Important Points Regarding Manufacturing Account

Important Points Regarding Manufacturing Account

1. Stocks. In case of a manufacturer, there can be stocks of three types:

 Stock of raw materials. It includes stock of raw materials or finished components which might have been purchased by the manufactrn-er for using them in the products manufactured by him but still lying unsold.

Stock of work-in-process. This is also tenned as stock of work-in-progress. It includes goods in semi-finished form.

Stock of finished goods. It includes stock of those goods which have been completely processed and are lying unsold at the end of a period with the manufacturer. It also includes stock of those finished goods which might have been purchased by a manufacturer-cum-trader from outside parties, but still lying unsold with him at the end of the accounting period.

2. Raw materials consumed. It is customary to show in the Manufacturing Account, the value of raw materials consumed for manufacturng goods during a particular period.

3.Carriage inwards, etc. The expenses incurred for bringing the raw materials to the factory or the octroi or customs duty paid by the manufacturer on the raw materials purchased or imported by him will also be charged to Manufacturing Account.

4.Cost of production. The Manufacturing Account gives the cost of manufacturing the goods during a particular period. This is comuted by deducting from the total of the dedit side of the Manufacturing Account, the total of the various items appearing on the credit side of the Manufacturing Account as shown in the proforma of the Manufacturing Account given earlier in the chapter.

5. Sale of scrap. In manufacturing operations, certain scrap is unavoidable, it may or may not have any sales value. In order to calculate the true cost of manufacturing the goods, it is necessary that the money realised on account of sale of scrap (or realisable value of the scrap in case it has not been sold) should be considered. The amount of scrap is, therefore, credited to the Manufacturing Account.

Depreciation Method – Machine hour rate method

Machine hour rate method. This is also known as Service Hours Method. This method lakes into account the running time of the asset for the purpose of calculating depreciation. The method is particularly suitable for charging depreciation on plant and machinery, air-crafts, etc. The amount of depreciation is calculated as follows:

Original Cost of the Asset — Scrap Value/ Life of the Asset in hours 

For example, if a machine (having a scrap value of Rs 1,000) is purchased for Rs 20,000 and it has an effective life of 10 years of 1,000 hours each, the amount of depreciation per hour will be computed

The method has the advantage of correlating the charge for depreciation, to the actual working time of the machine. However, this method can he used only in case of those assets whose life can be measured in terms of working time.


Accountancy Class 11 – Classification of Income


(i) Capital Income. The term ‘Capital Income’ means an income which does not grow out of or pertain to the running of the business proper. It is synonymous to the turn ‘Capital Gain’. For example, if a building costing Rs 10,000 purchased by a business for its use is sold for Rs 15,000, Ps 5,000 will be taken as a capital profit.

However, it should be noted that only the profit realised over and above the cost of the fixed-asset shouki be taken as a capital frofit. The profit realised over and above book value of the asset till it does not exceed the original cost of the asset should be taken as a revenue profit though it does not strictly arise out of and in the course of regular business transactions. This is because, the depreciation against the fixed asset has already been charged to the Profit & Loss Account of the earlier years and any profit which is now made on the sale of a fixed asset (not exceeding the original cost of the fixed asset) is simply recovery of excess provision for depreciation made in the earlier years. This is also provided by the Income Tax Rules. For example, if a plant originally purchased for Rs 10,000 standing in the books at Rs 6,000 (on account of charging depreciation) is sold for P.s 12,000, there is a profit of Rs 6,000 on the sale of this plant Out of this profit, Rs 2,000 (i.e., the amount over and above cost of the asset) should be taken as a capital profit while the balance of Ps 4,000 should he taken as a revenue profit. Capital profit is transferred to the Capital Reserve and is shown in the Balance Sheet on the liabilities side while revenue profit is credited 10 the Profit & Loss Account.

Revenue Income. Revenue Income means an income which arises out of and in the course of the regular business transactions of a concern. For example, in the course of rnnning business, the profit is made on sale, of goods, income is received from letting out the business property, dividends are received on business investments etc. All such incomes are revenue incomes. It should be noted that the terms “Revenue profit’ and Revenue Income’ synonymous.


