help about FOB shipping question

[kamranACA]

Dear,

In FOB arrangement such costs are in fact paid by Buyers. If any such cost has been mistakenly paid by the sellers, they will record it as receivable from the Buyers as under

................Receivable from Buyers (Debit)

...........................Bank account (from which such payment has been made) (Credit)


Then the sellers will discuss the issue with the buyers to resolve the matter. Two scenarios can emerge now.

SCENARIO 1

If their correspondence does not result in dis-agreement and Buyers accept the liability, the sellers and buyers would record following entry

SELLERS BOOKS

....Bank account (in which Buyers will re-imburse such cost incurred by sellers) (DEBIT)

............................... BUYERS' ACCOUNT (already debited) (CREDIT)


BUYERS' BOOKS

......Inventory/Raw material/Stores and spares (or L/C if it has been used) (DEBIT)

........................ Bank account (from which payment is made to sellers) (CREDIT)

The buyers will not record such cost as expense, since it has to make the cost of the item being traded in. In case such item has been consumed in production process fully and has made the part of finished goods, the buyers may directly debit the relevant consumption head instead of inventory account head. Further, in case if such item purchased was sold by buyers prior to finalizing this issue with sellers, any such payment made by buyers will be expensed out in relevant head of Cost of Sales, instead of debiting the inventory acount or inventory consumption account. These are just the possibilities.

SCENARIO 2

If the correspondence and discussion fails to resolve the matter and buyers due to whatever reason do not accept their liability, then buyers will obviously make no entry and the seller will have to recognise such errorneously made payment as its own expense as under

SELLERS BOOKS

....................Distribution and selling cost - frieght (DEBIT)

..................................... Buyers' account (already debited) (CREDIT)


BUYERS BOOKS

No entry will be passed.



I hope this will help to understand the problem.


Regards,



KAMRAN.