4: Preparing Financial Statements

Question 1

What are the two types of returns?

Answer 1

1. Sales returns
   - returns from customers
   - reduce sales figure by the amount returned
2. Purchase returns
   - returns to suppliers
   - reduce purchases figure by amount returned

Question 2

What is the double entry for a sales return?

Answer 2

We want to reduce our sales

Dr Sales
Cr either Trade Receivables or Cash

Question 3

What is the double entry for purchase returns?

Answer 3

We want to reduce our purchases

Cr Purchases
Dr Trade Payables or Cash

Question 4

What are the two types of discounts?

Answer 4

1. Trade (bulk buy)
   - given as a reduction at point of sale
   - account for sale/purchase at reduced price
2. Early settlement (prompt payment)
   - account for sale/purchase based on the expected settlement
   - if settlement not as expected, correction made at point of settlement

Question 5

What does correction to any early settlement discount do to sales and purchases?

Answer 5

Sales: adjusts revenue

Purchases: adjusts purchases

Question 6

What is involved in the ‘Wages and Salaries’ expense account?

Answer 6

Everything:

Gross Salary to employee
Employer’s NICS

Question 7

What three things are paid to the government in a payroll?

Answer 7

Employer’s NICs
Employee’s NICs
Income Tax (PAYE)

Note: the employee is liable for their Income Tax and NICs, but the employer pays it on their behalf

Question 8

What is included in a gross salary?

Answer 8

Net salary (what is paid to the employee)
Income tax (PAYE)
Employee’s NICS

Question 9

What is the correct double entry to record payroll?

Answer 9

Dr Wages and Salaries
- gross salary + employer’s NICs

Cr Cash
- net salary paid to employee

Cr Income Tax
- PAYE + employees’ NICs + employer’s NICs

Question 10

What kind of account is an income tax account and where does it live?

Answer 10

It is a payable - it lives as a current liability on the SFP

Question 11

Best way to deal with returns?

Answer 11

Use ledger accounrs

Think about the original purchase/sales first, and write that out, before approaching the return double entry

Always make sure suspense accounts are balanced out!

Question 12

What’s the difference between ‘Total Wages and Salaries’ and ‘Gross Salary’

Answer 12

‘Total’ is everything, inc. employer’s NICs.

‘Gross’ does not include employer’s NICs