slide 6.1 pauline weetman, financial and management accounting, 5 th edition © pearson education...

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Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011

Chapter 6

Accounting information for trading businesses

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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

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£

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

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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)

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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


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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


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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

=–

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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)

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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)

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Detailed work

• See further spreadsheets and charts in Chapter 6.

• Then work through M. Carter.

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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

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£

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

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Flow of accounting information

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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.

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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.

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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.

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‘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.

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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

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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)

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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

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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).

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J. BROWN (Br1)

Debit Credit Balance

Jan 15

Sales SJ6

300 300

S. LENNOX (Le4)


Jan 20

Sales SJ6

400 400

P. WATSON (Wa2)


Jan 25

Sales SJ6

150 150

Transfers to ledger accounts (Continued)

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RECEIVABLES (DEBTORS) ACCOUNT (Ref GL 12)


Jan Sales Journal SJ6 850 850 Dr

SALES ACCOUNT (Ref GL 24)


Jan Sales SJ6 850 (850)Cr

General ledger (nominal ledger)

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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

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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).

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L. GREEN (Gr2)

Feb Debit Credit Balance

11 Purchases PJ8 140 (140)

P. JARVIS (Ja1)



N.YATES (Ya3)



Transfers to ledger accounts (Continued)

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TOTAL PAYABLES (CREDITORS) ACCOUNT (Ref GL 15)


Feb Purchases Journal

PJ8 910 (910)Cr

PURCHASES ACCOUNT (Ref GL 31)


Feb Purchases PJ8 910 910 Dr

General ledger (nominal ledger)

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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)

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Chapter 6

Bookkeeping supplement

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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

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£ 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

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£ 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)

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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)

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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

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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

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