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  4. Dear Mr Moffat

    1. When we remove the opening inventory and transfer it to the debit side of income statement, do we do it in order to show that costs incurred in production unsold must decrease sales revenue ( credit side of income statement ) ?
    2. Since closing inventory is transferred to the credit side of income statement, do we do it in order to decrease expenses incurred in full production with the aim to arrive at expenses incurred in production sold on debit side of income statement ?

  7. Hi Mr Moffat,

    I am unsure with questions regarding sole trader taking drawings whether to Cr Inventory or to Cr Purchases.

    It is not always clear, can you please explain the difference?

  8. Hi,
    In topic inventory IAS 16 the lecturer has credited the inventory in income statement example 2. Inventory is an asset therefore it should be debited in income statement why it has been credited? Because on income statement debit side are for expenses and credit side is for income. Please explain.

    • The inventory account records the asset, and this has been debited.

      The income statement has been credited because closing inventory reduces the cost of goods sold. Assets do not appear in the income statement!

      I suggest that you watch the lecture again.

  9. Hi! Is there no need to create a cost of sales account first and close the same later to profit and loss account? Because sometimes if we close all the purchases to the income statement account, I loose track of the ending inventory if it is not given.

    Many thanks,

    Liza

    • There is no need, although in practice you can deal with it in many ways – there are no rules for the actual double entries.

      The way in the lecture is the way for the exam (although there is very little testing of debits and credits in the exam).

    • But I do balance it – a balance of 4,000 is left on the inventory account.
      (As I explain in earlier chapters, if there is only one figure on the account you do not need to start putting in totals and carrying forward a balance when you will still end up with just one figure.)

  11. An invoice of $15,000 for energy costs relating to the quarter ended 30 November 20X7 was received on
    2 December 20X7. Energy costs are included in administrative expenses.
    the year ends 31october 2007. Administrative expenses —325. the answer is: 15000 2/4=10000. i understood this but i didn’t understand this: ,,Administrative expenses (325 + 10) .why we add 10? I think because 15000 included we less 325 by 15 and than add 10.. pls.help me.. last year i get 48 marks and…:(

      • I have no idea what the 325 and the 10 are!

        With regard to the invoice of 15,000, that was for the three months September, October, November.
        The year end is 31 October, and so at the year end they were owing for 2 months.
        If the invoice for 3 months was 15,000, then they must have been owing 2/3×15,000 = 10,000 for the two months.
        The invoice had not been recorded as the year end, and so there is an accrual of 10,000 and the expense in the Statement of profit or loss needs increasing by 10,000.

  12. hi john, l saw this example and answer is this :
    Cost of sales
    Opening inventory 160
    Purchases 1,140
    Closing inventory (75)
    =1,225
    add Depreciation (W2) 59=
    1,284
    in the example it said that Depreciation is treated as a cost of sales expense. why it addes and not less?

  13. A company with an accounting date of 31 October carried out a physical check of inventory on 4
    November 20X3, leading to an inventory value at cost at this date of $483,700.
    Between 1 November 20X3 and 4 November 20X3 the following transactions took place:
    1 Goods costing $38,400 were received from suppliers.
    2 Goods that had cost $14,800 were sold for $20,000.
    3 A customer returned, in good condition, some goods which had been sold to him in October for
    $600 and which had cost $400.
    4 The company returned goods that had cost $1,800 in October to the supplier, and received a
    credit note for them.
    What figure should appear in the company’s financial statements at 31 October 20X3 for closing
    inventory, based on this information?
    A $458,700
    B $505,900
    C $508,700
    D $461,500

    I don’t understand how the answer is D. i thought we must add purchases a less sales. .not add sales and less purchases

    • The reason is that we need to work backwards because we know the inventory on 4 Nov and we want to know what it was on 31 Oct.
      So…..if you purchased something on 2 Nov (for example) the inventory on 4 nov will be higher and the inv on 31 oct would be lower.

      • The answer is certainly not 505,900!

        The answer is 461500.

        The inventory as at 4 November is 483700, so we have to work backwards to find out what it was on 31 October.
        483700 – 38400 + 14800 – 400 + 1800 = 461500

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