chapter 6
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Chapter 6. Accounting information for trading businesses. Trading businesses. Trading : Business buying goods for resale. Will hold inventories (stocks of goods). Manufacturing : Converting raw materials to finished products. Will hold inventories (stocks) of: Raw materials - PowerPoint PPT PresentationTRANSCRIPT
Slide 6.1
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Chapter 6
Accounting information for trading businesses
Slide 6.2
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Trading businesses
Trading: Business buying goods for resale. Will hold inventories (stocks of goods).
Manufacturing: Converting raw materials to finished products. Will hold inventories (stocks) of:
• Raw materials
• Work-in-progress (part-completed)
• Finished goods
Slide 6.3
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
£
Apr 1 Purchase goods from manufacturer, 100 items at £2 each, paying in cash, and store in warehouse.
200
Apr 4 Remove 70 items from warehouse to meet a customer’s request. Those 70 items cost £2 each on Apr 1. They are delivered to the customer, who accepts the delivery.
140
Apr 4 The customer pays in cash. Selling price is £2.50 per item.
175
Analysis of transactions and events
Table 6.1 Transactions of a trading company
Slide 6.4
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
What is the profit on the sale of 70 items?
MATCHING the COST of goods sold against the amount earned by the SALE of the goods.
In accounting that calculation might be set out as follows:
£
Sale of goods (70 items) 175
Cost of goods sold (70 items) 140
Gross profit 35
There is an asset of unsold goods (30 items) which cost £2 each or £60 in total. Since that item is an asset, it will appear in the balance sheet.
Analysis of transactions and events (Continued)
Slide 6.5
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Transactions A – L = OI
Purchase goods from manufacturer, 100 items at £2 each, paying in cash, and store in warehouse
cash
invent-tory
Remove 70 items from warehouse to meet a customer’s request. Cost £2 each on Apr 1. Delivered to the customer who accepts the delivery
Invent-tory
(stock)
expense:cost of goods sold
The customer pays in cash. Selling price is £2.50 per item
cash revenue
Analysis of transactions and events (Continued)
Slide 6.6
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Transaction or event Assets Ownership interest
Cash Inven-tory
(stock)
Expense Revenue
Purchase goods from manufacturer, paying in cash
(200) 200
Remove 70 items from warehouse for sale to customer
(140) 140
The customer pays in cash 175 175
Totals (25) 60 140 175
Table 6.2 Spreadsheet analysing transactions and events into elements of the accounting equation
Analysis of transactions and events (Continued)
Slide 6.7
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Business transactions of the entity A L OI
Purchase raw materials from supplier, 100 trays at £2 each, paying in cash, and place in raw materials store
↑ ↓RM cash
Remove 80 trays from raw materials store to meet production department’s request (cost £2 each)
RM ↑↓ WIP
Transactions of a manufacturing business
Table 6.4 Transactions of a manufacturing company
=–
Slide 6.8
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Carry out labour work and use production facilities to convert raw materials into finished goods. Additional costs incurred for labour and use of facilities were £1.50 per tray processed.
cash ↑ ↓ WIP
Finished goods are transferred to finished goods store. The job has cost £3.50 per tray in total (80 trays × £3.50 = £280)
WIP ↑↓ FG
60 trays, which cost £3.50 each to manufacture, are delivered to a customer
FG↓ ↑
expense:↓ cost of
goods sold
Transactions of a manufacturing business(Continued)
Table 6.4 Transactions of a manufacturing company (Continued)
Slide 6.9
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
The customer pays a price of £5 cash per tray immediately on delivery
cash↓ ↑
revenue↑
Table 6.4 Transactions of a manufacturing company (Continued)
Transactions of a manufacturing business(Continued)
Slide 6.10
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Detailed work
• See further spreadsheets and charts in Chapter 6.
• Then work through M. Carter.
