Introduction:
TechCo, a company that manufactures electronic gadgets, needed to transport some crucial materials from their supplier to their factory. To do this, they hired a shipping company to manage the inbound shipment.
The Situation:
TechCo arranged for the shipment of 500 units of electronic components needed for their latest product. The cost of shipping these components was $5 per unit, making the total shipment cost $2,500. However, TechCo decided not to pay for the shipping service upfront or upon delivery.
Case Facts:
Instead, TechCo negotiated with the shipping company to receive trade credit. This meant TechCo would receive the shipping service immediately and pay for it later, once they had the funds available.
The Numbers:
Number of units shipped: 500
Cost per unit for shipment: $5
Total cost of shipment: $2,500
Payment method: Trade credit (payment to be made at a later date)
Question for You:
Now, let’s think about how TechCo would record this transaction in their accounting books according to IFRS (International Financial Reporting Standards). When the shipping service is completed, TechCo needs to make two journal entries:
When the service is received by TechCo:
Debit: Inbound Shipment Expense for the total cost of the shipment.
Credit: Accounts Payable for the amount owed to the shipping company.
When TechCo pays the shipping company at a later date:
Debit: Accounts Payable for the amount owed.
Credit: Cash/Bank for the amount paid.
Can You Figure Out the IFRS Journal Entries?
Based on the information provided:
When the shipment service is received:
Debit: Inbound Shipment Expense for $2,500
Credit: Accounts Payable for $2,500
When TechCo pays the shipping company:
Debit: Accounts Payable for $2,500
Credit: Cash/Bank for $2,500
This case study illustrates how businesses manage their expenses by utilizing trade credit, allowing them to pay for essential services at a later time, ensuring they can continue operations smoothly without immediate cash outflows.
Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.
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