PURCHASE COMMITMENT ng gain.

Loss lang ang pwedeng irecord kasi pwedeng

ireverse or marecover yung loss.
It is common for a company to make purchase Example:
commitments, which are agreements to buy inventory in Assume that Sterling Paper Co. signed a timber
advance. cutting contracts to be executed in 2021 at a price of
Mostly, the seller retains title to the merchandise or P1,000,000 (No entry). Assume further that the market price
materials covered in the purchase commitments. (still, of the timber cutting rights on December 31, 2020, decreased
the seller owns the merchandise until such time na to P700,000. Sterling Paper would make the following entry
madeliver sa buyer.) on December 31, 2020:
Indeed, the goods may exist only as natural resources as Debit Credit
unplanted seed (in the case of agricultural products) or
as work in process (in the case of a product). Loss on purchase commitments 300,000
Once you committed in purchase commitment scheme,
Liability on purchase commitments 300,000
there would be contract or written agreement. Pwedeng
oral pero common ang written. 1,000,000 – 700,000

Types of Purchase Commitment Bakit need magrecognize ng liability? Even though we have a loss
of 300,000, in the future we are expected to pay it. Marereverse
Cancellable Purchase Commitment
lang rin yan at the time of execution ng 1,000,00 na payment natin.
Usually, it is not necessary for the buyer to make any
Note: Pag nagincrease naman no entry na
entries to reflect commitments for purchases of goods
Because the contract is to be executed within 2021,
that the seller has not shipped. (No entry)
Sterling would report the Liability on Purchase Commitments
Ordinary orders, for which the buyer and seller will
in the current liabilities section on the statement of financial
determine prices at the time of shipment, and which are
position.
subject to cancellation, do not represent either an asset
If the company received and paid the timbers on July
or a liability to the buyer.
1, 2021, the entry to record the payment is:
Therefore, the buyer need not record such purchase
Debit Credit
commitments or report them in the financial
statements. (but if you find it useful for all the user na Purchase 700,000
meron kayong cancelable commitments then you can put
it on notes of financial statement.) Liability on purchase commitments 300,000
Record only kapag nadeliver or nareceive na natin.
Cash 1,000,000

Non-cancellable purchase commitment On the other hand, if the value of the timbers
When a buyer enters a formal, non-cancelable purchase decreases to P650,000 on the time of execution, the entry
contract, the buyer recognizes no asset or liability at the will be:
date of inception, because the contract is “executory” in Debit Credit
nature: Neither party has fulfilled its part of the contract.
(no entry, need nila magwait para madeliver yung Purchase 650,000
product para marecord)
Loss on Purchase commitments 50,000
Executory – obligation na hindi pa nafufulfill
However, if material, the buyer should disclose such Liability on purchase commitments 300,000
contract details in a note to its financial statements.
If the contract price(purchase price) is greater than the Cash 1,000,000
market price(available price on the market participants)
Lastly, if the value of the timbers increases to
and the buyer expects that losses will occur when the
P1,050,000 on the time of execution, the entry will be
purchase is affected, the buyer should recognize losses
Debit Credit
in the period during which such declines in market prices
take place. Purchase 1,000,000
Paano pag mas mataas yung market price sa purchase
price? Walang irerecord dahil hindi pwedeng magrecord Liability on purchase commitments 300,000
 Cash 1,000,000

Recovery of Loss on purchase 300,000

commitment (miscellaneous income)

Note: if ever man na tumaas yung market price nung purchase natin,
we do not record it because our limit is 1,000,000. Pwede tayo
magrecord ng 1,000,000 below lang.
The recovery of loss on purchase commitment is classified
as other income. Take note that the amount to be paid by the buyer
should not exceed the committed price indicated in the contract.
Thus, the P50,000 difference (P1,050,000 value at the time of
execution vs. P1,000,000 contract price) will not have any effect to
the entry. Finally, the recovery of loss on purchase commitment
should not exceed the previously recognized loss.

Note: Also, companies enter non cancellable commitment

kasi baka yung product na yon ay pagagawan ng various
companies.