The Garage's Missing Delivery Note
Tsela runs a small tyre-fitting garage in Gaborone. On 3 March he ordered 12 tyres at P450 each from Kalahari Tyres, on credit. The tyres arrived on 6 March with a delivery note but no invoice, and Tsela recorded nothing because 'no invoice means no transaction'. The invoice (12 tyres, P5,400, terms 30 days) arrived on 20 March; Tsela filed it in a drawer and forgot it. On 31 March the supplier's statement arrived showing P5,400 outstanding. Tsela checked his purchases account, found no entry, and concluded the statement was wrong. He also noticed the physical stock count showed 12 tyres on hand that he had not paid for. His year end is 31 March.
1. Identify the source documents involved and explain which one should have triggered the first accounting entry, and why the absence of an invoice does not mean no transaction.
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Two source documents exist: the delivery note (6 March) and the invoice (20 March); the statement of account (31 March) is a summary document, not an original entry source.
The correct trigger for the first record is the delivery note, because that is the point at which goods and the obligation to pay arise. The garage should have recorded a purchase and a trade payable of P5,400 on 6 March, with the invoice merely confirming the amount and terms. A delivery note evidences receipt of goods; the invoice evidences the price and credit terms. Deferring the entry until the invoice arrives is acceptable only if the invoice follows promptly and the year-end position is corrected.
Key reasoning the examiner wants:
- Accruals/matching: the tyres were received in the period, so the cost belongs to that period regardless of when the invoice is dated.
- Business entity and prudence: the liability exists once goods are received on credit terms; ignoring it understates liabilities and overstates profit.
- Audit trail: filing the invoice without recording it breaks the link between source document and ledger.
So Tsela's belief is wrong: the statement is correct and his records are incomplete.
2. State the correcting entries Tsela must make before preparing final accounts at 31 March, and explain the effect on profit and the statement of financial position if he does nothing.
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Correcting entries (double entry):
| Account | Debit | Credit |
|---|---|---|
| Purchases | P5,400 | |
| Trade payables (Kalahari Tyres) | P5,400 |
If the invoice has still not been entered by 31 March, this is an accrual for goods received but not invoiced. If the tyres remain in closing stock, the closing stock valuation of P5,400 offsets the purchases charge in cost of sales, so gross profit is unaffected - but only if the stock count includes them. If they were sold before year end, the full P5,400 hits cost of sales.
Effect of doing nothing:
- Purchases understated by P5,400 (or closing stock correct but purchases missing, distorting the purchases figure).
- Trade payables understated by P5,400 → current liabilities and the working capital figure are wrong.
- Profit overstated if the tyres were sold, because the matching cost is missing.
- The statement from the supplier will not reconcile, and the payables ledger control account will not agree to the list of balances.
Examiner tip: always state both the amount and the direction (under/overstated) - vague answers score poorly.