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Chapter 6
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Chapter 6

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  1. Chapter 6 Accounting information for trading businesses

  2. Trading businesses Trading: Business buying goods for resale. Will hold inventories (stocks of goods). Manufacturing: Converting raw materials to finished products. Will hold inventories (stocks) of: • Raw materials • Work-in-progress (part-completed) • Finished goods

  3. Analysis of transactions and events Table 6.1 Transactions of a trading company

  4. Analysis of transactions and events (Continued) What is the profit on the sale of 70 items? MATCHING the COST of goods sold against the amount earned by the SALE of the goods. In accounting that calculation might be set out as follows: There is an asset of unsold goods (30 items) which cost £2 each or £60 in total. Since that item is an asset, it will appear in the balance sheet.

  5. Analysis of transactions and events (Continued) revenue cash

  6. Analysis of transactions and events (Continued) Table 6.2 Spreadsheet analysing transactions and events into elements of the accounting equation

  7. Transactions of a manufacturing business – = Table 6.4 Transactions of a manufacturing company

  8. Transactions of a manufacturing business(Continued) Table 6.4 Transactions of a manufacturing company (Continued)

  9. Transactions of a manufacturing business(Continued) Table 6.4 Transactions of a manufacturing company (Continued)

  10. Detailed work • See further spreadsheets and charts in Chapter 6. • Then work through M. Carter.

  11. Cost of goods sold

  12. Calculation for M. Carter

  13. Flow of accounting information

  14. Transactions involving cash • Paying cash to acquire an asset. • Paying cash to settle a liability. • Paying cash for an expense. • Receiving cash from the sale of goods and services. • Receiving cash from a customer. • Receiving cash from sale of a non-current (fixed) asset.

  15. Transactions not involving cash • Buying goods on credit from suppliers. • Returning unwanted goods to suppliers. • Selling goods on credit to customers. • Receiving rejected goods from customers.

  16. Events affecting the business • Depreciation of non-current (fixed assets). • Bad debts when customers fail to pay. • Bad news, such as extra costs expected due to a change in safety legislation.

  17. ‘Day books’ (‘daily diaries’) • Cash Book. • Sales Day Book (Sales Journal). • Purchases Day Book (Purchases Journal). • Sales Returns Book (Sales Returns Journal). • Purchases Returns Book (Purchases Returns Journal). • Journal.

  18. Cash book On 12 Jan the business pays wages of £100. The transaction is recorded as: DEBIT Expense of wages £100 CREDIT Asset of cash £100

  19. Cash book (Continued) W1 WAGES

  20. Sales Journal page SJ6

  21. Transfers to ledger accounts • Make one debit entry in the ledger account of each customer (not part of double entry but useful for controlling records of payment by each customer). • Make debit entry for total receivables (debtors) in General Ledger (Nominal Ledger). • Make credit entry for total sales in General Ledger (Nominal ledger).

  22. Transfers to ledger accounts (Continued) J. BROWN (Br1) S. LENNOX (Le4) P. WATSON (Wa2)

  23. General ledger (nominal ledger) RECEIVABLES (DEBTORS) ACCOUNT (Ref GL 12) SALES ACCOUNT (Ref GL 24)

  24. Purchases Journal page PJ8

  25. Transfers to ledger accounts • Make one credit entry in the ledger account of each supplier (not part of double entry but useful for tracking records of payment to each supplier). • Make credit entry for total payables (creditors) in General Ledger (Nominal Ledger). • Make debit entry for total purchases in General Ledger (Nominal ledger).

  26. Transfers to ledger accounts (Continued) L. GREEN (Gr2) P. JARVIS (Ja1) N.YATES (Ya3)

  27. General ledger (nominal ledger) TOTAL PAYABLES (CREDITORS) ACCOUNT (Ref GL 15) PURCHASES ACCOUNT (Ref GL 31)

  28. General ledger (nominal ledger) (Continued) Purchase invoices Customer Goods £ Sales invoices Supplier Goods £ Sales Journal J. Brown £300 S. Lennox £400 P.Watson £150 Total £850 Purchases Journal L. Green £140 P. Jarvis £610 N. Yates £160 Total £910 Day Books Debtors ledger Creditors ledger J. Brown Dr Cr Bal 300 300 L. Green Dr Cr Bal 140 (140) Cr S. Lennox Dr Cr Bal 400 400 P. Jarvis Dr Cr Bal 610 (610)Cr Creditors Dr Cr Bal 910 (910)Cr Debtors Dr Cr Bal 850 850 P. Watson Dr Cr Bal 150 150 N. Yates Dr Cr Bal 160 (160)Cr Sales Dr Cr Bal 850 (850)Cr General Ledger (Nominal Ledger) Purchases Dr Cr Bal 910 910

  29. Chapter 6 Bookkeeping supplement

  30. DEBIT ENTRIES CREDIT ENTRIES Left-hand side of the equation Asset Increase Decrease Right-hand side of the equation Liability Decrease Increase Ownership interest Expense Revenue Capital withdrawn Capital contributed Rules of debit and credit Table 6.10 Rules of debit and credit

  31. Transactions of a trading company Table 6.11 Transactions of a trading company: debit and credit entries

  32. Transactions of a manufacturing company (Continued) Table 6.12 Transactions of a manufacturing company: debit and credit entries

  33. Transactions of a manufacturing company (Continued) Table 6.12 Transactions of a manufacturing company: debit and credit entries (Continued)

  34. Trial balance at 31 May for M. Carter Table 6.14 Trial balance at 31 May for M. Carter, wholesaler

  35. Items costing £3,500 removed from inventory (stock) for agreed sales 3,500 Cost of goods sold Inventory (stock) Business sells goods for cash 4,000 Cash Sales Business sells goods on credit to R. Welsby 3,000 R.Welsby Sales R. Welsby pays in cash 3,000 Cash R.Welsby M. Carter (extract)