Chapter 6- Cost of Sales, accruals + prepayments

Question 1

Double entry for recording closed inventory

Answer 1

• Dr Closing inventory (SFP)

- Cr Closing inventory (cost of sales on SP+L)

Question 2

Opening inventory is…

Answer 2

closing inventory from the previous period and is part of this period’s cost of sales. Therefore is added to purchases

Question 3

Delivery inwards (on purchases)…

Answer 3

amount paid by a business for having goods delivered to it. Part of CofS in P+L

Question 4

Delivery outwards (on sales)…

Answer 4

amount paid by a business for delivering goods to its customers. Expense in P+L

Question 5

The accruals basis of accounting means that to calculate the profit for the period you must…

Answer 5

include all the income + expenditure relating to the period (no matter if cash has been received/ paid or invoice received). Income is therefore matched with expenditure incurred to generate that income in a particular accounting period

Question 6

Accruals + prepayment in FS arise from…

Answer 6

year end adjustment caused by accruals concept as we need to ensure that correct expense figure has been included in SP+L

Question 7

(Accruals + prepayments) May be necessary to make an adjustment if…

Answer 7

cash paid for expenses during the period does not equal expenses relating to the period

Question 8

(accruals + prepayments) if you have incurred an expense but not yet paid for it at YE you need to…

Answer 8

record the extra expense at YE by making an accrual.
Dr Expenses (SPL)
Cr Accruals (SFP)

Question 9

(accruals + prepayments) if you have paid for an expense in advance you need to…

Answer 9

reduce expense at YE by making a prepayment 
Dr Prepayment (SFP)
Cr Expense (SPL)

Question 10

Accruals are when…

Answer 10

you have used an expense but haven’t yet paid for it

Question 11

to deal with an accrual

Answer 11

• Record any cash paid in expense ledger
• Calculate if closing accrual is required (Dr Expenses; Cr Accruals)
• Close off expense ledger (clear down to 0) take balance to TB then SPL
• Close of accruals ledger/ ‘other payables’ (roll forward to next yr) take balance to TB then to current liabilities in SFP

Question 12

steps for opening + closing accruals

Answer 12

• Bring in brought forward opening balance on accruals ledger (Cr side)
• Reverse out opening accrual (Dr Accruals, Cr Expense)
• Record any cash paid during year in expense ledger (Dr Expense, Cr Cash)
• Calculate whether a closing accrual is required (Dr Expense, Cr Accruals)
• Close off expense ledger (take balance to TB then SPL)
• Close off accruals ledger (take balance to TB then current liabilities in SFP)

Question 13

to deal with prepayments

Answer 13

• Bring in brought forward opening balance on prepayments ledger (Dr side)
• Reverse out opening prepayment (Dr Expense, Cr Prepayments)
• Record any cash paid during year in expense ledger (Dr Expense, Cr Cash)
• Calculate whether closing prepayment is required (Dr Prepayments, Cr Expense)
• Close off expense ledger (take balance to TB then SPL)
• Close off prepayments ledger/ ‘other receivables’ (take balance to TB then to current assets ing SFP)

Question 14

Accrued income + deferred income in FS arise from…

Answer 14

a YE adjustment caused by accruals concept as we need to ensure that correct income figure is included in SPL

Question 15

Deferred income is…

Answer 15

income received in advance that related to next period. Removed from SPL

Question 16

Accrued income is…

Answer 16

income earned during period but not yet received. Included in SPL

Question 17

Dealing with accrued income

Answer 17

• Bring in brought forward opening balance on accrued income ledger (Dr side)
• Reverse out opening accrued income (Dr Income, Cr Accrued income)
• Record cash received during year in income ledger (Dr Cash, Cr Income)
• Calculate whether a closing accrued income adjustment is required (Dr Accrued income, Cr Income)
• Close off income ledger (Take balance to TB then SPL)
• Close of accrued income ledger/ ‘other receivables’ (Take balance to TB and then to current assets in SFP)

Question 18

Dealing with Deferred income

Answer 18

• Bring in brought forward opening balance on deferred income ledger (Cr side)
• Reverse out opening deferred income (Dr Deferred income, Cr Income)
• Record cash received during year in income ledger (Dr Cash, Cr Income)
• Calculate whether closing deferred income adjustment is required (Dr Income, Cr Deferred income)
• Close off income ledger (take balance to TB then SPL)
• Close off deferred income ledger/ ‘other payables’ (take balance to TB then to current liabilities in SFP)

Question 19

Formula for charge to SPL for accruals =

Answer 19

Cash paid during year + Closing accrual - Opening accrual

Question 20

Formula for charge to SPL for prepayments =

Answer 20

Cash paid during year - Closing prepayments + opening prepayments