Question

merchandise so that the customer will buy, and store makes it profit. O 3. Discuss accrual accounting principles and apply these to a business that you: work for, have worked for, have observed, or have researched. Provide specifics and ensure that your responses are unique. 4. Discuss the practice of purchase/payment discounts. What relationship does accounts payable have to this activity? 5. What is shrinkage? Select a business and provide examples of internal and external shrinkage occurring in that business. How can those be mitigated? Ensure that your posting is unique from your classmates' posts. D. Focus

Answer 1

Answer 3:

We have two main principles in Accrual accounting: Revenue Recognition principle and Matching Principle.

Revenue recongnition principle states that record the revenue in the period in which the sale occurs or in which the service is rendered. The period in which cash is realised out of sale or service rendered is not relevant for revenue recognition and there may be a considerable time gap between the two. The concept being that the organsation making the sale, is entitled to receive a sum of money on transfer of risks and rewards associated with the product and hence revenue is to be realised immediately.

Example: Hospitality industry: Service staff was being provided by a service provider to a Hotel throughout the month. However, the billing was only made in next month based on the total attendance of staff provided for each month. Hence an accrual for revenue was being made in each month based on staff provided, though the billing and payment was made in subsequent month.

Matching Principle in Accrual Accounting states that record all the expenses in the same period in which revenue was recognised to which they have contributed to generation of revenue. The actualy payment may be made at a later date but the expenses need to be recorded in the period in which they were incurred.

Example: Hospitality industry: In same example above the service provider was paying wages to the staff next month based on their attendance and leaves availed. However the service was being consumed in last month and accordingly an accrual for wages expense is to be made in the month in which staff provided services and not in the next month in which payment was made. This expense accrual will match the accrual billing on Hotel raised for the service provided - matching concept.

Answer 4:

Practise of Purchase Discount/Cash Discount : We have two practices for treating cash discount at the time of purchases - Gross method and net method.

In Gross method we record the entire amount of purchases made and cash discount is ignored here. Cash discount will be accounted for only at the time payment is made within the discount period and cash discount is availed.

In Net method we only record the net amount of purchases (net of cash discount) and the payment is made within the discount period so that only the net payment is made to settle off the liability. This method is followed by cash rich organisations who are sure to make payments on time and get benefit of cash discounts or by the organisations who follow a policy of making payments within discount periods to gain advantage of payment terms cash discount.

Relationship of Accounts payable with above activity:

In Gross method the Accounts payable willbe recorded at Gross amount of Sales while in Net method Accounts payable will be recorded at Net amount (net of cash discount) of Sales.

A simple example will clear this:

Sales of $500 at 2% cash discount if paid in 30 days		Sales of $500 at 2% cash discount if paid in 30 days
Gross Method		Debit	Credit		Net Method		Debit	Credit
Purchases	Dr	500			Purchases	Dr	490
Accounts Payable	Cr		500		Accounts Payable	Cr		490
Accounts Payable	Dr	500			Accounts Payable	Dr	490
Cash	Cr		490		Cash	Cr		490
Cash Discount Received	Cr		10

Answer 3.

Shrinkage is prevantable inventory loss and can be attributed to human behaviour mainly.

Internal Shrinkage: Inventory Loss attributable to own employees or to persons within the organisation

External Shrinkage: Inventory loss attributable to persons outside the organisaion like customers, thieves, etc.

These can be mitigated by employing strict inventory controls both internal and external, conducting checks - both automated and manual and by creating a sense of awareness regarding shrinkage, making employees accountable for loss due to shrinkage, CCTV controls, etc.