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MGT101 - Financial Accounting - I - Lecture Handout 14

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POSTING TO LEDGERS AND RECORDING OF STOCK

We have demonstrated the carrying forward of balances in lecture-13. Another solved example is given below:

Illustration

Following is the Trial Balance of Rahil & Co. for the month ended January 31, 2002.

Rahil & Co..
Trial Balance
As on January 31, 2002
Title of Account Code Dr.
Rs.
Cr.
Rs.
Cash Account 01 30,000  
Accrued expense Account 02   10,000
Bank Account 03 50,000  
Loan Account 04   100,000
Furniture Account 05 20,000  
Office Equipment 06 10,000  
Debtors account 07 12,000  
Creditors account 08   10,000
Sales account 09   20,000
Purchase account 10 18,000  
Total   140,000 140,000

During the month, following entries took place:

No. Date Particulars
01 Feb 07 They purchased stationery worth of Rs. 3,000
01 Feb 10 They paid their first installment of loan Rs. 12,000
03 Feb 12 They received a cheque from a customer of Rs. 5,000
04 Feb 13 They paid a cheque of Rs. 8,000 to a creditor
05 Feb 15 Purchased goods of Rs 6,000 & paid through cheque
06 Feb 17 Accrued expenses of Rs. 5,000 are paid.
07 Feb 20 They purchased furniture of Rs. 2,000
08 Feb 21 Sold goods for cash Rs.5,000
09 Feb 22 Purchased goods on credit Rs. 5,000
10 Feb 23 Office equipment of Rs. 5,000 is Purchased
11 Feb 25 Staff salaries are paid by cheque Rs. 15,000
12 Feb 28 Utility expenses of Rs. 3,000 are accrued.

Ledger accounts of Rahil & Co. during the month will show following picture:

Cash Account Account code # 1
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
1-2-02
21-2-02
Balance c/f
Sold a/c
01
09
30,000
5,000
7-2-02
10-2-02
17-2-02
23-2-02
Stationery a/c
Loan a/c
Accrued expenses
Furniture a/c
Office equipment
Balance c/d
10
04
02
05
06
3,000
12,000
5,000
2,000
5,000
8,000
  Total   35,000   Total   35,000

 

Accrued Expenses Account Account code # 2
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
17-2-02 Accrued expenses
Balance c/d
01 5,000
8,000
1-1-02 Balance c/f
Expenses accrued
  10,000
3,000
  Total   13,000   Total   13,000

 

Bank Account Account code # 3
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
12-2-02 Balance c/f
Cheque received
07 50,000
5,000
13-2-02
15-2-02
25-2-02
Paid to creditors
Purchases
Salaries a/c
Balance c/d
08
10
11
8,000
6,000
15,000
26,000
  Total   55,000   Total   55,000

 

Loan Account Account code # 4
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
10-2-02 Installment paid
Balance c/d
01 12,000
88,000
13-2-02
15-2-02
25-2-02
Balance c/f   100,000
  Total   100,000   Total   100,000

 

Furniture Account Account code # 5
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
10-2-02
20-2-02
Balance c/f
Furniture a/c
01 20,000
2,000
23-2-02 Balance c/d   22,000
  Total   22,000   Total   22,000

 

Office Equipment Account Account code # 6
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
23-2-02 Balance c/f
Office
Equipment a/c
01 10,000
5,000
23-2-02 Balance c/d   15,000
  Total   15,000   Total   15,000

 

Debtors Account Account code # 7
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
  Balance c/f   12,000 12-2-02

Cheque received


Balance c/d

03

5,000


7,000

  Total   12,000   Total   12,000

 

Creditors Account Account code # 8
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
13-2-02 Paid to creditors
Balance c/d
03 8,000
7,000
22-2-02 Balance c/f
Purchases a/c
10 10,000
5,000
  Total   15,000   Total   15,000

 

Sales Account Account code # 9
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
  Balance c/d   25,000 21-2-02 Balance c/f
Sales a/c
01 20,000
5,000
  Total   25,000   Total   25,000

 

Purchases Account Account code # 10
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
15-2-02
22-2-02
Balance c/f
Purchases a/c
Purchases a/c
03
07
18,000
6,000
5,000
  Balance c/d   29,000
  Total   29,000   Total   29,000

 

Salaries Account Account code # 11
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
25-2-02 25-2-02
Salaries a/c
03 15,000   Balance c/d   15,000
  Total   15,000   Total   15,000

 

Stationery Account Account code # 12
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
25-2-02 Stationery a/c 01 3,000   Balance c/d   3,000
  Total   3,000   Total   3,000

 

Utility Expenses Account Account code # 13
Date Particulars Code # Amount
Rs. (Dr.)
Date Particulars Code # Amount
Rs. (Cr.)
28-2-02 Accrued utility
expenses
02 3,000   Balance c/d   3,000
  Total   3,000   Total   3,000

The Trial Balance at the end of the month is as follows:

Rahil & Co.
Trial Balance
As on January 31, 2002
Title of Account Code Dr. Rs. Cr. Rs.
Cash Account 01 8,000  
Accrued expense Account 02   8,000
Bank Account 03 26,000  
Loan Account 04   88,000
Furniture Account 05 22,000  
Office Equipment 06 15,000  
Debtors account 07 7,000  
Creditors account 08   7,000
Sales account 09   25,000
Purchase account 10 29,000  
Salaries Account 11 15,000  
Stationery Account 12 3,000  
Utility Expenses Account 13 3,000  
Total   128,000 128,000

Difference between expenses & Purchases

  • If business purchases items for its own use (items that are not meant to be resold) such items are charged to expense account.
  • If business purchases items for resale purposes, such items are charged to purchases account.

Stock: Stock is the quantity of unsold goods lying with the organization.

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:

  1. In trading concern, Stock consists of goods that are purchased for the purpose of resale, but not sold in that accounting period. Trading concern is that organization, which purchases items for resale purposes.
  2. In manufacturing concern, (an organization that converts raw material into finished product by putting it in a process) stock consists of:
    o Raw material
    o Work in process
    o Finished goods

Raw Material
Raw material is the basic part of an item, which is processed to make a complete item.

Work in Process
In manufacturing concern, raw material is put into process to convert it into finished goods. At the end
of the year, some part of raw material remains under process. It is neither in shape of raw material nor in
shape of finished goods. Such items are taken in stock as work in process.

Finished Goods
Finished goods contain items that are ready for sale, but could not be sold at the end of accounting
period.

Recording of Stock Account

  • Stock Account is Debited with the Value of the Goods Purchased
  • Stock account is credited with the Purchase Price of the Goods Sold / Issued for Production.
  • Stock Account shows the cost / purchase value of unsold goods.

In manufacturing concern, entries for stock are:

For Purchase of Stock

Debit: Stock Account
Credit: Cash/Supplier /Creditors Account
When the stock is purchased, stock account gets the benefit, so it is debited & cash or supplier account provides the benefit, so it is credited.

For Payment to Creditors

Debit: ` Supplier / Creditors account
Credit: Cash account

For Consumption of goods

Debit: Cost of goods sold
Credit: Stock Account

Cost of goods sold

Cost of goods sold is different in both forms of organizations:

  • In trading concern, cost of goods sold is the value of goods unsold (goods stands for the items purchased for resale purpose)
  • In manufacturing concern, cost of goods sold is the value of raw material consumed plus any other manufacturing cost. e.g., salaries of labor cost of machinery etc.

Stock and cost of goods sold in manufacturing concern

flow of money

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.

 

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