You can manually tell google to delete the pages that do not exist anymore.
Log onto Google webmaster tools and click on the url for the site.
Then click on "tools", which is on the left, and then "remove url's". Just follow the instructions on the page and google will delete those pages (but I think it takes about 2 days).
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One more question... On my google webmaster tools I have got two 'top search queries' in position 3 & 7 is this what people are searching for and finding my site?
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Yes, also look at the "top clicked queries" on the right side of the page. That list tell you how many people actually clicked on your site when they found you for a specific keyword.