MANUFACTURING

ACCOUNT
The statement of account
which is prepared to identify
the cost of goods produced
in a specific accounting period,
is called the Manufacturing Account.
It is needed only for manufacturing concerns.
It is not needed for Merchandise concern.
In a simple manufacturing process the manufacturing
cost start in a number of ways.
They may be
cash payments,
incurrence of liabilities,
fixed assets depreciation, or
the expiration of prepaid expenses.

Once these costs have been incurred, they are

recorded as being either, direct materials, direct
labor, or
factory overhead costs.
As the resources are used up, the company transfer,
their costs into the Work in Process inventory
account.
When production is completed, costs assigned to
finished units, are transferred to finished Goods
inventory account which is an element of trading
account at the debit side.
 PREPARATION OF MANUFACTURING ACCOUNT

Manufacturing Classified .
Transferred Trading Account
Concerned

Material
Inventory
Account
Material are Work in Finished
purchased and Process Goods Trading
Factory
other Inventory Inventory Account
Payroll
manufacturing Account Account Account
costs incurred

Factory
Overhead
Account

PROCESS DIAGRAM FOR COMPUTATIUON OF COST OF GOODS

 As the sequence shown above process
diagram the computation of cost of goods
manufactured involved following three steps:

First Step : Computation of cost of material used.

Beginning Balance: Material Inventory Tk. 17,500

Plus Material Purchased Tk. 142,600
......................
Cost of Material available for used Tk. 160,100
Less Ending Balance: Materials Inventory Tk. 20,400
.......................
Cost of Materials used Tk. 139,700
===========
Second Step : Computation of total manufacturing
cost.

Cost of materials used Tk. 139,700

Plus direct labor cost Tk. 199,000
Plus factory overhead cost Tk. 156,200
-------------------
Total Manufacturing Cost Tk. 494.900
==================
Third Step : Computation of cost of goods
manufactured.

Total manufacturing cost Tk. 494,900

Plus beginning balance of
Work-in-Process Inventory Tk. 21,200
......................
Total costs of goods in process
during the period Tk. 516,100
Less Ending Balance of
Work-in-Process Inventory Tk. 23,500
.......................
Cost of goods manufactured Tk. 492,600
===========
 Name Of Manufacturing Concern
Manufacturing Account
Dr For the Year Ended on ... Cr
Particulars Taka Particulars Taka
Direct Expenses
Opening Inventory Closing Inventory
Raw Material xxxx Raw Material xxxx
Work-in-process xxxx Work-in-process xxxx
------- xxxx ------- xxxx
Raw material purchased xxxx Cost of production transferred to Trading xxxx
Less Purchase return xxxx Account
-------- xxxx
Freight xxxx
Carriage inward xxxx
Import duty xxxx
Dock charges xxxx
Clearing charges xxxx
VAT xxxx
Productive wages xxxx
Factory Expenses xxxx
Indirect Wages xxxx
Foreman's salary xxxx
Supervisors salary xxxx
Manager's salary & Commission xxxx
Power and Fuel xxxx
Manufacturing expenses xxxx
Repair and Maintenance xxxx
Depreciation : Factory Building xxxx
Depreciation : Plant & Machinery xxxx
Warehouse Expenses xxxx
Factory insurance xxxx
Royalty xxxx
Factory rent xxxx
xxxxxx xxxxxx
====== ======
 TRADING ACCOUNT
The main objective of the trading account
is to calculate the gross profit or gross
loss during the related accounting period.

Trading account of manufacturing concerns

are prepared after preparation of
manufacturing account.
The debit side of the trading account of
manufacturing concern contains
opening inventory of finished goods,
the cost of goods transferred from
manufacturing account and gross profit
(where appropriate).

