Flashcards in Trial balance to financial statements question Deck (11):
How do you record a prepayment transaction using ledger accounts, when an expense is paid in advance for a future accounting period?
The prepayment account is debited, since a prepayment is an asset to the company
The expense account is credited by the prepayment amount
The expense goes to the SOPL, under expenses (distribution or admin)
and the prepayment goes to the SOFP, under current assets
How do you record an accrual transaction using ledger accounts, when an expense has not been paid by the end of the accounting year?
The accrual account is credited, since an accrual is a liability to the company at the year end
The expense account is debited, to show the cost of the expense being accounted for
The expense goes to the SOPL, under expenses
and the accrual goes to the SOFP, under current liabilities
How are debentures accounted for when issued?
Debit cash account, increase in asset
Credit debenture account, increase in liability
When debenture interest is paid, how is this accounted for in ledger accounts?
Debit finance cost (debenture interest), since liability is being decreased by paying the amount payable
Credit cash account, since a decrease in asset of the business
What is a debenture?
A long-term loan taken out by companies
It is required that debenture interest is paid before dividends are paid to shareholders
How is a taxation charge accounted for in ledger accounts?
Debit the taxation charge
Credit current liabilities, taxation payable - since the liability has been paid
How do you calculate gross profit?
Revenue less COGS
COGS = cost of sales
COGS = opening inventory + purchases - closing inventory
How do you account for new shares issued?
Debit the bank account with the amount received from the shares, share proceeds: selling price x no. of shares
Credit the share capital account: nominal value x no. of shares
Credit the share premium account: (selling price - nominal value) x no. of shares
How do you account for dividend payments been made?
Debit - Retained Earnings account, decrease in equity/income
Credit - Dividend liability
How is a prepayment accounted for in ledger accounts?
The bank is credited since the payment has come from the bank account in the financial year
The expense account for which the expense has been prepaid is debited by the bank to show the payment for the expense
The expense account is then credited by the prepayment
The prepayment is shown in the expense account as:
Debit - Bank account on date of payment (£p/pay amount)
Credit - Prepayment account at year end (£p/pay amount)