Preparation of Final Accounts: Manufacturing Accounts

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Final Accounts

Preparation of final account is the last stage of the accounting cycle. The basic objective of every concern maintaining the book of accounts is to find out the profit or loss in their business at the end of the year. Every businessman wishes to ascertain the financial position of his business firm as a whole during the particular period. In order to achieve the objectives for the firm, it is essential to prepare final accounts which include Manufacturing and Trading, Profit and Loss Account and Balance Sheet. The determination of profit or loss is done by preparing a Trading, Profit and Loss Account. The purpose of preparing the Balance Sheet is to know the financial soundness of a concern as a whole during the particular period. The following procedure and important points to be considered for preparation of Trading, Profit and Loss Account and Balance Sheet. (1) Manufacturing Account

Manufacturing Account is the important part which is required to preparing Trading, Profit and Loss Account. Accordingly, in order to calculate the Gross Profit or Gross Loss, it is essential to determine the Cost of Goods Manufactured or Cost of Goods Sold. The main purpose of preparing Manufacturing Account is to ascertain the cost of goods manufactured or cost of goods sold, which is transferred to the Trading Account. This account is debited with opening stock and all items of costs including purchases related to production and credited with closing balance of work in progress and cost of goods produced transferred to Trading Account. The term "Cost of Goods Sold" refers to cost of raw materials consumed plus direct related expenses. Components of Manufacturing Account

The following are the important components to be considered for preparation of Manufacturing Accounts: (1)

(2) (3) (4)

Opening Stock of Raw Materials. Purchase of Raw Materials. Purchase Returns. Closing Stock of Raw Materials.

Final Accounts


(5) (6) (7) (8)

Work in Progress (semi-finished goods). Factory Expenses. Opening Stock of Finished Goods. Closing Stock of Finished Goods.

(1) Opening Stock: The term Opening Stock refers to stock on hand at the beginning of the year which include raw materials, work-in-progress and finished goods. (2) Purchases: Purchases include both cash and credit purchase of goods. If any purchase is returned, the same will be deducted from gross purchases. (3) Direct Expenses: Direct expenses are chargeable expenses or productive expenses which include factory rent, wages, freight on purchases, manufacturing expenses, factory lighting, heating, fuel, customs duty, dock duty and packing expenses. In short, all those expenses incurred in bringing the raw materials to the factory and converting them'into finished goods will constitute the direct expenses that are to be shown on the debit side of the trading account. Calculation of Cost of Goods Sold Cost of Goods Sold can be calculated as under : Cost of Goods Sold Illustration: 1 From the following information, calculate cost of goods sold : Stock of materials on 1.1.2003 Stock of materials on 31.12.2003 Purchases of materials Purchase Returns Wages Factory expenses Freight and Carriage Other direct expenses


Value of Opening Stock + Cost of Purchases + Direct Expenses - Value of Closing Stock

Rs. 35,000 5,000 62,000 2,000 10,000 3,500 4,000 2,500

Solution: Calculation of Cost of Goods Sold
Opening Stock of raw materials

62,000 2,000

35,000 60,000 4,000 99,000 5,000 94,000

Add: Purchases
Less: Purchase Return Freight and Carriage Less: Closing stock of raw materials Cost of Raw Materials Consumed Add: Direct Expenses : Wages Factory Expenses Other direct expenses Cost of Goods Sold


10,000 3,500 2,500

16,000 1,10,000


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