Procedure of Journalising

Journal is the book of primary entry in which every transaction is recorded before being posted into the ledger. It is that book of account in which transactions are recorded in a chronological (day to day) order. In modern times, besides the main journal, specialized journals are maintained to record different type of transactions. The process of recording transaction in a journal is termed as journalising. A journal is generally kept on a columnar basis. Journalising is the root of accounting.

In a bookkeeping system involving the use of books of prime entry, it is inevitable that there will be transactions that do not correspond with the main books of prime entry used,that is, the daybooks and cash books. In order to complete the system, another book is needed in which to capture sundry items prior to entering them in the ledger. This book
is called ‘the journal’ and is used for a wide variety of transactions, such as:

• the purchase and sale of non-current assets on credit;
• depreciation
• the write-off of bad debts;

Procedure of Journalising

The following procedure is followed for passing journal entries-
— Analyze each transaction in terms of accounts affected. As a rule every transaction has at least two accounts.
— Find out the type of accounts affected in a transaction i.e. personal, real or nominal.
— Apply the rules of debit and credit to each type of accounts involved.
— The debit and credit accounts must be equal. Sometimes, a journal entry may have more than one debit or more than one credit. This type of journal entry is called compound journal entry. Regardless of the number of debits or credits in a compound journal entry, the aggregate amount of debits should be equal to the aggregate amount of credits.

Accountancy Class 11 – Rectifying Accounting Entries


The errors committed in the books of accounts when located out, have to be corrected. However, corrections in the books of accounts should he done by passing proper rectifying entries and not by culling or erasing figures. Such entries, as explained earlier, are passed in the General Journal or Journal Proper. The passing of proper rectifying entries is being explained below with suitable examples.

Example 1, The Sales Book overcast by Ps 50.

Over-casting of Sales Book will result in over-credit to Sales Account by Ps 50 since the total of the Sales Book is posted to the credit of the Sales Account at the end of a period. There can be two situation in such a case:

(i) The error might have been located out by the accountant before transferring the difference to the Suspense Account In such a case, there is mistake only in one account, i.e., the Sales Account. It has been credited more by Ps 50. The error can be rectified if the Sales Account is debited by Ps 50. Thus, the following will be the rectifying entry in the Journal Propet

No account is to be credited since the error affects only one account.

(ii) The error might have been located out by the accountant after transferring the difference in the Trial Balance to a Suspense Account In such a case two accounts are involved: (a) Sales Account, and (b) Suspense Account. Since Sales Account had been credited more by Ps 50 the credit side of the Thai Balance must have been more than the debit side of the Trial Balance. The Suspense Account should, therefore, have been put on the debit side of the Thai Balance in order to balance the two sides

The Sales Account has been &edited more by Ps 50. In order to rectify the error, the Sales Account should therefore be debited by Ps 50. Suspense Account has been debited because of this mistake which has now been found out. It should therefore, be closed by giving credit to it.

Objectives of Providing Depreciation


The following are objectives of providing depreciation:

1. Ascertainment of true profits. When an asset is purchased, it is nothing more than a payment in advance for an expense. For example, if a building is purchased for Rs 10,000 for business, the effect of such a purchase will be saving in the cost of rent in the future. But, after a certain number of years, the building will become useless. The cost of the building is, therefore, nothing except paying rent in advance for a period of years. If the rent had been paid, it would have been charged as an expense for determination of the true profits, made by the business during a particular period. The amount paid for the purchase of building should, therefore, be charged over a period of time for which the asset would be serviceable.

2. Presentation of true financial position. The assets get depreciated in their value over a period of time on account of various factors, as explained before. In order to present a true slate of affairs of the business, the assets should be shown in the Balance Sheet, at their proper values.

3. Replacement of assets. Assets used in the business need replacement after the expiry of their service life. By pmviding depreciation a part of the profits of the business is kept in the business which can be used for purchase of new assets on the old fixed assets becoming useless.


Consignment Accounting – Abnormal loss

Abnormal loss. This loss should be debited to Abnormal Loss Account and credited to Consignment Account. Abnormal Loss Account may be closed by transferring to P & L Account.

