8. Adj. Nominal Ledger and Complete Accounting Cycle

Question 1

What are accrued expenses, accrued income, prepaid expenses and prepaid income?

Answer 1

Accrued expense = Expense incurred during the year but haven’t paid for it at the YE date.

Accrued income = Income you have earned but haven’t received the cash by the YE date.

Prepaid expense = Expense you have paid in advance of receiving the benefit.

Prepaid Income (Deferred) = Income you have received in advance of earning it yet.

Question 2

2. Where are accruals, accrued income, prepayments and prepaid income presented in the financial statements?

Answer 2

Accruals & pre-paid income = Liability

Accrued income & pre-payments = Asset

Question 3

How do we calculate the amount accrued when an invoice spans year end?

Answer 3

You must pro-rate to identify which portion relates to the
accounting period.

This is normally done in every month-end.

Question 4

Can you prepare the journal entries to record accruals and accrued income?

Answer 4

Journal entry to record accrual:

Dr SPL – expense
Cr Accruals

Journal entry to record accrued income:

Dr Accrued Income
Cr SPL – revenue/ other income

Question 5

What journal entries happen in the next accounting period after the financial controller records accruals and accrued income?

Answer 5

The entries need to be reversed.

Dr Accruals
Cr SPL - expense
Journal entry to reverse prior period accrual

Dr SPL - Revenue/ other income
Cr Accrued Income
Journal entry to reverse accrued income

Question 6

What is the impact of recording an accrual on the profit for the year?

Answer 6

Profit is decreased as we are making sure all expenses are correctly in that year thus more expenses = less profit.

Question 7

Can you calculate the amount prepaid when an invoice spans year end?

Answer 7

You pro rate for the amount that has been prepaid and should
calculate this in months.

Question 8

Can you prepare the journal entries to record prepayments and deferred income?

Answer 8

Journal entry to record prepayment:
Dr Prepayments
Cr SPL - expense

Journal entry to reverse accrued income:
Dr SPL - Revenue/ other income
Cr Accrued Income

Question 9

What is the accounting journals to reverse prepayments and deferred income and why do we do this?

Answer 9

We reverse the journals so now we can record income when earned and then expense when incurred.

Journal entry to reverse prepayment:
Dr SPL – expense
Cr Prepayments

Journal entry to reverse Deferred income and record income when earned:
Dr Deferred Income
Cr SPL – revenue/ other income

Question 10

Explain the impact of recording an accrual, prepayment, accrued income and deferred income on the profit for the year

Answer 10

• Accrual Increases expenses, so will decrease profit for year
• Prepayment Decreases expenses, so will increase profit for year
• Accrued Income Increases income, so will increase profit for year
• Deferred Income Decreases income, so will decrease profit for year

Question 11

Do you understand what corporation tax is?

Answer 11

Corporation tax is a tax on taxable company profits at the end of the year. Typically it’s recognised as taxation payable in the accounts.

Question 12

Can you prepare the journal entries to record the corporation tax expense and taxation payable?

Answer 12

Dr SPL - Current tax expense
Cr Taxation payable
To record Corporation Tax

Question 13

Do you understand the difference between the draft trial balance and the final trial balance?

Answer 13

Draft trial balance is all the nominal ledger accounts balances in the nominal ledger at the period-end date.

Final trial balance is when the period-end adjusting entries are recorded in a journal, they are then posted to the nominal ledger and a final trial balance can be prepared. The final trial balance is then used to prepare the financial statements.

Question 14

Do you know how to close the income and expense nominal ledger accounts and how to calculate profit or loss for the period?

Answer 14

Journal entry for a profit:
Dr SPL - Income account
Cr Retained Earnings
For a profit

Dr Retained Earnings
Cr SPL - Expense account
For a loss

Profit/Loss for the year = Income - Expenses

Question 14

Do you understand how an extended trial balance worksheet is used?

Answer 14

ETB worksheet is used to show the adjustments that have been made to the numbers, typically on paper as most of it is computerised now.

Question 15

Do you know how to calculate closing retained earnings?

Answer 15

Closing RE = Opening RE +/- Profit/Loss for Year - Dividends paid +/- Transfers from or to to the Revaluation surplus

Question 16

What are closing journal entries and what are their purpose?

Answer 16

Closing entries are required to transfer the final balances of all the income and expenses accounts to the ‘retained earnings’ equity account on the statement of financial position. There are no closing journals for assets/liabilities etc.

Purpose: To ensure that the income and expense accounts are reset to have a zero balance, so that the income and expenses for the subsequent accounting period can be correctly recorded.