format – accountingexplained

So far, all previous posts deal with businesses that either sell goods (or products) to customers or services to customers. We have not been dealing with manufacturing company. A manufacturing company not only manufactures products but also sells them to other company. So, the existing preparation of accounts are not enough to record everything (the trading and profit and loss account and the balance sheet statement.) In this case, you will need to have another account drawn up; the manufacturing account.

In manufacturing account, you will need to be aware of new terms;

1) Direct costs – Costs that can be directly traced to making the products. Direct costs are categorised into direct materials, direct labour and direct expenses.

2) Indirect costs – Costs that cannot be directly traced to making the products.

3) Prime costs – All direct costs.

4) Factory overhead – Costs which occur in the factory where the production is being done.

5) Production cost – prime costs + factory overhead (remember this but not that simple).

You will also need to know that there are three types of stock in manufacturing account; 1) raw materials, 2) finished goods and 3) work in progress. As the name implies, you will expect raw materials as the costs in direct materials so it will appear in the manufacturing account. As for finished goods (treat them as you normally do) in the trading account. Lastly, work in progress are products that are partially finished. You will be expected to include them in the manufacturing account to arrive at the Production Cost.

As for now, what is the format of manufacturing account? Manufacturing account has a purpose in arriving at the cost of production – you needed to know how much finished goods have been

Remember that Prime costs = Direct Materials + Direct Labour + Direct Expenses so now

Production cost = Direct Materials + Direct Labour + Direct Expenses + Factory Overhead (+Work In Progress – see below)

Now then that’s done but what else to watch out for?

1) It is important to know that examiners will have a list of expenses for you to categorize whether there are “factory overhead,” “administration expenses” and “selling and distribution expenses.” A general rule will be to treat factory expenses in manufacturing account and office expenses in profit and loss account. In some cases, you will need to further classified office expenses into “administrative” and “selling and distribution expenses”.

2) Production cost is transferred to trading account. You replaced the purchases from trading account. 3) Lastly, you must remember to post all closing balance of stocks into balance sheet (same treatment like the normal closing stock).

This post is finished.

This post has been re -updated on 7th June 2013.

This topic is easy if you understand what is accounting period and accrual concept.

Accrual concept is the consideration of income and expenses (also called charges) relating to the accounting period. You then need to know what is an accounting period. Accounting period is the time set by a company itself on its period of accounting, reporting date and year end closing. Most companies have an accounting period of one year and they usually ends at 31st December 20XX so you could expect most companies and exam questions’ accounting period starts at 1st January 20XX – 31st December 20XX.

Accrual means owing and prepayment means advanced payment. If you start a business on 15th August 2012 and you decide to rent a vacant lot for your business. So you will expect payment to be made in advance, say 3 months in advance worth of $3,000 (well, the tenant needed to ensure that you really wanted to rent the lot and perhaps also for security reason). So you made the following payments on 15th August 2012 and 15th November 2012. I have further explained the points below:Right now, you will need to know how to open up a Rent account (an expense account). The reason I emphasized on an expense account is the fact that you will need to apply the nature of transaction for an expenses – which is the debit side. You will also need to know how to post the rental account items to its relevant account and the overall format of how the adjusted accounts will look like. The above example uses rental account, which is an expense item, in this case, you will need to follow the general format for an expense account as proposed above. You will not see this in any textbook, you are expected to know where to put accrued and prepaid opening and closing entries, which is indeed confusing during the examination. In any case, you should also be able to tell whether it is an expense or an income. Remember that if you pay then it is an expense while if you receive then it is an income. Then use the relevant format to solve for the Profit and Loss amount.

In order to score well, you will need to know:

1) How to charge expense/income to the profit and loss account, for which you will need to refer back to the format above to solve.

(The trick that I used!) In order to remember,

I denote Expenses as [E], Revenues as [R], Accrual as [A], Bank as [B], Profit and Loss as [P] and Prepaid as [P].
For an Expense Account, the debit side will be PBA and the credit side will be APP.
So memorize only “E – PBA APP”
For an Income Account, the debit side will be APP and the credit side will be PBA.
So memorize only “R – APP PBA”

You can stick with any other method you like to as long as you can remember them.

2) How to post closing entry to the balance sheet.

Accrued at closing balance of Expenses = Current Liabilities
Prepaid at closing balance of Expenses = Current Assets
Accrued at closing balance of Revenues = Current Assets
Prepaid at closing balance of Revenues = Current Liabilities

Tag: format

Manufacturing Account

Adjustments for Final Accounts – Accrual and Prepayments