Current Assets & Liabilities

Definitions

Debtors (property)

Trade debtors or accounts receivable (open-account sales, not evidenced by a written promise), bills receivable (written evidence of debt), advances and deposits with suppliers, short-term loans to employees. Long-term loans to associated organisations are classified as investments.

Creditors (right to property)

Trade creditors or accounts payable, bills payable, deposits or advances from customers, loans from banks or associated organisations.

Deferral

Postponing the recognition of an expense already paid whose benefit belongs to a later period, or of an income already received that is still unearned. Deferred expenses are assets; deferred incomes are liabilities.

Accrual

An expense or income that has gradually accumulated but not yet been paid or received. Accrued expenses are liabilities; accrued incomes are assets.

Deferral example — rent paid a year in advance

After January the Prepaid Rent account still shows an asset of 550 — eleven months of rent that belong to future periods.

Cost of goods sold

The closing inventory sets the profit

Sales, purchases and expenses are facts; the value put on the goods still on the shelf is a judgement. Move the closing inventory and see profit and capital move with it, rupee for rupee.

FIFO, LIFO and weighted average

FIFO — merchandise is sold in the order of purchase (as with perishable items); the inventory left consists of the most recent purchases. LIFO — sold in reverse order (in harmony with inflation); the inventory left consists of the earliest purchases. The weighted average spreads the total cost over all units. Inventories are always valued at the lower of cost or net realisable value.