The credit side contain

the sales revenue (less sales return and
allowances),
closing inventory of finished goods and
gross loss (where appropriate)
 Name Of Manufacturing Concern
Trading Account
For the Year Ended on ...
Dr Cr

Particulars Taka Particulars Taka

Opening Inventory xxxx

Cost of production transferred Sales xxxx
xxxx
from manufacturing account Less Sales Return xxxx xxxx
--------- xxxx
Gross profit transferred to xxxx Closing Inventory
Profit Gross Loss transferred to xxxx
& Loss Account xxxxxx Profit & Loss Account xxxxxx
====== ======

If the total of credit side is greater than total of debit side the difference is gross
profit to be reported in the debit side. On the other hand, if the debit side's total
becomes greater than credit side's total difference amount is gross loss to be
reported in the credit side.
 The trading account of merchandising
concern is slightly different from that of
manufacturing concerns.
Merchandising concerns buy and sell the
goods that do not need further
processing.
The debit side of the trading account of
merchandising company contain
opening inventory of merchandise,
the purchases and
all the purchase related expenses
 Name Of Business Concern
Trading Account
For the Year Ended on ...
Dr Cr
Particulars Taka Particulars Taka
Opening Inventory xxxx
Purchases xxxx Sales xxxx
Less purchase return xxxx Less Sales Return
------- xxxx xxxx xxxx
Wages --------- xxxx
Freight xxxx Closing Inventory xxxx
Special Packing Wages xxxx Gross profit transferred to
Import Duty xxxx Profit & Loss Account
Carriage Inward xxxx
Clearing Charges xxxx
Dock Charges xxxx
Gross Profit transferred to xxxx
Profit & Loss Account
xxxxxx
====== xxxxxx
======
 PROFIT AND LOSS
ACCOUNT
The profit and loss account is prepared to
determine the net profit or loss earned by
the concern in a specific period.
The credit balance of the account indicates
net profit and the debit balance of the
account indicate net loss.
Profit and loss account is prepared after
preparation of trading account
from which gross profit is taken as one of
the major component in this account.
 In the debit side of the account
the gross loss,
the operating expenses,
general and administrative expenses,
financial expenses and losses
other non-operating expenses and
net profit are written.
The gross profit,
other income and
net loss are written
in credit side of the account.
 Name Of Business Concern
Profit And Loss Account
For the Year Ended...
Particulars Taka Particulars Taka
Operating Expenses Gross profit transferred
Packing expenses xxxx from trading account xxxx
Warehouse Rent xxxx Rent received xxxx
Export duty xxxx Commission received xxxx
Carriage outward xxxx Discount received xxxx
Cost of price list xxxx Interest of bank deposit xxxx
Advertisement xxxx Interest on investment xxxx
TA of Sales person xxxx Profit on sale of assets xxxx
Commission xxxx Bad debts. Recovered xxxx
Salaries of salesman xxxx
Discount xxxx Net loss transferred to capital Account xxxx
Administrative Expenses
Office expenses xxxx
Office salaries xxxx
Office rent xxxx
Printing stationery xxxx
Telephone xxxx
General Expenses xxxx
Financial expenses and losses
Interest on overdraft xxxx
Interest on loan xxxx
Loss increased due to loss of xxxx
Investment xxxx
Loss on sale of asset xxxx
Repairing xxxx
Depreciation xxxx
Net profit transferred to capital
xxxxxx xxxxxx
====== ======
 BALANCE SHEET
Balance sheet is a list of balances of
accounts that fell in the categories of
assets, liabilities, and owner’s equity.
Because even a fairly small company may
have hundreds of accounts, simply listing
these accounts by broad categories is not
very helpful to statement user.
Setting up subcategories within the major
categories will often make the financial
statements much more useful.
 Investors and creditors often study and
evaluate the relationships among the
subcategories.

When general-purpose external financial

statements are divided into useful sub
categories,
they are called financial statements.

The balance sheet presents the financial

position of a company at a particular time.
ASSETS
The assets of company are often divided into
following four categories;
 Current asset

 Investments

 Properties, Plants, and Equipments

 Intangible assets.

