CH6 - Cost of sales, accruals and prepayments

Question 1

What is cost of sales?

Answer 1

Cost of goods sold during the period

Question 2

What is closing inventory?

Answer 2

Goods that have been purchased and not yet sold. Classed as an Asset

Question 3

What is the double entry for recording closing inventory?

Answer 3

Dr Closing Inventory (statement of financial position)
Cr Closing Inventory (Cost of sales on statement of profit or loss)

Question 4

What is opening inventory?

Answer 4

It is the closing inventory from the previous period
As it is part of this period’s cost of sales it is added to purchases

Question 5

What is a delivery inwards?

Answer 5

Amount paid by a business for having goods delivered to it (cost of sales in statement of profit and loss)

Question 6

What is a delivery outwards?

Answer 6

Day to day running expense (expense)

Question 7

How do you work out cost of sales?

Answer 7

Cost of sales = Opening inventory + purchases + delivery in - closing inventory

Question 8

What is a service organisation?

Answer 8

Supplying a service e.g. bookkeeping, legal advice, training

Question 9

What is included in the cost of sales for service organisations?

Answer 9

Labour costs, sales commission, materials used

Question 10

What is the accruals basis of accounting?

Answer 10

Means that we should include all income and expenditure relating to the period whether cash is received or not

Question 11

What is an expense that is not yet paid called?

Answer 11

A liability

Question 12

What is a prepayment?

Answer 12

Expense paid in advance

Question 13

Do we need an adjustment if we have incurred an expense but not yet paid for it at the year-end

Answer 13

Yes by making an accrual
Dr Expense (SPL)
CR Accruals (SFP)

Question 14

Do we need an adjustment if we have paid an expense in advance?

Answer 14

Yes by making a prepayment
Dr Prepayment (SPL)
Cr Expense (SPL)

Question 15

What are the 4 steps to make an accruals?

Answer 15

1. Record cash paid during the year in expense ledger
2. Calculate whether a closing accrual is required
   Dr - Expense
   Cr - Accruals
3. Close of expense ledger > take to trial balance > statement of profit and loss
4. Close of accruals ledger > take balance to the trial balance then to current liabilities in the statement of financial position

Question 16

What is the accruals ledger sometimes known as?

Answer 16

Other payables

Question 17

What is an accrual?

Answer 17

Expense yet not paid for

Question 18

How to we reverse an accrual for the start of the next period? 6 steps

Answer 18

1. Credit B/f balance on accruals ledger (Credit as it’s an asset)
2. Reverse out the opening accrual
   Dr - Accruals

Question 19

How do we deal with Prepayments in a double entry

Answer 19

1. Bring forward balance on the prepayments ledger (debit) as prepayments are asset
2. Reverse out opening prepayment
   Dr Expense
   Cr Prepayments
3. Record any cash paid during the year in an expense ledger
   Dr Expense
   Cr Cash
4. Calculate whether a closing prepayment is required
   Dr Prepayments
   Cr Expense
5. Close off the expense ledger > take balance on trial balance > then the statement of profit or loss
6. Close off prepayment ledger > take balance to trial balance then current assets in statement of financial position

Question 20

What is the prepayment ledger sometimes referred as?

Answer 20

Other receivables

Question 21

What is an accrued income?

Answer 21

Revenue that’s earned but not yet received

Question 22

How do you deal with the double entry for accrued income

Answer 22

1. B/f Opening balance on accrued income ledger
2. Reverse out the opening accrued income
   Dr Income
   Cr Accrued income
3. Record any cash received during the year in the income ledger
   Dr Cash
   Cr Income
4. Calculate if a closed accrued income adjustment is required. If required:
   Dr Accrued income
   Cr Income
5. Close off income ledger > take balance to the trial balance > then statement of SPL
6. Close off the accrued income ledger > take balance to the trial balance > current asset in the statement of financial position