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You said in your lecture on Prepayments example 3 – that we need to remove the balance from Prepayment account next year because it is not our prepayment but it is insurance expense in year 2.
1. My question is that do we need to remove the balances from all the SOFP items in the subsequent periods the balance brought forward from previous years (or it is just in case of prepayment)?
2. It is true that whatever we have to charge any SOFP item as expense to SOPL then we need to remove the balance of SOFP item from the general ledgers and add it to the SOPL item into the expense account?
3. Whenever we have to remove any item from the general ledgers then we simply make the reverse entry to remove their balances from our books?
4. Does that reversal not make difference in our balances in general ledgers at the end of the year?
1. At the end of the period we leave all the SOFP balances on the accounts, and start the new period with the same balances.
For accruals, prepayments and inventories the opening balances then need dealing with in the way I illustrate in my lectures.2. True (except we are not removing things from the general ledger’s. We are transferring them between accounts and all the account are in the general ledger (and there is only one general ledger).
3. We are not removing anything from the books – we are transferring balances to expense accounts.
4. Any entries in accounts will change the balances.
In relation to all of the above, appreciate that you cannot be asked to write up any t-accounts in the exam.
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