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At 31 March 20X2 a company had oil in hand to be used for heating costing $8,200 and an unpaid heating oil bill for $3,600.
At 31 March 20X3 the heating oil in hand was $9,300 and there was an outstanding heating oil bill of $3,200.
Payments made for heating oil during the year ended 31 March 20X3 totalled $34,600.
Based on these figures, what amount should appear in the company’s statement of comprehensive income for heating oil for the year?
The answer is $33’100 and is explained as:
Payments made: $34’600
Add: opening balance $8’200
Less: opening accrual $(3’600)
Less: closing balance $(9’300)
Add: closing accrual $3’200Could you please explain:
– Why $8’200 is the opening balance?
– Why do you less opening accrual and add closing accrual? Should this not be the reverse?(I have already watched your lecture videos on accruals and prepayments.)
Thanks for help!The adjustments for the opening and closing inventories are inventory adjustments – not accruals or prepayments.
For this part of it, here is a simple example:
We start the year with $100 oil. During the year we buy for $1000. At the end of the year we still have $200 of oil left.
What we want in the Statement of profit or loss is the cost of the oil actually used.
So if you started with 100 and bought another 1,000, that means you had 1,100 available to use. But if 200 of it is still there at the end, then we must have used only 1100 – 200 = $900.With regard to the opening and closing accruals. I we start the year owing 3,600 and paid 34,600 during the year, then 3,600 of the payment was what was owing from last year and so only the remained of 31,000 is for this year.
Similarly, if we paid 31,000 for this year but still owe 3,200 at the end of the year, then the cost for this year of oil bought must be 31,000 + 3,200.To get the expense for the year, we always subtract opening accruals and add closing accruals from the cash actually paid during the year.
So if I wanted to calculate this using T-accounts instead, would these be the correct entries for the P/L account?
Dr. Opening inventory a/c $8’200
Dr. Heating Bill a/c $34’200Cr. Closing Inventory a/c $9’300
Cr. P/L Statement $33’100Many thanks.
No.
There will be an opening debit balance on the inventory account (because it is an asset)
So at the start of the period:
Dr Heating expense account; Cr Inventory account.At the end of the period:
Dr Inventory account; Cr Heating expense account.(Although you must do whichever is quickest and easiest for you, there is very little testing of double entry in the exam and you cannot be asked to prepare t-accounts. I find most questions easier without bothering with t-accounts)
Hello, sir. I still don’t understand why we adding 8200 and subtracting 9300. We “had oil in hand” means we already pay for it? Thank you.
When we pay for it is irrelevant, the expense in the SOPL is the cost of the oil used during the period and the oil in inventory at the start of the period is used during the period.
Have you watched my free lectures on accruals and prepayments? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
sir,
Your response to the above questions the on accrual question suggest that $ 31,000+3,200 = $34,200 is the answer. However, In the revision text, the answer is $33,100. This might sound unintelligent on my part but am just confuse in my head. Thank you
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