Some company uses a fifth category called Other

Assets if there are miscellaneous assets that
do not fall into any other groups.
These categories are listed in the order of their
presumed liquidity (the ease with which an
asset can be converted into cash).
For example: current assets are said to be more
liquid then property, plant and equipment.
 Current Assets
The Accounting Principles Board has defined
current assets into following way:

Current assets are defined as cash or other

assets that are reasonably expected to be
realized in cash or sold during a normal
operating cycle of a business or within one year
if the operating cycle is shorter then one year.
The normal operating cycle of a company is the
average time that is needed to go from cash to
cash.

Cash is used to buy merchandise inventory,

which is sold for cash or for a promise of cash
(a receivable), if the sell is made on account
(for credit).

If the sells are on account, the resulting

receivable must be collected before the cycle is
completed.
The normal operating cycle for most companies
is less then one year, but there are exceptions.

Tobacco companies, for examples, must cure

the tobacco for two or three years before their
inventory can be sold. The tobacco inventory is
still considered a current asset because it will
be sold within the normal operating cycle.

Another example is a company that sells on the

installment basis. The collection payments or a
television set or stove may be as long as
twenty-four or thirty six months, but these
receivable are still considered current assets.
Cash is obviously a current asset.

Temporary investments, accounts and note

receivable, and inventory are also current
assets because they are expected to be
converted to cash within the next year or during
the normal operating cycle of most firms.

They are listed in the order of the ease of their

conversion into cash.
Prepaid expenses, such as rent and insurance
paid for in advance, and inventories of various
supplies bought for use rather than for sale
should also be classified as current assets.

These kinds of property are current in the sense

that, if they had not been bought earlier, a
current outlay of cash would be needed to
obtain them.

They are an exception to the current asset

defined above.
In deciding whether or not an asset is current or
non-current, the idea of "reasonable
expectation" is important.
For example, short-term investments represent
an account used for temporary investments of
idle cash or cash not immediately required for
operating purposes.
As a need for cash arises, these securities will be
sold to meet this need.
Investments in securities that management does
not expect to sell within the next year and that
do not involve the temporary use of idle cash
should be shown in the investments category of
a classified balance sheet.
 Investments
The investments category includes assets, generally of a
long-term nature, that are not used in the normal
operation of a business and that management does
not plan to convert to cash within the next year.
Items in this category are
 securities held for long-term investments,

 land held for future use,

 plant or equipment not used in the business, and

 special funds such as a fund to be used to pay off a

debt or buy a building.
 Also in this category are large permanent investments
in another company for the purpose of controlling that
company.
 Property, Plant, and Equipment
The property, plant, and equipment category
includes long-term assets that are used in the
continuing operation of the business.

They represent a place to operate (land and

buildings) and equipment to produce, sell,
deliver, and service its goods.

For this reason, they are often called Operating

Assets or some times Fixed Assets, Tangible
Assets, Long Lived Assets.
Through depreciation, the cost of these assets
(except land) is spread over the periods they
benefit.

Past depreciation is recorded by the accumulated

depreciation accounts.

The exact order in which property, plant, and

equipment are listed is not the same
everywhere in practice.

Assets not used in the regular course of business

should be listed in the investment category as
noted above.
 Intangible Assets
Intangible assets are long-term assets that have
no physical substance but have a value based
on rights or privileges that belongs to the
owner.
Examples are:
 patents,

 copyrights,

 goodwill franchise, and

 trademarks.

These assets are recorded at cost, which is

spread over the expected life of the right or
privilege.
 LIABILITIES

Liabilities are divided into two categories:

       Current liabilities
       Long-term liabilities.
 Current liabilities
The category called current liabilities is made up
of obligations due within the normal operating
cycle of the business or within a year,
whichever is longer.
They are generally paid firm's current assets or
by incurring new short-term liabilities.
Under this heading are:
 notes payable,

 accounts payable,

 taxes payable,

 wages payable, and

 customer advances (unearned revenues).

 Long-term liabilities
Debts of a business that fall due more than one
year ahead or beyond the normal operating
cycle, or that are to be paid out of non current
assets are long-term liabilities.
 Mortgages payable,

 long term notes,

 bonds payable,

 employee pension obligations, and

 long term lease liabilities

generally fall in this category.

