Lecture 11-12 (Accounting information for a trading business) Flashcards
TRADING
Business buying goods for resale. Will hold inventories (stocks of goods).
MANUFACTURING
Converting raw materials to finished products. Will hold inventories of:
- Raw materials
- Work-in-products
- Finished goods
TRADING BUSINESS
Can buy goods and sell them on
and/or
Buy goods, put them through a manufacturing process and then sell them on.
GOODS PURCHASED FOR RESALE
Business makes profits by selling the goods at a higher price than it costs to purchase them.
GROSS PROFIT
Gross Profit = Sales - Cost of Sales
Debit and credits for a cash purchase.
Dr Inventory
Cr Bank
Debit and credit for transfer between accounts (items removed from warehouse and delivered to customer).
Dr Cost of sales
Cr Inventory
Debit and credit for cash sales.
Dr Bank
Cr Sales
How do you work out cost of sales?
Cost of Sales = Opening Inventory + Purchases - Closing Inventory
Appears at top of income statement.
Debit and credit for cash purchase (manufacturing).
Dr Raw Materials
Cr Bank
Debit and credit transfer between inventory accounts (materials passed from raw material store to production line).
Dr WIP
Cr Raw Materials
Debit and credit for converting raw materials in to finished goods- cash purchase (additional costs of production).
Dr WIP
Cr Bank
Debit and credit for completed goods moving to stores.
Dr Finished goods
Cr WIP
Add raw material cost and cost of production.
Debit and credit for delivering to customer.
Total cost of production and raw materials.
Dr Cost of sales
Cr Finished goods
Debit and credit for sales.
Dr Bank
Cr Sales
