CH6 - Cost of sales, accruals and prepayments Flashcards
What is cost of sales?
Cost of goods sold during the period
What is closing inventory?
Goods that have been purchased and not yet sold. Classed as an Asset
What is the double entry for recording closing inventory?
Dr Closing Inventory (statement of financial position)
Cr Closing Inventory (Cost of sales on statement of profit or loss)
What is opening inventory?
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
What is a delivery inwards?
Amount paid by a business for having goods delivered to it (cost of sales in statement of profit and loss)
What is a delivery outwards?
Day to day running expense (expense)
How do you work out cost of sales?
Cost of sales = Opening inventory + purchases + delivery in - closing inventory
What is a service organisation?
Supplying a service e.g. bookkeeping, legal advice, training
What is included in the cost of sales for service organisations?
Labour costs, sales commission, materials used
What is the accruals basis of accounting?
Means that we should include all income and expenditure relating to the period whether cash is received or not
What is an expense that is not yet paid called?
A liability
What is a prepayment?
Expense paid in advance
Do we need an adjustment if we have incurred an expense but not yet paid for it at the year-end
Yes by making an accrual
Dr Expense (SPL)
CR Accruals (SFP)
Do we need an adjustment if we have paid an expense in advance?
Yes by making a prepayment
Dr Prepayment (SPL)
Cr Expense (SPL)
What are the 4 steps to make an accruals?
- Record cash paid during the year in expense ledger
- Calculate whether a closing accrual is required
Dr - Expense
Cr - Accruals - Close of expense ledger > take to trial balance > statement of profit and loss
- Close of accruals ledger > take balance to the trial balance then to current liabilities in the statement of financial position
What is the accruals ledger sometimes known as?
Other payables
What is an accrual?
Expense yet not paid for
How to we reverse an accrual for the start of the next period? 6 steps
- Credit B/f balance on accruals ledger (Credit as it’s an asset)
- Reverse out the opening accrual
Dr - Accruals
How do we deal with Prepayments in a double entry
- Bring forward balance on the prepayments ledger (debit) as prepayments are asset
- Reverse out opening prepayment
Dr Expense
Cr Prepayments - Record any cash paid during the year in an expense ledger
Dr Expense
Cr Cash - Calculate whether a closing prepayment is required
Dr Prepayments
Cr Expense - Close off the expense ledger > take balance on trial balance > then the statement of profit or loss
- Close off prepayment ledger > take balance to trial balance then current assets in statement of financial position
What is the prepayment ledger sometimes referred as?
Other receivables
What is an accrued income?
Revenue that’s earned but not yet received
How do you deal with the double entry for accrued income
- B/f Opening balance on accrued income ledger
- Reverse out the opening accrued income
Dr Income
Cr Accrued income - Record any cash received during the year in the income ledger
Dr Cash
Cr Income - Calculate if a closed accrued income adjustment is required. If required:
Dr Accrued income
Cr Income - Close off income ledger > take balance to the trial balance > then statement of SPL
- Close off the accrued income ledger > take balance to the trial balance > current asset in the statement of financial position
