Is it true that, when one firm sells to another on credit, the seller records the transaction as an account receivable while the buyer records it as an account payable and that,
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Is it true that, when one firm sells to another on credit, the seller records the transaction as an account receivable while the buyer records it as an account payable and that, disregarding discounts, the receivable typically exceeds the payable by the amount of profit on the sale? |
Verified Answer
No, for a credit sale involving a certain discount, the buyer and the seller will record the transactions at the same amount.
Consider a credit sales transaction amounting to $90, after offering a discount of $10. The seller will record the buyer as accounts receivable and buyer will record the transaction as accounts payable. However the amount at which the transaction is recorded by both the parties will be $90. The discount amount is disregarded as only the net amount receivable (or payable) is relevant. The profit element of the transaction will be included by the seller in the sales amount. This is because accounts receivable (or payable) should reflect the total amount receivable from the credit transaction, which is $90. If this amount is adjusted with profit (or loss), the value of receivables will be incorrect.
Hence, the statement is partially correct. The seller ill recognise the credit transaction as accounts receivable and buyer will recognise the same as accounts payable. However, the amount reported by the seller will not exceed that the buyer by profit element.
