Journal Entries and Cost Flow in Manufacturing Concerns, Exercises of Financial Accounting

Download Journal Entries and Cost Flow in Manufacturing Concerns and more Exercises Financial Accounting in PDF only on Docsity! Financial Accounting - I – MGT101 VU © Copyright Virtual University of Pakistan 93 Lesson-15 RECORDING OF STOCK (Continued) Stock is termed as “the value of goods available to the business that are ready for sale”. For accounting purposes, stock is of two types: • Opening stock • Closing stock Opening stock is the value of goods available for sale in the beginning of an accounting period. Closing stock is the value of goods unsold at the end of the accounting period. Journal Entries to Record Stock In Case of Trading Concern: Journal entries for those goods which are bought for resale purposes are as follows: Purchase of goods: Debit: Stock/Material Account Credit: Cash/Bank/Creditor Consumption of goods Debit: Cost of goods sold Credit: Stock Payment in case of credit purchase Debit: Creditors Account Credit: Cash/Bank In Case of Manufacturing Concern: • In case of manufacturer there are at least two types of Stock Accounts: o Raw Material Stock Account o Finished Goods Stock Account Raw Material Raw material is the basic part of an item, which is processed to make a complete item Finished Goods Finished goods contain the items that are ready for sale, but could not be sold in that accounting period. Work in Process In manufacturing concern, raw material is put in a process to convert it into finished goods. At the end of accounting period, some part of raw material remains under process. i.e. it is neither in shape of raw material nor in shape of finished goods. Such items are taken in stock as work in process. docsity.com Financial Accounting - I – MGT101 VU © Copyright Virtual University of Pakistan 94 Flow of Costs Raw Material Stock Other Costs Accounts Work in Process Account Finished Goods Account Cost of Goods Sold Account In manufacturing concern, Raw material stock is put into process. For accounting purposes, all value of stock and other manufacturing costs are charged to work in process account. When the process is completed and the goods are prepared, all the value of work in process is charged to finished goods account. The business sells finished goods for the whole accounting year. At the end of the year, goods that are unsold are deducted from cost of goods sold account. Journal Entries For Manufacturing Concern Purchase of raw material Debit: Stock/Material Account Credit: Cash/Bank/Creditors Other direct costs incurred Debit: Relevant cost/Expense Head Credit: Cash/Bank/Payables Raw material issued and other costs allocated to production of units Debit: Work in process Credit: Stock Material Account Debit: Work in process Credit: Relevant Expense Head Account When production is completed Debit: Finished Goods Stock Account Credit: Work in process account docsity.com Financial Accounting - I – MGT101 VU © Copyright Virtual University of Pakistan 97 Stock Account Code -- Date No. Narration Dr. Rs. Cr. Rs. Bal. Dr/(Cr) 1 Purchased goods for cash 10,000 10,000 2 Purchased goods from ABC 25,000 35,000 3 Goods sold 20,000 15,000 4 Returned goods to ABC 5,000 10,000 5 – Paid to ABC Co. Rs. 15,000 through cheque ABC Co. Code -- Date No. Narration Dr. Rs. Cr. Rs. Bal. Dr/(Cr) 2 Purchased goods from ABC 25,000 (25,000) 4 Returned goods to ABC 5,000 (20,000) 5 Paid to ABC 15,000 (5,000) Bank Account Code -- Date No. Narration Dr. Rs. Cr. Rs. Bal. Dr/(Cr) 5 Paid to ABC 15,000 6 – Sold goods whose cost was Rs. 5,000 Cost of Goods Sold Code -- Date No. Narration Dr. Rs. Cr. Rs. Bal. Dr/(Cr) 3 Goods sold 20,000 20,000 6 Goods sold 5,000 25,000 Stock Account Code -- Date No. Narration Dr. Rs. Cr. Rs. Bal. Dr/(Cr) 1 Purchased goods for cash 10,000 10,000 2 Purchased goods from ABC 25,000 35,000 3 Goods sold 20,000 15,000 4 Returned goods to ABC 5,000 10,000 6 Goods sold 5,000 5,000 docsity.com Financial Accounting - I – MGT101 VU © Copyright Virtual University of Pakistan 98 Cost of Goods Sold Cost of Goods Sold Code -- Date No. Narration Dr. Rs. Cr. Rs. Bal. Dr/(Cr) 3 Goods sold 20,000 20,000 6 Goods sold 5,000 25,000 Value of Closing Stock Stock Account Code -- Date No. Narration Dr. Rs. Cr. Rs. Bal. Dr/(Cr) 1 Purchased goods for cash 10,000 10,000 2 Purchased goods from ABC 25,000 35,000 3 Goods sold 20,000 15,000 4 Returned goods to ABC 5,000 10,000 6 Goods sold 5,000 5,000 Amount Payable to ABC Co. ABC Co. Code -- Date No. Narration Dr. Rs. Cr. Rs. Bal. Dr/(Cr) 2 Purchased goods from ABC 25,000 (25,000) 4 Returned goods to ABC 5,000 (20,000) 5 Paid to ABC 15,000 (5,000) Example 2 Using the following data calculate the Cost of Goods Sold of XYZ Co.
