Question

flextech ltd is in the manufacturing business. It has just purchased an equipment. The company received an invoice for $76000, but the company did not expect such an amount for the asset. So the management was in the process of negotiating with the suppliers on the price. The negotiation was ongoing and by the end of the accounting period, they were not able to arrive at an agreed price. The accountant therefore did not record the transaction in the books of the company.

what accounting concept is this ? is the concept used properly ?

Answer 1

The accounting concept used is cash basis accounting. In cash basis accounting, the accountant records the transaction only after making a payment for a product purchased. In accrual accounting, expenses are recognized when incurred and not when they are paid.

In this example we can say that the cash basis concept is applied properly because Flextech ltd has still not arrived at an agreed price and the payment for the equipment has not been made. In such situations the cash basis concept does not allow the transaction to be recorded.