Slide 6.11
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
I know what I held at the start of the period
Opening inventory (stock)
I know what has come into the business during the period
Plus Purchases
This is all available to sell
I know what remains unsold at the end of the period
Less Closing inventory (stock)
The difference must represent what has been sold
Equals Cost of Goods Sold
Cost of goods sold
Slide 6.12
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
£
Opening inventory (stock) Nil
Plus Purchases 11,500
11,500
Less Closing inventory (stock)
(8,000)
Equals Cost of Goods Sold 3,500
Calculation for M. Carter
Slide 6.13
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Flow of accounting information
Slide 6.14
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Transactions involving cash
• Paying cash to acquire an asset.
• Paying cash to settle a liability.
• Paying cash for an expense.
• Receiving cash from the sale of goods and services.
• Receiving cash from a customer.
• Receiving cash from sale of a non-current (fixed) asset.
Slide 6.15
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Transactions not involving cash
• Buying goods on credit from suppliers.
• Returning unwanted goods to suppliers.
• Selling goods on credit to customers.
• Receiving rejected goods from customers.
Slide 6.16
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Events affecting the business
• Depreciation of non-current (fixed assets).
• Bad debts when customers fail to pay.
• Bad news, such as extra costs expected due to a change in safety legislation.
Slide 6.17
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
‘Day books’ (‘daily diaries’)
• Cash Book.
• Sales Day Book (Sales Journal).
• Purchases Day Book (Purchases Journal).
• Sales Returns Book (Sales Returns Journal).
• Purchases Returns Book (Purchases Returns Journal).
• Journal.
Slide 6.18
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
CASH RECEIVED CASH PAID
Date Description L £ p Date Description L £ p
Cash book
On 12 Jan the business pays wages of £100. The transaction is recorded as:
DEBIT Expense of wages £100 CREDIT Asset of cash £100
Slide 6.19
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
CASH RECEIVED CASH PAID
Date Description L £ p
Date Description L £ p
Jan 12 Wages W1
100.00
W1 WAGES
DATE PARTIC-ULARS
P DEBIT CREDIT BAL-ANCE
£ £ £
Jan 12 Cash CB 100 100
Cash book (Continued)
Slide 6.20
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Ref £
Jan 15 J. Brown Br1 300
Jan 20 S. Lennox Le4 400
Jan 25 P. Watson Wa2 150
Jan Total GL12GL 24
850
Sales Journal page SJ6
Slide 6.21
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Transfers to ledger accounts
• Make one debit entry in the ledger account of each customer (not part of double entry but useful for controlling records of payment by each customer).
• Make debit entry for total receivables (debtors) in General Ledger (Nominal Ledger).
• Make credit entry for total sales in General Ledger (Nominal ledger).
Slide 6.22
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
J. BROWN (Br1)
Debit Credit Balance
Jan 15
Sales SJ6
300 300
S. LENNOX (Le4)
Debit Credit Balance
Jan 20
Sales SJ6
400 400
P. WATSON (Wa2)
Debit Credit Balance
Jan 25
Sales SJ6
150 150
Transfers to ledger accounts (Continued)
Slide 6.23
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
RECEIVABLES (DEBTORS) ACCOUNT (Ref GL 12)
Debit Credit Balance
Jan Sales Journal SJ6 850 850 Dr
SALES ACCOUNT (Ref GL 24)
Debit Credit Balance
Jan Sales SJ6 850 (850)Cr
General ledger (nominal ledger)
Slide 6.24
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Purchases Journal page PJ8
Ref £
Feb 11 L. Green Gr2 140
Feb 14 P. Jarvis Ja1 610
Feb 22 N. Yates Ya3 160
Feb Total GL15GL 31
910
Slide 6.25
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Transfers to ledger accounts
• Make one credit entry in the ledger account of each supplier (not part of double entry but useful for tracking records of payment to each supplier).
• Make credit entry for total payables (creditors) in General Ledger (Nominal Ledger).
• Make debit entry for total purchases in General Ledger (Nominal ledger).