Stock levels Opening Rs. Closing Rs. Raw material 100,000 85,000 Work in process 90,000 95,000 Finished goods 150,000 140,000
Purchase of raw material during the period Rs. 200,000
Paid to labor Rs. 180,000 out of which Rs. 150,000 used on production.
Other production costs Rs. 50,000 docsity.com Financial Accounting - I – MGT101 VU © Copyright Virtual University of Pakistan 99 Cost of goods sold F/G 420000 Illustration # 1 Record the following transactions • Purchased goods for cash Rs, 10,000 • Purchased goods from Ali Brothers. worth of Rs. 20,000 • Sold goods having cost of Rs.15,000 • Returned goods to Ali Brothers. worth of Rs. 4,000 • Sold goods having cost of Rs. 5,000 • Paid to Ali Brothers. Rs. 10,000. Also ascertain • Cost of goods sold. • Value of closing stock. • Payable to Ali Brothers. Raw Material Account O/S 100,000 Purchases 200,000 WIP 215,000 C/S 85,000 Total 300,000 Total 300,000 Labor Account Cost 180,000 Charge 150,000 Total 180,000 Total 180,000 Work in Process Account O/B 90,000 Raw M 215,000 Labor 150,000 F/G 410,000 O/H 50,000 C/B 95,000 Total 505,000 Total 505,000 Other Costs Account Paid 50,000 Charge 50,000 Total 50,000 Total 50,000 Finished Goods Stock Account O/S 150,000 COS 420,000 WIP 410,000 C/S 140,000 Total 560,000 Total 460,000 docsity.com Financial Accounting - I – MGT101 VU © Copyright Virtual University of Pakistan 102 Solution Labor Account Debit Credit Cost 180,000 Charged 150,000 Total 180,000 Total 180,000 Work in Process Account Debit Credit O/B 90,000 Raw M 215,000 Labor 150,000 F/G 410,000 O/H 50,000 C/B 95,000 Total 505,000 Total 505,000 Cost of Goods Sold Account Debit Credit F/G 420,000 In Raw Material Account, the debit side contains: o Opening balance 100,000 o Purchases 200,000 On the credit side, closing balance of Rs. 85,000 is shown along with the balancing figure of Rs. 215,000 which is charged to work in process OR WIP account through the following entry: Debit: Work in process OR WIP Account Credit: Raw Material Account Raw Material Stock Account Debit Credit O/S 100,000 Purchases 200,000 WIP 215,000 C/S 85,000 Total 300,000 Total 300,000 Other Costs Account Debit Credit Paid 50,000 Charge 50,000 Total 50,000 Total 50,000 Finished Goods Stock Account Debit Credit O/S 150,000 COS 420,000 WIP 410,000 C/S 140,000 Total 560,000 Total 560,000 docsity.com Financial Accounting - I – MGT101 VU © Copyright Virtual University of Pakistan 103 Labor cost of Rs. 180,000 is given, out of which Rs. 150,000 is charged to production. (Remaining cost of Rs. 30,000 will be explained in some later stage). That means Rs. 150,000 is charged to work in process OR WIP account through the following entry: Debit: Work in process OR WIP Account Credit: Labor Cost Account Other costs of Rs. 50,000 are also charged to work in process OR WIP account through the following entry: Debit: Work in process OR WIP Account Credit: Other Costs Account Work in process account has the opening balance of Rs. 90,000 and closing balance of Rs. 95,000. After charging all the above mentioned accounts to WIP, balancing figure of work in process of Rs. 410,000 is charged to finished goods account through the following entry: Debit: Finished Goods Account Credit: Work in process Account Finished goods account has the opening balance of Rs. 150,000 and closing balance of Rs. 140,000. After charging WIP account to finished goods, the balancing figure of Rs. 420,000, is charged to cost of goods sold account through the following entry: Debit: Cost of Goods Sold Account Credit: Finished Goods Account docsity.com