VCAA 2008 Exam 2 Question 2.3.1

[Random_Guy]

Can someone please explain to me part D (Jan 15 2011) of question 2.3.1 in the VCAA 2008 Exam 2? I don't understand why Assets increase. My workings for Assets:

1. 5 beds delivered. Debtors increase.
2. Debtors pay off their whole account. Therefore, bank would increase, but this would be offset by a decrease in debtors control.
3. There is an outflow of stock from the sale, therefore, overall, assets would decrease. Right???

[MaddehZ]

hey mate,

its best to think of it in two parts:

1) A credit sale occurred

Assets: this increases debtors control, decreases stock control
overall effect: increase

Liabilities: this increases GST Clearing
overall effect: increase

Owner's Equity: this increases Sales, increases cost of sales
overall effect: increase

2) Debtor repaid the money

Which, as you said offsets Bank, but you're forgetting that we have INCREASED debtors control (the sale) and then INCREASED bank (the receipt) and then DECREASED DEBTORS CONTROL (to show they dont owe us anything)

therefore assets increases

[Random_Guy]

I still don't understand it. Your first part is right, but for the second part, if debtors repay the money, then debtors control would decrease, and the increase in bank should be equal to the decrease in debtors control, as debtors are paying off their FULL account. Therefore, shouldn't there be no change in assets when debtors pay off their account? Then there would be a decrease in Stock as a result of the sale, therefore, assets should decrease overall???

Thanks.

[MaddehZ]

try to think of it as a normal credit sale, read the last bit of my post and see if you get it


increase debtors...then they repay, which increases bank the same amount, and cancels debtors

making a bit more sense ?

[Random_Guy]

But when debtors are paying off their account, they are paying off their current balance, PLUS the credit sale, right? So the increase in bank would be equal to the decrease in debtors.

[MaddehZ]

But when debtors are paying off their account, they are paying off their current balance, PLUS the credit sale, right? So the increase in bank would be equal to the decrease in debtors.

correct, but remember how debtors increased originally....