Slide 6.26
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
L. GREEN (Gr2)
Feb Debit Credit Balance
11 Purchases PJ8 140 (140)
P. JARVIS (Ja1)
Feb Debit Credit Balance
14 Purchases PJ8 610 (610)
N.YATES (Ya3)
Feb Debit Credit Balance
22 Purchases PJ8 160 (160)
Transfers to ledger accounts (Continued)
Slide 6.27
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
TOTAL PAYABLES (CREDITORS) ACCOUNT (Ref GL 15)
Debit Credit Balance
Feb Purchases Journal
PJ8 910 (910)Cr
PURCHASES ACCOUNT (Ref GL 31)
Debit Credit Balance
Feb Purchases PJ8 910 910 Dr
General ledger (nominal ledger)
Slide 6.28
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
CustomerGoods £
SupplierGoods£
Sales JournalJ. Brown £300S. Lennox £400P.Watson £150Total £850
Purchases JournalL. Green £140P. Jarvis £610N. Yates £160Total £910
Day Books
Debtors ledger Creditors ledger
J. Brown Dr Cr Bal 300 300
S. Lennox Dr Cr Bal 400 400
P. Watson Dr Cr Bal 150 150
P. Jarvis Dr Cr Bal 610 (610)Cr
L. Green Dr Cr Bal 140 (140) Cr
N. Yates Dr Cr Bal 160 (160)Cr
General Ledger(Nominal Ledger)
Sales Dr Cr Bal 850 (850)Cr
Purchases Dr Cr Bal 910 910
Debtors Dr Cr Bal 850 850
Creditors Dr Cr Bal 910 (910)Cr
Purchase invoicesSales invoices
General ledger (nominal ledger) (Continued)
Slide 6.29
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Chapter 6
Bookkeeping supplement
Slide 6.30
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Rules of debit and credit
Table 6.10 Rules of debit and credit
Capital contributedCapital withdrawn
RevenueExpenseOwnership interest
IncreaseDecreaseLiability
Right-hand side of the equation
DecreaseIncrease Asset
Left-hand side of the equation
CREDIT ENTRIES DEBIT ENTRIES
Slide 6.31
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
£ DEBIT CREDIT
Purchase 100 items at £2 each for cash
200 Inventory(stock)
Cash
Remove 70 at £2 each for delivery to the customer
140 Cost of goods sold
Inventory(stock)
Customer pays in cash. 70× £2.50 per item
175 Cash Revenue
Transactions of a trading company
Table 6.11 Transactions of a trading company: debit and credit entries
Slide 6.32
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
£ DEBIT CREDIT
Purchase raw materials from supplier, 100 trays at £2 each, paying in cash, and place in raw materials store
200 Raw materials inventory
(stock)
Cash
Remove 80 trays from raw materials store to meet production department’s request (cost £2 each)
160 Work-in-progress
Raw materials inventory
(stock)
Carry out labour work and use production facilities to convert raw materials into finished goods. Additional costs incurred for labour and use of facilities were £1.50 per tray processed
120 Work-in-progress
Cash
Table 6.12 Transactions of a manufacturing company: debit and credit entries
Transactions of a manufacturing company (Continued)
Slide 6.33
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Finished goods are transferred to finished goods store. The job has cost £3.50 per tray in total (80 trays × £3.50 = £280)
280 Finished goods
Work-in-progress
60 trays, which cost £3.50 each to manufacture, are delivered to a customer
210 Cost of goods sold
Finished goods
The customer pays a price of £5 cash per tray immediately on delivery
300 Cash Revenue
Transactions of a manufacturing company (Continued)
Table 6.12 Transactions of a manufacturing company: debit and credit entries (Continued)
Slide 6.34
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
L1 Cash 6,400
L2 Ownership interest 49,000
L3 Buildings 30,000
L4 Equipment 5,750
L5 Inventory (stock of goods) 8,000
L6 R. Busby nil
L7 Electricity 100
L8 Wages 2,000
L9 Cost of goods sold 3,500
L10 Sales 7,000
L11 R. Welsby nil
L12 Depreciation 250
Totals 56,000 56,000
Trial balance at 31 May for M. Carter
Table 6.14 Trial balance at 31 May for M. Carter, wholesaler
Slide 6.35
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
M. Carter (extract)
R.WelsbyCash3,000R. Welsby pays in cash
SalesR.Welsby3,000Business sells goods on credit to R. Welsby
SalesCash4,000Business sells goods for cash
Inventory(stock)
Cost of goods sold
3,500Items costing £3,500 removed from inventory (stock) for agreed sales