Chapter 6 - accruals and prepayments

Question 1

1. What is opening inventory?
2. What is closing inventory?
3. what is it recorded as at the end of the year on SFP?
4. What is closing inventory recored as in double entry?

Answer 1

1. opening inverntory →The closing inventory from the previous year
2. Stock which had been purchased but not yet sold at the end of the year → (therefore are not part of ‘cost of goods sold’)
3. A current asset
4. SPL → Cr cost of sales (income)

SFP → Dr closing inventory (asset)

Question 2

1. What is carriage inwards?
2. What is carriage outwards?

Answer 2

1. The delivery costs of goods to a business → (part of cost of sales in SPL)
2. The delivery costs of goods to a customer → (expense in SPL)

Question 3

What does accruals bais state?

Answer 3

The all income and expenditure must be accounted for regardless as to whether payment has been made or recieved.

Question 4

According to the accruals basis what 2 adjustements may be needed at the end of the year?

Answer 4

1. Incurred expenses that have not yet been paid for by the end of the year → extra expense is recorded making an accrual (liability account).
2. Having paid for an expense in advance for the next year → expense needd to be reduced at the end of the year by making a prepayment (asset account)

Question 5

1. When making an accrual what is debited and what is credited?
2. When making an prepayment what is debited and what is credited?

Answer 5

1. Dr expense (SPL), Cr accruals (SFP)
2. Dr prepayments (SFP), Cr expenses (SPL)

Question 6

What is the equation to calculate the SPL expense for accruals and preypayments?

Answer 6

SPL expense = - opening accrual + opening preypayment + cash paid + closing accrual - closing preypayment.

Question 7

1. What is deferred income?
2. What is accrued income?

Answer 7

1. Income recieved in advance that relates to the next year → miust be removed from SPL
2. Income earned during the period but has not yet been recieved. → needs to be included in SPL

Question 8

1. What are the debits ad credits for deferred income?
2. What are the debits ad credits for accrued income?

Answer 8

1. Dr income (SPL), Cr deferred icome (liability) (SFP)
2. Cr income (SPL), Dr accured income (asset) (SFP)

Question 9

What is the equation to calculate SPL income from deffered income and accrual income?

Answer 9

SPL income = - opening accrued income + opening deffered income + cash recieved + closing accrued income - closing defferd income.

Question 10

What are arrears?

Answer 10

Another word for accruals