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FUNDAMENTALS OF FINANCIAL ACCOUNTING
FURTHER ASPECTS OF LEDGER ACCOUNTING
supply of letterheads. If, for example, the accountant’s fees are $500 and the letterheads are
$200, then the printer will pay $300 to the accountant. The accountant will record fees of
$500 in his books and the cost of stationery $200. The printer will record sales of $200
and accountancy fees $500. It would be incorrect for the accountant just to record fees of
$300 and to ignore the stationery expense; it would be incorrect for the printer just to
record accountancy fees of $300 and to ignore the sale of $200.
Thus these transactions are recorded in the books at the full amount. Where there is a
barter for the exchange of goods, these must not be ignored; where there is a difference
in the value of the goods exchanged, and some cash changes hands, then this transaction
is recorded at the gross amounts and is not netted off. Although the inclusion of these
transactions in the accounts at the gross, as opposed to the net amount, does not affect
profi t, the sales and the expenses would not be correctly stated if no adjustment was made
for the barter.
It is not always easy to place a value on the goods exchanged if a business sells goods
but is negotiable on the price it charges. This is particularly important if the exchange
involves a non-current asset. For example, a car dealer (C) may buy a second-hand car for
$15,000 and advertise the car at $20,000, but expect to receive only $19,000 and may be
prepared to sell at $18,000, if it is a poor trading month (the customer will not know that
C is prepared to do this). Suppose another business (G) has goods in inventories which
cost $16,000 which it normally sells for $18,500, which it is prepared to exchange for
the car.
What is the profi t G has made on exchanging the goods and how should the car be
valued in its books? The cost of the goods to G is $16,000; the value of the car could
be regarded as $20,000, or $19,000, or $18,000 or even $15,000. In the fi rst two cases, G
would have made more profi t than normal; in the third case, it would be less profi t than
normal; and in the last case it would be a loss. This is not, therefore, a very satisfactory
approach to the problem.
The better solution to the problem is to look at what G gave up in exchange for the car.
G gave up goods valued at $18,500 and this is therefore the value that he places on the
car. The sale of the goods should, therefore, be recorded at $18,500 and the car should
be included in non-current assets at a cost of $18,500.
However, suppose that G’s normal selling price was $21,000, it does not follow that
the car should be valued at $21,000. This would not be a sensible solution, as it would
have been better for G to sell its inventories for $21,000 in the normal course of business,
and then pay $20,000 for the car, as it would have been better off by $1,000. In these
circumstances, it must be assumed that the maximum price that G could have obtained
for its goods is $20,000 and the car should be valued at this price.
The bartering of goods and services illustrates the prudence convention (see Chapter 10)
which means that G should not overstate the profi t that it has made on selling its goods.