Chapter 6

• Closing Inventory:

  • goods that have been purchased but not yet sold
  • not part of the costs of goods sold
  • an asset to the business, held for resale so a current asset

  Debit Closing inventory on SFP

  Credit Closing inventory on SPL - cost of sales
• Opening inventory:

  • closing inventory from the previous period
  • part of the periods cost of sales, as expected to be sold this year
  • added to purchases
• Inwards delivery: amount paid by a business for having the goods delivered to it. Part of cost of sales in SPL.

  Outwards delivery: amount paid by a business for having goods delivered to its customers. Expenses on the SPL.
• Service organisations:

  If supplying a service, there will be no inventory to account for. Cost of sales must reflect the cost of providing the service to customers. Normally including:

  • direct labour costs
  • sales commission
  • materials used
• Accruals basis of accounting:

  We must include all the income and expenditure relating the the period whether or not the cash has been received of paid or an invoice received/ not received.

  Income is therefore matched against the expenditure incurred to generate that income in a particular accounting period - the matching concept
• Accrual: We have incurred an expense but not yet paid for it at year end

  Need to record the extra expense at year end.

  Debit Expense

  Credit Accruals
• Prepayment: We have paid for an expense in advance.

  We need to reduce the expense at the year end.

  Debit Prepayments

  Credit Expense
• Accrued Income: income earned during the period but not yer received.

  Needs to be included in the SPL

  Debit Accrued Income

  Credit Income
• Deferred income: Income received in advance that related to the next period.

  Needs to be removed from the SPL

  Debit Income

  Credit Deferred income