Joan Webster, the owner of a small business, decides that she should “look after Number One”, as she puts it. Webster has a thorough system of recordkeeping for accounts receivable. She makes certain that every debt is collected on time and her collection record is extremely good. However, Webster has an entirely different attitude toward accounts payable. “Why,” she asks, “should I keep records of how much I owe to others? Let them keep track of how much I owe them. And if they don’t do a thorough job of it, maybe I’ll get away without paying for something.” She believes that other businesses should control their accounts receivable as she controls hers. As a result of this policy, Webster’s procedure for handling incoming purchase invoices is very casual. After the purchase invoices are received and checked, they are placed in a pile on an office desk. The pile represents the accounts payable of the business, but no accounting entries are made to record them. The purchase invoices stay in the pile on the desk until a request for payment is made. Then Webster removes the particular invoice in question and authorizes its payment. When the cheque in payment is issued, the purchase invoice is then accounted for as if it were a cash purchase of goods and services. The purchase invoice is filed with the cheque copy.

a. List the problems with this system. Is Webster’s policy a reasonable one? Explain.

b. Would Webster’s accounts be useful in providing information for management decisions? Why or why not?

c. When financial statements are prepared, how should the pile of unpaid bills be handled?

Answer rating: 100% (QA)

aThere are several problems with this system 1 Webster is not keeping track of what she owes which c... View the full answer