Chapter 6: Cost of sales, accruals and prepayments Flashcards
What is closing inventory?`
Goods that have been purchased but not yet sold.
They are an asset of the business.
What is the correct double entry for closing inventory?
Dr closing inventory (SOFP)
Cr closing inventory (cost of sales on SFP)
What is opening inventory?
-the closing inventory from the previous period.
-part of this periods cost of sales (as it should be sold this year)
To calculate the gross profit
Work out the cost of sales with the inventory figures provided. Subtract if from the Sales/Revenue figure.
What is delivery inwards and delivery outwards?
The amount paid by the business for having the goods delivered to it.
The amount paid by the business for delivering goods to its customers.
What is delivery inwards part of?
Cost of sales (SPL)
What is delivery outwards part of?
Expense (SPL)
For service organisations, what do cost of sales typically include?
-Direct labour costs
-Sales Commission
-Materials used.
What is the accruals basis of accounting?
Means that all income and expenditure for the period must be included, whether or not the cash has been recieved/paid or an invoice recieved/not received.
What is the matching concept?
Income is matched to the expenditure incurred to generate that income.
What are accruals and prepayments in the SPL?
Adjustments
What is the double entry for an accrual?
Dr Expense
Cr Accrual
What is the double entry for a prepayment?
Dr Prepayment
Cr Expense
What can the accruals ledger also be referred as?
Other Payables
Steps for dealing with an accrual in t-accounts
- Record any cash paid during the year into the expense account.
- Work out if a closing accrual is required:
Dr Expense
Cr Accrual - Close off expense ledger- to TB and then SPL
- Close off accruals ledger- Take to TB and then current liabilities in SFP.
What is the formula to work out what is to go to the P&L in relation to accruals?
cash paid +closing accrual - opening accrual
What is the formula to work out what is to go to the P&L in relation to prepayments?
opening prepayment +payments - closing prepayments
What needs to happen to opening accruals and opening prepayments?
They need to be reversed.
What is deferred income?
Income received in advance that relates to the next period.
What is the double entry for Deferred income?
Dr Income
Cr Deferred Income (liability)
What is the double entry for accrued income?
Dr Accrued Income (SFP)
Cr Income
What is accrued income?
Income earned during the period but not yet received. It is an asset.
Shortcut formula for accrued income?
closing accrued income + sales throughout the year -opening accrued income
shortcut formula for deferred income?
opening deferred income + income receipts - closing deferred income balance
