Cost of sales and other expenses

Question 1

definition of expenses

Answer 1

costs incurred in the operation of a business to earn income in the same accounting period

Question 2

definition of cost of sales

Answer 2

cost incurred in buying inventory that was sold
or
cost price of goods that have been sold

Question 3

definition of other expenses

Answer 3

other costs incurred during the operation of a business to earn income e.g. wages and salaries, utilities expense, rental expense

Question 4

expenses are recognised when they are ______

Answer 4

incurred

Question 5

definition of expenses that are incurred

Answer 5

expenses are incurred when the business consumes (uses up) their benefits to generate income

Question 6

What are the 2 key accounting theories for expenses

Answer 6

1. matching theory
2. accrual basis of accounting

Question 7

state matching theory

Answer 7

according to the matching theory, costs incurred during the operation of a business to generate revenue and other income must be matched against revenue and other income earned in the same accounting period to determine profit for the period

Question 8

state the accrual basis of accounting

Answer 8

the accrual basis of accounting states that:
- income is recorded in the financial period that it is earned, regardless of when cash or cheque is received
- expenses are recorded in the financial period that they are incurred, regardless of when cash or cheque is paid

Question 9

cost of sales double entry

Answer 9

Dr Cost of Sales (+ expense)
Cr inventory (- asset)

Question 10

other expenses double entry

Answer 10

Dr other expense (+ expense)
Cr cash in hand / cash at bank (- asset)

Question 11

closing double entry for cost of sales account

Answer 11

Dr Income summary
Cr Cost of sales (- expense)

Question 12

closing double entry for other expenses account

Answer 12

Dr income summary
Cr Other expense (- expense)

Question 13

why would a business have expenses payable

Answer 13

the business might have used services (such as insurance or utilities) but have not paid for them at the end of the financial year

Question 14

state and explain the theory for expense payable

Answer 14

According to the accrual basis of accounting , such expenses must be recognised in the period the services have been used, regardless of whether the business has paid for them

Question 15

Expenses payable in statement of financial performance/position

Answer 15

performance:
added to other expenses
position:
recorded as a current liability

Question 16

double entry for the reversal of expense payable at the start of the next financial year

Answer 16

dr expense payable (- current liability)
cr other expense

Question 17

state the 4 steps for expense journal

Answer 17

step 1:
reversal at the start of the financial year
step 2:
record expenses paid during this year
step 3:
adjustment for expense payable at the end of the financial year
step 4:
close expense account to income summary at the end of financial year

Question 18

what is prepaid expenses

Answer 18

refers to expense which have not been incurred, but the amount has been paid in advance at the end of the period

Question 19

theory for prepaid expenses, and explain

Answer 19

according to the accrual basis of accounting, such expenses should be recognised in the period the services have been used, regardless of whether they have been paid or not.

Question 20

prepaid expenses are recognised as ___________ in the next financial year when they are subsequently used by the business

Answer 20

expenses

Question 21

prepaid expenses in statement of financial performance / position

Answer 21

performance:
deducted from other expenses

position:
recorded as current assets