with a number of units and values that
do not match the "perpetual record."

This variance can be positive or negative, the net of which can be the
result of a combination of things e.g. a reduction is often referred to as
shrinkage which can be the result of theft, spoilage (if perishable),
breakage, clerical/shipping mistakes (erroneously shipping 13 items (a
baker's dozen) when you should have shipped just 12 a normal dozen) add to
that an unrecorded purchase at the end of year that is included in the
count, or merchandise that has been invoiced and recorded properly but for
some reason not yet received and therefore not counted, stir up this mess
with the human factor and it is conceivable that the net variance is looked
at with distain as "being to much effort to research and not material
enough" in the scheme of things, and the lazy/simple solution adopted by
some is to adjust the perpetual inventory to the valuation assigned to the
inventory count with the offset going to Cost of Sales.

When it is inaccurately dealt with like that, that is when it impacts to net
income for the year.

Wolfgang
 
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Thank You very much for the info

Effect on the NI of Unrecorded purchases

I have been reviewing for my exams in auditing problems and I was experiencing the same problem of the Thread starter. (Lucky I haved googled this thread!..)

I can't also visualize the counter-balancing effect before I have read the replies. Thank you very much. The explanations helped me alot.
 

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