Category: Accounting

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.

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.

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.

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.

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.

SIGNIFICANCE OF BANK RECONCILIATION STATEMENT

(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

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. 

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.