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ID: 2468253 • Letter: Z
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Purchases discounts and accounts payable The Laurel Co. is owned and operated by Paul Laurel. The following is an excerpt from a conversation between Paul Laurel and Maria Fuller, the chief accountant for Laurel Co. Paul: Maria, I've got a question about this recent balance sheet. Maria: Sure, what's your question? Paul: Well, as you know, I'm applying for a bank loan to finance our new store in Clinton, and I noticed that the accounts payable are listed as $180,000. Maria: That's right. Approximately $150,000 of that represents amounts due our suppliers, and the remainder is miscellaneous payables to creditors for utilities, office equipment, supplies, etc. Paul: That's what I thought. But we normally receive a 2% discount from our suppliers for earlier payment, and we always try to take the discount. Maria: That's right. I can't remember the last time we missed a discount. Paul: Well, in that case, it seems to me the accounts payable should be listed minus the 2% discount. Let's list the accounts payable due suppliers as $147,000, rather than $150,000. Every little bit helps. You never know. It might make the difference between getting the loan and not. How would you respond to Paul Laurel's request?Explanation / Answer
The accounting is based on US GAAP and the conservatism principle states that in case of two options the option which is less favorable should be selected.
In the given case 2% discount would be earned but can also be missed if delayed payment is made. Hence based on conservatism principle the 2% discount should not be considered now.
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