To determine the credit purchases for the year 2016, we need to analyze the changes in trade creditors and the payments made to them during the year. Here’s a step-by-step breakdown of how to arrive at the correct answer.
Step 1: Understand the Components
- Trade Creditors at the Beginning of the Year (01/01/2016): 30,000
- Trade Creditors at the End of the Year (31/12/2016): 40,000
- Payments Made to Trade Creditors During 2016: 220,000
Step 2: Calculate the Change in Trade Creditors
To find out how much was purchased on credit during the year, we first need to understand how the trade creditors have changed over the year.
- Increase in Trade Creditors:
[
\text{Ending Creditors} - \text{Beginning Creditors} = 40,000 - 30,000 = 10,000
]
This means that the trade creditors increased by 10,000 over the year.
Step 3: Use the Formula for Credit Purchases
The formula to calculate credit purchases is:
[
\text{Credit Purchases} = \text{Payments to Creditors} + \text{Increase in Creditors}
]
Step 4: Plug in the Values
Now we can substitute the values we have into the formula:
- Payments to Creditors = 220,000
- Increase in Creditors = 10,000
So,
[
\text{Credit Purchases} = 220,000 + 10,000 = 230,000
]
Conclusion
Thus, the total credit purchases for the year 2016 is
230,000. Therefore, the correct option is
B.
Explanation of Other Options
-
Option A (290,000): This option incorrectly assumes a higher amount of credit purchases without considering the increase in creditors. It does not align with the payments made and the increase in creditors.
-
Option C (220,000): This option only considers the payments made to creditors and ignores the increase in trade creditors. It fails to account for the fact that some purchases were not paid off by the end of the year.
-
Option D (210,000): This option is also incorrect as it does not accurately reflect the increase in creditors and miscalculates the total credit purchases.
Common Pitfalls
- Ignoring Changes in Creditors: A common mistake is to only consider payments made without accounting for the changes in trade creditors.
- Misunderstanding the Flow of Transactions: It’s crucial to understand that an increase in creditors indicates that not all purchases were paid off, which affects the total credit purchases.
Revision Summary
- Credit purchases can be calculated using the formula: Credit Purchases = Payments to Creditors + Increase in Creditors.
- Always account for the beginning and ending balances of trade creditors to determine the increase or decrease.
- Ensure to differentiate between cash payments and credit purchases to avoid miscalculations.
- The correct answer for credit purchases in this scenario is 230,000 (Option B).