Day 2- Chapter 6 Flashcards
Cost of Sales = ?
opening inventory + purchases - closing inventory
When do we adjust our inventory?
only at year end
What is closing inventory?
goods held at the year end
remain unsold at year end
are a current asset
NOT PART OF COST OF GOODS SOLD
What is the double entry to record closing inventory?
DR closing inventory - statement of financial position
CR closing inventory - cost of sales on p/l
Why do we CR closing inventory at year end?
to reduce the cost of sales in the p/l
Why do we DR closing inventory at year end?
to increase our current assets on balance sheet
What is opening inventory a part of?
the periods cost of sales therefore you have to increase it - we assume its the first to get sold
THEREFORE we add to purchases
How to account for inventory at Y/E
- REMOVE OPENING INVENTORY
DR opening inventory - cos, SPL
CR inventory - CA, SFP
- RECORD CLOSING INVENTORY
DR inventory - CA, SFP
CR closing inventory - cos, SPL
Double entry for closing inventory
RECORD CLOSING INVENTORY
DR inventory - CA, SFP
CR closing inventory - cos, SPL
Double entry for opening inventory
REMOVE OPENING INVENTORY
DR opening inventory - cos, SPL
CR inventory - CA, SFP
What else might go into cos?
delivery in and outwards
Delivery inwards
delivery cost of purchases - cos on p/l
Delivery outwards
delivery cost to send to customers - expense on p/l
distribution costs
What is the main equation for accruals basis of accounting?
Profit = income earned - expenses incurred
relates to relevant AP
- regardless of cash paid/ received
What would happen if cash paid for expenses during period does not equal expenses relating to the period?
accural/prepayment has occurred
When does accrual occur?
when cash paid is less than expense for the year
current liability
When does prepayment occur?
if cash paid is more than expense for the year
its is a current asset
How do we account for accrual at the end of the year?
DR expense - P/L
CR accural - FP
How do we account for prepayment at the end of the year?
DR prepayment - FP
CR expense - P/L
What does accural mean?
we have incurred an expense but have not paid it at y/e
What does prepayment mean?
we have paid for an expense in advance - relates to next year
closing accural = ?
cash paid - expenses
accrued expense incurred =?
cash paid + closing accrual - opening accrual
prepayment expense incurred = ?
opening prepayment + cash paid during year - closing prepayment
