Can Accounts Payable be negative?

[abbas_chinikham]

We are in trading business. We have a customer/supplier from whom we purchases as well as sell our product. So I am confuse whether to use one head or 2 different head for the same company.

The issue is if I make 1 head as Account Payable and we sell more good than we had purchased, this will cause Account Payable to be negative.

Can we have negative Account Payable?

[kamranACA]

Dear,

You can have four types of balances with such parties i.e. debtors (Debit), advances from customers (Credit), creditors (CreDit), and advances to suppliers (Debit).

So at any point of time the credit balance could be regarded as Creditor or Advances from Customers. Like wise a debit balance could be a Debtor or Advance to Supplier.

The individual balances do not count a lot where you have different sort of transactions at the same time. You can either open it in Debtors or Creditors. However, when there would be net Debit balance at a given balance sheet date it could be grouped in Debtors or Advances to Suppliers and when the net balance would be credit it could be grouped in Creditors or Advances from Customers, depending upon the nature of the balance.

In fact proper grouping is the thing which matters while drafting the financial statement.

You can open two accounts for facilitation purpose. However, you must have to take the net balance to the balance sheet. IAS 39 says that such financial instruments can be reported on net basis if legally enforceable right of set off exists. In your case I guess such right does exist and there is no harm in reporting/grouping the balance on net basis.

If you need further clarification, let me know.


Regards,


KAMRAN.

[abbas_chinikham]

Thanx Kamran .. So base on ur suggestion, I will make a Receiveable account (As we usually sell more than we purchase).

[Hasaan]

You have to prepare receivable as well as payable accounts if u r selling or purchasing respectively on credit basis.
Opening receivable account is not connected with the "more sales than purchases" scenario.

even if ur selling less than u purchase, if u r trading goods on credit basis you have to open trade receivables and trade parables accounts separately.

[kamranACA]

Dear,

It's purposeless to discuss it at length since it's matter of choice and system in place.

There are some benefits of opening two accounts but lots of demerits as well. One has to see how he or his system works better. Off course some systems will not take debit entries in credit accounts and credit entries in debit accounts. It's a demerit/limitation of such systems.


Regards,


KAMRAN.

[Uzair]

Yes right hasaan it is to be recorded separately.
Because first of all offsetting is not allowed in this case,, see para2, IAS1.
The only instance in which such an offsetting will be allowed is where he re-purchases the goods sold,, se para13, IAS 18.

Now for your orignal question. Yes account payable can be negative and it'll be advance to your customer and will appear as an asset in your balance sheet.

[kamranACA]

Uzair,

I advise you to go back and study the paragraphs you have referred. These have nothing to do with the issue being discussed.

Mind it, it's not the setting off pertaining to recognition of sales or purchase that is being discussed. Rather, it is setting off of the financial instrument (liability or asset) which has been discussed.

I cannot force you but would like to suggest that please don't advise the others on the matters which you don't understand properly. This would ruine the concepts instead of clarifying the issues.

Regards,


KAMRAN.

[Star]

Dear,

In fact, party balance may be positive or negative at any reporting period if we used to buy and sell the goods as well.

In my opinion, one should open the party ledgers in the Chart of Account and should record debits (due to sale and purchase return) and credits (due to purchase and sale return)in the specific party ledger account.

At year end we shall see some positive as well as negative balances in party ledgers.

What to do for financial reporting purpose-------------

Total all the debits and report under the account head - A/c Receivable

Total all the credit and report under the the account head - A/c Payable.

Dear if some simple transactions have simple treatement why we refer to IASs. And off course the above, treatement do not contravenes the IASs.


Regards,

*

[Uzair]

Well as far as I remember para 32 of IAS1 does talk about setting off of assets and liability.
But never the less I won't argue as u r senior to me n much more experienced and also I've studied much of it on my own,, so yea mayb a bit off track...

[kamranACA]

Star/Uzair

If you will open two accounts of a similar party on debit and credit side and will gross up their balances to present in the Balance sheet, it would not be in line with IASs.

Star, please remember there is nothing in accounting which could be done without considering the reporting frame-work (e.g. IFRSs). I stress nothing means nothing. You may one day understand it.

I wish you guys should read IAS 32. Its paragraphs from 32-50 along with application guidelines paragraphs AG38 to AG39 may help you clearing your concepts.

Uzair, first I must tell you that in your previous post you quoted paragraph 2 of IAS 1 instead of paragraph 32. It may be due to typographical error. Further, paragraph 32 of IAS 1 is a broad guideline and makes such offsetting subject to all other IASs/IFRSs to follow. It states that such offsetting will not be made unless it is REQUIRED or PREMITTED by a standard or an interpretation.

If you will read the paragraphs of IAS 32 referred by me, you will come to know that this standard used the following words

QUOTE

A financial asset and a financial liability SHALL BE OFFSET and the net amount presented in the statement of financial position when, and only when, an entity

(a) currently has a legally enforceable right to set off the recognised amounts; And

(b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.


UNQUOTE

The words "SHALL BE OFFSET" have been used instead of "permitted to offset". This makes it a requirement if you can understand. Now whether the conditions of offsetting are fulfilled are not, is the only question. I don't find any issue with it in the circumstances written by the person who made this particular query. If you do find something please let me know.

I hope this may clarify the things.

Yes, in the end I must again say that nothing in accounting can happen without considering the guidelines of applicable reporting framework, whatever is it.

Regards,


KAMRAN.

[kamranACA]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Uzair</i>
<br />Yes right hasaan it is to be recorded separately.
Because first of all offsetting is not allowed in this case,, see para2, IAS1.
The only instance in which such an offsetting will be allowed is where he re-purchases the goods sold,, se para13, IAS 18.

Now for your orignal question. Yes account payable can be negative and it'll be advance to your customer and will appear as an asset in your balance sheet.

<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Uzair,

This is just to tell that you mentioned paragraph 2 of IAS 1.


Kamran.

[Uzair]

Oh i'm extremly sorry I missed the 3 earlier on (

[Uzair]

And yes thanks Kamran for this detailed explanation,, I certainly had neva gone thru IAS 32 before.

Hey Kamran one more thing man,, can u like refer me some good guide to IFRS I've really bin looking for one for quiet some time.

I would also rather prefer one written bu you as your explanations i.e ur unquote versions click to me at once ;-)

[kamranACA]

Uzair,

The choice and suitability of book depends upon the level at which you are. You may attend Mr. Maqbool's lectures if you afford. I had some disagreements with him on certain issues of IFRS interpretted by him and have expressed it to him straightforwardly in some CPD meetings to which he did not like.

Anyway, he is one of the best interpreters and teachers in Pakistan. You can also use his interpretaions to IFRSs (latest volume) probably referred as Technical Reference Manual (TRM).

However, I felt the book titled "Gripping IFRS - Volume 1" made available at ICAP recently is a best effort. It's volume II is probably awaited. I recommend this book.

Regards,


KAMRAN.

[Star]

Dear all,

I dont mean to open two accounts of same party on debit and credit side.

Just open one account and define its nature as asset or liabilty.

Check at year end its balance negative or positive and then report accordingly,

Regards,

*