Chapter 7- Amounts Receivable And Amounts Payable

Question 1

Key Concept: Trade receivables

Answer 1

Trade receivables arise when a business sells goods or services to a third party on credit terms, i.e. when goods or services are sold on the understanding that payment will be received at a later date.

Question 2

Key Concept: Prepayments

Answer 2

Prepayments arise when the business has paid for a service in advance of using it. The key question that must be considered when a payment is made is whether the benefit has been used up or whether there is still some future benefit to be obtained. If there is a future benefit to the business we have an asset; if there is no future benefit we have an expense. The expense must then be matched with the revenue earned in the period in question.

Question 3

Key Concept: Payables and Accruals

Answer 3

• Payables are amounts owing at a point in time, the amounts of which are known.
• Accruals are amounts owing at a point in time, although the precise amount owed is not known with certainty.

Question 4

Describe what trade payables are and when they arise.

Answer 4

A trade payable represents an amount owing by an enterprise to a third party. They arise when goods or services are supplied in advance of payment being made.

Question 5

Explain the difference between trade payables and accruals

Answer 5

In the former case an invoice for the goods or services supplied has been received, whereas in the latter no invoice has been received at the time the accounts are drawn up; therefore an estimate of the amount owing for the goods or services provided is made.

Question 6

Why are receivables and prepayments classified as current assets?

Answer 6

Because they will change their form in the next year, in the former case to cash and the latter normally to services.