help about FOB shipping question

[konantheone]

<b>suppose that a byer purchased good with FOB Shipping Terms so he is supposed to pay the FOB cost but the seller paid it
so what will be the needed entries at the BUYER ?</b>

[kamranACA]

Dear,

Post your question with some details or some dummy figures at least if you want to have a refined answer. Also elaborate whether or not letter of credit has ben used by buyer.

Normally such terms are used for import export trading because locally instead of FOB , C&F or CIF, the terms used are ex-store, ex-factory, premises delivery etc.

As a gneral principle the following entry has to be recorded

.........Letter of credit account (DEBITED)
.........All refundable taxes paid on imports (DEBITED)

.................................Bank account (CREDITED)

Every sort of payments made in connection with such procurement against one L/C are recorded as per above entry. If some payments are made after availing credit time, the payment etry could be routed from Creditors account as well.


......... Inventories / Stores and spares / raw material (DEBIT)


...................................Letter of credit account (CREDIT)


This entry is made to transfer the L/C account to proper account head after complete valuation on the basis of all cost components.


The above two entries have to be recorded invariablly. Now if the related costs including freight, insurance and carriage etc are paid by the buyer, these will also make part of the L/C cost. If these are paid by seller, there arises no question.


Regards,



KAMRAN.

[konantheone]

thanks alot for your full detalied replay but i am afraid that letter of credit didnot use yet
so what will be the correct entry at the buyer records where the Freight costs is FOB SHipping and the seller who paid for it ?
THanks Again for reply and thanks in advance

[unseendemon]

Unless they renegotiate the terms of the contract, the entries would be easy. Basically, the seller would record a receivable from the buyer for the cost that he erroneously paid. If the buyer does not agree to a renegotiation then the expense would be recorded as selling and distribution cost.

[konantheone]

thanks alot for all replies
but would you please write to me in the form of entries?
at the buyer records thanks again

[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.

[konantheone]

thanks alooot Mr Kamran I am so grateful for your help