The credit to the consignment account with the value of Abnormal Loss is given because it will make possible for the management to judge properly the profitability or otherwise of the consignnicnt.

The valuation of stock destroyed on account of abnormal reasons will be done on the same basis as valuation of Stock on Consignment i.e., proportionate cost price plus proportionate direct expenses incurred up to the date of loss.

While valuing abnormal loss, care should be taken of the stage where abnormal loss took place since only such expenses have to be included in the valuation oEsuch abnormal loss which have been incurred upto that stage. This will be clear with the help of the following illustration.

Significance Of Bank Reconciliation Statement

The purpose of a bank reconciliation statement is to check the accuracy of an organisation’s bank account record by comparing it with the record of the account held by the bank. In Chapter 8 we saw that there is often a timing delay between the transaction occurring (and therefore being recorded in the cash book) and it being processed by the bank. It is this timing difference that is usually the cause of any difference between the balances. However, there are some transactions of which the organisation will not be aware until they receive their bank statement. These include bank charges, commissions and dishonoured cheques (where the drawer’s bank has refused to honour the cheque drawn upon it), and may also include direct debits and standing orders if the account holder has not been separately notified of their being paid.

In order to ensure that both the bank’s and the organisation’s records are correct a comparison is made of the two sets of records and a reconciliation statement produced.


(i) It highlights the causes of difference between the bank balance as per cash book and the balance as per pass book. Necessary adjustments can, therefore, be carried out at an early date.

(ii) It reduces the chance of fraud by the staff dealing in cash.

(iii) It acts as a moral check on the staff of the organization to keep the cash records always up to date.

(iv) Bank balance as per cash book cannot be accepted as final unless it is supported by statement of passbook. When these two balances do not tally, reconciliation becomes essential to determine the correct bank balance that can be used while finalizing the accounts.

(v) It helps in finding out actual position of the bank balance.

Average Due Date Introduction


Avenge Due Date may be defined as the mean or equated date on which one payment may be made in lieu of several payments due on different dates without loss of interest to either party. For example, A, a businessman may have a series of transactions involving receipts and payments of money due on different dates with B, another businessman. They may decide to settle their accounts on a particular date, after taking into account the amount of interest which may have become due by one party to another. There are two alternatives available in such a case:

(a) Interest may be calculated separately for each transaction; or

(b) A mean date may be determined and the interest may be calculated from such mean date to the date of actual scttlement on the total amount due by one party to another.

Alternative (a) is preferable since it will reduce a lot of clerical work. The mean date so calculated is termed as the Average Due Date. 

Salient Features of the Single Entry System

The salient features of the Single Entry System can be put as follows:

(i) Maintenance of personal accounts. Usually under this system personal accounts are maintained while real and nominal accounts are avoided. On account of his reason some accountants define it as a system where only personal accounts are maintained.

(ii) Maintenance of cash book. A Cash Book is maintained, which usually mixes up both the personal transactions and the business transactions.

(iii) Dependence on original vouchers. In order to collect the necessary information one has to depend on original vouchers. For example, the figure of credit purchases may not be readily available, it may have to be found out on the basis of original invoices received from the suppliers. Similarly, the total figure of sales at the end of a particular period may have to be found out on the basis of the invoices which have been issued by the business from lime to time.

(iv) No uniformity. The system may differ from finn to finn as per their individual requirements and conveniences.

(v) Suitability. The system is suitable in case of small, proprietary or partnership concerns. Limited companies cannot adopt this system on account of legal requirements.


Depreciation Accounting – Dilapidations

Dilapidations. The term dilapidation refers to damage done to a building or other property during tenancy. When a property is taken on lease, is returned to the landlord he may ask the lessee as per agreement to put it in as good condition as it was at the time it was leased out. In orderlo meet cost of such dilapidation, a provision may be created by debiting the property account with the estimated amount of dilapidation and crediting the provision for dilapidations account. Depreciation may then be charged on the total cost of the asset so an-ivçd at Any payment made later on dilapidation may be debited to the provision for dilapidation account. The balance, if any, may be transferred to profit and loss account.