Chapter 6: Cost Of Sales, Accruals and Prepayments

Question 1

What is the formula for Cost of Sales?

Answer 1

CoS = OPENING INVENTORY + PURCHASES - CLOSING INVENTORY

Question 2

What is the double entry for recording closing inventory?

Answer 2

Dr Closing Inventory (SoFP)
Cr Closing Inventory (deduct from CoS in Statement of P/L)

Question 3

What is Opening Inventory?

Answer 3

Opening Inventory is:
- the closing inventory from the previous year
- part of the periods CoS
- added to purchases

Question 4

Double entry for Accrual

Answer 4

We have incurred an expense but not yet paid for it at year end

Need to record the extra expense at year-end by making an ACCRUAL

Dr Expense (SPL)
Cr Accruals (SoFP)

Question 5

Double entry for Prepayments

Answer 5

We have paid for an expense in advance (i.e relates to next year)

Need to reduce the expense at year end by making a PREPAYMENT

Dr Prepayments (SoFP)
Cr Expense (SPL)

Question 6

How to reverse an opening Accrual?

Answer 6

Reverse out opening accrual:
Dr Accruals
Cr Expense

Record any cash paid during the year in the expense ledger:
Dr Expense
Cr Cash

Calculate whether a closing accrual is required:
Dr Expense
Cr Accruals

Question 7

How to deal with Prepayments?

Answer 7

Reverse the opening prepayment:
Dr Expense
Cr Prepayement

Record any cash during the year into the expense ledger:
Dr Expense
Cr Cash

Calculate whether a closing prepayment is required?:
Dr Prepayment
Cr Expense

Question 8

Prepayment: Formula for calculating P/L expense

Answer 8

P/L Expense = OPENING PREPAYMENT + CASH PAID - CLOSING PREPAYMENT

Question 9

How to Adjust for deferred income?

Answer 9

Income received in advance that relates to the next period

Needs to be removed from the statement of profit and loss

Dr Income (SPL)
Cr Deferred Income (SoFP)

Question 10

How to adjust for Accrued Income?

Answer 10

Income earned during the period but not yet received

Needs to be included in SPL

Dr Accrued Income (SFP)
Cr Income (SPL)

Question 11

How to deal with accrued income?

Answer 11

Reverse out opening accrued income:
Dr Income
Cr Accrued Income

Record any cash received during the year in the income ledger:
Dr Cash
Cr Income

Calculate whether a closing accrued income adjustment is required
Dr Accrued Income
Cr Income

Question 12

How to adjust for deferred income?

Answer 12

Reverse out the opening deferred income:
Dr Deferred Income
Cr Income

Record any cash received during the year in the income ledger
Dr Cash
Cr Income

Calculate whether a closing deferred income adjustment is required:
Dr Income
Cr Deferred Income

Question 13

Formula for calculating P/L for Deferred Income

Answer 13

P/L income = cash received + opening deferred income - closing deferred income