An acquaintance of yours, H. Gee, has recently set up in business for the first time as a general dealer. The majority of his sales will be on credit to trade buyers but he will sell some goods to the public for cash. He is not sure at which point of the business cycle he can regard his cash and credit sales to have taken place.
After seeking guidance on this matter from his friends, he is thoroughly confused by the conflicting advice he has received. Samples of the advice he has been given include:
The sale takes place when:
1. You have bought goods which you know you should be able to sell easily;
2. The customer places the order;
3. You deliver the goods to the customer;
4. You invoice the goods to the customer;
5. The customer pays for the goods;
6. The customer's cheque has been cleared by the bank.
He now asks you to clarify the position for him.
Required
a. Write notes for Gee setting out, in as easily understood a manner as possible, the accounting conventions and principles that should generally be followed when recognizing sales revenue.
b. Examine each of the statements 1-6 above and advice Gee (stating your reasons) whether the method advocated is appropriate to the particular circumstances of his business.