6: CoS, Accruals and Prepayments

Question 1

Where does Closing Inventory live on the financial statements?

Answer 1

As a credit on the P&L, as part of CoS
As a current asset on the SFP

Question 2

What is the correct double entry to record closing inventory?

Answer 2

Dr Closing Inventory (SFP)
Cr Closing Inventory (SPL)

Question 3

Define Delivery Inwards and Delivery Outwards (and where can they be found on the statements)

Answer 3

Delivery Inwards - the amount paid by a business for having the good delivered to it
Part of CoS

Delivery Outwards - the amount paid by a business for delivering goods to its customers
Expense in the P&L

Question 4

List everything on a CoS

Answer 4

Opening Inventory
Purchases
Other deductions (impairment/delivery inwards)
(Closing Inventory)

Overall figure is (negative)

Question 5

How do service organisations look after Inventory, and what costs are there?

Answer 5

CoS must reflect the cost of providing the service. Costs include:

• direct labour (incurred to perform the service)
• sales commission
• materials used

Question 6

When should you make adjusting entries for accruals, prepayments etc?

Answer 6

At the YEAR END!

Question 7

What does the accrual basis mean for accounting?

Answer 7

We must include all the income and expenditure for the period, whether not the cash has been received or paid, or an invoice is received/not recieved.

Question 8

Define an accrual, and what needs to be done to sort it

Answer 8

We have incurred an expense this FY, but will not be paying for it until the next financial year

Dr Expense with the full amount
Cr Cash with this year’s amount
Cr Accruals with next year’s amount
Note: on long-form, make sure next’s years amount is added as an expense (the additional expense)

Question 9

Define an prepayment, and what needs to be done to sort

Answer 9

We paid fully for an expense but some of it is happening next year

We need to reduce the expense this year
Dr Prepayments
Cr Expense
Note: for long-form, the bit we are getting rid of that relates to next year needs to be in (negative)

Question 10

What are the ‘proper’ steps for opening and closing accruals/prepayments?

Answer 10

1. Bring in the b/f balances
2. Reverse out the opening balances
3. Record any cash paid during the year
4. Calculate and add any closing adjustments
5. Close off the ledgers and send them to the statements

Question 11

What’s the quick equation for an accrual?

Answer 11

Looking back

+ cash
+ c/f
- b/f

Question 12

What’s the equation for prepayments

Answer 12

Looking forward

+ b/f
+ cash
- c/f

Question 13

Define accrued income, and what do we need to do with it

Answer 13

Income we have earned in this period but won’t be paid to us until next period

Dr Accrued Income
Cr Cash

Question 14

Define deferred income, and what we need to do with it

Answer 14

Income that we have received in this financial period that relates to the next financial period

Dr Income
Cr Deferred Income

Question 15

What’s the equation for accrued income

Answer 15

+ cash
+ c/f
- b/f

Question 16

Equation for deferred income?

Answer 16

+ b/f
+ cash
- c/f

Question 17

Best way to approach a question on accruals and prepayments?

Answer 17

1. Split out the figures for what’s bern accrued and prepaid
2. Figure out how many months have been accrued or prepaid, and then divide the total amounts by 12 and times by the number of months

Prepayments: what’s been paid for NEXT FY
Accruals: what needs to be paid for THIS FY

Question 18

Steps to doing a question on accrued and deferred income?

Answer 18

If it’s deferred, then they’ve paid first!

Find the deferred income figure.
- this is money got in advance.
- it’s a liability, you want to get rid of it.

Find the accrued income figure.
- this is money got after the fact.
- an asset, you want to hold onto it.

Take trial balance figure, - deferred income, + accrued income.