[Asja]

U Co. had cash purchases and payments on account during the current year totaling $455,000. U’s beginning and ending accounts payable balances for the year were $64,000 and $50,000, respectively. What amount represents U’s accrual-basis purchases for the year?
$441,000
$469,000
$505,000
$519,000

I understand that you do the T account for payables…but I don’t get how the 455000 debit entry to the AP account to back into the $ spent for purchases makes sense since the $455000 includes cash purchases – which wouldn’t go thru an AP account, right?

[chandler]

In cash-basis there is no AR/AP. Purchases are debited as they are paid for. So here we know that U Co. actually made payments of $455,000. Looking outside of that we see that AP went down by $14,000 during the year. This means they made payments in excess of merchandise actually received by $14,000. $455,000 payments – $14,000 pay down on AP = $441,000 accrual basis purchases.

[Asja]

Thanks, how is it accrual basis purchases tho, isn't it cash basis? Since we subtracted out the accrued payable decrease? Sorry I'm a little rusty. Blame the pot.

[Puppykoala]

@BrightLIght
I took the question from a different angle:
Beginning AP is $64,000 which is a credit, then total pmt for the year is $455,000 which is debit. Ending AP is a credit $50,000. So what's the missing credit number that will give you a $50,000 ending balance? $441,000.

I can tell Chandler is a master on those calculation questions based on his logic on solving this question.

[DiscontinuedOps]

@BrightLIght
The first time I saw a question like this, I thought the same thing that you did. Why would cash purchases interact with the A/P account at all? The answer is that they don't (as Chandler pointed out), but if you think of cash purchases as being credited to and then immediately debited out of A/P at the same time (and thus having no net effect on A/P) this can start to make more sense. I look at it that way and it helps me.

[Asja]

@Discontinued – thanks alot! I appreciate it…I thought I was going crazy or missing something, but it helps to know that I am not the only one struggling with this…All this mental gymnastics, agh.

I guess cash basis purchases would include the cash paid to accounts payable as well…so that was the other confusing part.

[Keycat]

In accounting theory there is no such thing as cash purchases of inventory. This coincides with the real world when the bills are due usually 30 days after the purchase has been completed. To make it short, we must assume that all the payments went through AP unless the question points out that another account was involved (most likely it would be prepaid rather than cash).

[Author]

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