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GOODS IN TRANSIT & CASH IN TRANSIT – IFR 15

GOODS IN TRNASIT & CASH IN TRANSIT – IFR 15

GOODS IN TRANSIT & CASH IN TRANSIT – IFR 15

CONSOLIDATION PROCESS

The consolidation process is a lengthy and requires elimination of transaction between Parents and subsidiary which result in dual accounting or double accounting.

To avoid situations where it does not get double counted, and present fairly the financial statements, from the perspective of “single economic entity” concept when presenting consolidated financial statements.

The principle used to eliminate such transactions is: “Asset of one entity and liability of another gets cancelled on consolidation.

One such problem is posed by Goods in Transit and Cash in Transit

On the date of reporting, when we count the inventories or reconcile trade payables and trade receivables and have a closer look at transactions within group, we get to know that inventory is missing, or cash is not received by parent or subsidiary for intra group transactions.

One party has delivered goods, but the other seems to be unaware of it and have not recorded it as part of their books.

One party has paid cash, but the other seems to have not received it and have not recorded the receipt of cash.

This is a concern to be resolved by accounting treatment of “Cash in transit” and “Goods in transit.

 

What is the accounting treatment for goods in transit & cash in transit?

The goods in transit are assumed to be had been delivered and cash in transit are assumed to have been received.

 

GOODS IN TRANSIT

Parent has a trade receivable of Rs. 50,000 and Subsidiary has a Trade payable of Rs. 40,000.
All the purchases of subsidiary are made from Parent.

It is a case of Goods in transit, goods are delivered by Parent, so they recorded Rs. 10,000 increasing the receivable, but the same goods have not been received by subsidiary, the reason for lower trade payables.

So, we assume, as if the goods have been delivered resulting in increasing the inventory & trade payables.

Inventory a/c  Dr 10,000
Trade payables Cr 10,000

Once, we have dealt with goods in transit, we also need to deal with another principle “Asset of one entity and liability of another gets cancelled on consolidation” since all the purchases by subsidiary are from parent.
So, the adjustment is as below:

Trade payables  Dr. 50,000
Trade receivables Cr. 50,000

 

CASH IN TRANSIT

Parent has a trade receivable of Rs. 50,000 and Subsidiary has a Trade payable of Rs. 40,000.
All the purchases of subsidiary are made from Parent.

It is a case of cash in transit, subsidiary made payment of Rs. 10,000, which has not been received by Parent. So, subsidiary recorded Rs. 10,000 reductions in trade payable bringing it down to Rs. 40,000

So, we assume, as if the cash has been received by Parent, reducing the Trade receivables by Rs. 10,000

Cash a/c  Dr. 10,000
Trade receivables  Cr. 10,000

Once, we have dealt with cash in transit, we also need to deal with another principle “Asset of one entity and liability of another gets cancelled on consolidation” since all the purchases by subsidiary are from parent.

So, the adjustment is as below:

Trade payables  Dr. 40,000
Trade receivables  Cr. 40,000

 

SUGGESTED READING:

Ind AS 38 – Research and Development – INTANGIBLE ASSETS
IND AS 8 : Indian Accounting Standard 8
5 Steps to prepare for clearing Dip IFR

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July 2, 2020

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