 Owner’s equity
The terms Owner’s Equity, Proprietorship,
Capital, and Net Worth are used inter
changeably.

They all stand for the owner’s interest in the

company.

The first three terms are felt to be better usage

than net worth because most assets are
recordable at original cost rather than at current
value. For this reason, the ownership section will
not represent “worth”. It is really a claim against
the assets.
The accounting treatment of assets and liabilities
is not generally affected by the form of
business organization.
However, owner’s equity section of the balance
sheet will be different depending on whether
the business is a sole proprietorship, a
partnership, or private or public limited
company.

Owner's equity of a sole proprietorship is shown

in the balance sheet of Shafer Auto Parts
Company below.
The owner’s equity section of the balance sheet for a
partnership is called Partners Equity and is much like
that of the sole proprietorship.

It might appear as follows:

 
Partner’s Equity
 
A.J.Martin, Capital 21,666.00
R.C.Moore, Capital 35,724.00
Total Partner’s Equity 57,390.00
Companies are by law separate and legal
entities.

The owner’s are the STOCKHOLDERS.

The owner’s equity section of a balance sheet for

a company is called Stockholders Equity and
has two parts:

 contributed or paid-in capital and

 earned capital or retained earnings.

This might appear as follows:  
Stockholder’s Equity 
Common stock
TK 10 per value 5000 shares Tk.
50,000.00
(authorized, issued and outstanding)
Paid in capital in excess of
par value Tk. 10,000.00
________
Total contributed capital Tk. 60,000.00
Retained Earnings Tk. 37,500.00
________
As, owner’s equity accounts show the sources of and
claims on assets, of course, these claims are not
on any particular asset but rather on the assets as
a whole.
Contributed or paid-in capital account reveal the
accounts of assets invested by stockholders
themselves.
Generally, contributed capital is shown on company
balance sheets by two amounts:
1. The face or par value of issued stock, and
2. Amounts paid in or contributed capital of the face
or par value per share.
In the above illustration stockholders invested
amounts equal to par value of the outstanding
stock (5,000 x Tk.10) plus Tk. 10,000.00 more.
The Retained Earnings account is sometimes
called Earned Capital because it represents the
stockholder’s claim to the assets earned during
profitable operations and plowed back into or
reinvested in company’s operations.
Distribution of assets to shareholders, called
dividends, reduce the Retained Earnings
account balance just as withdrawals of assets by
the owner of a business lower his or her capital
account balance.
Thus the Retain Earnings account balance, in its
simplest form, represents the earnings of the
corporation less dividends paid to stockholder
over the life of the business.
 We have shown the owner’s equity of a
sole proprietorship
in the balance sheet of
Shafer Auto Parts Company
in the next slide.
 
 Shafer Auto Parts Company
BALANCE SHEET as on December 31, 20_ _
Assets Taka Liabilities Taka
Current assets Current Liabilities
Cash 10,360 Notes Payable 15,000
Short term investment 2,000 Account Payable 25,683
Notes receivable 8,000 Salaries Payable 2,000
Accounts receivable 35,300
Merchandise inventory 60,400 Total current liabilities 42,683
Prepaid insurance 6,600
Store supplies 1,060 Long Term Liabilities
Office supplies 636
Total current assets 1,24,356 Mortgage Payable 17,800
Investments 5,000 Total Liabilities 60,483
Land held for future use 4,500
Property, Plant, and equipment Owner's Equity
Land
Building 20,650 Fred Shafer's Capital 98,433
Accumulated Depreciation (8,640)
Delivery Equipment 18,400
Accumulated Depreciation (9,450)
Office equipment 8,600
Accumulated Depreciation (5,000)
Total Property, Plant, and
equipment 29,060
Intangible Assets-Trade Mark 500 TOTAL LIABILITIES AND
TOTAL ASSETS 1,58,916 OWNERS EQUITIES 1,58916