FORM ONE STUDY NOTES BOOK KEEPING TOPIC 5-7.

TOPIC 5: STOCK

Difference between Stock at Start and Stock at Close
Distinguish between stock at start and stock at close
Stock is the value of the goods that you have on hand to sell to your customers. If you sell services rather than goods, you won't have any stock.
Stock might include raw materials that you buy to make your goods, half-finished goods (known as 'work in progress'), and finished goods.
You must include the value of stock in your accounts at 'the lower of cost and net realizable value'. That means that if you're going to sell off your stock more cheaply than you bought it, perhaps if it's gone out of fashion and you just want to get it off your hands, you have to show it in your accounts at the amount you're going to sell it for.
Stock example:
Mary makes cushions to sell. Her stock figure will include raw materials such as fabric, cushion pads and zips; half-finished cushions; and completed cushions.
Mary bought a large roll of Christmas fabric and did not sell all of it as cushions. In January she decides to sell off the remainder at a knock-down price, less than she paid for it, to a quilter. She must change the value of that fabric in her accounts from the amount she paid for it, to the amount she expects to get for it.
Treatment of Stocks in the Books of the Business with Particular Reference to the Final Accounts
Identify the treatment of stocks in the books of the business with particular reference to the final accounts
Accounting for Inventory
Opening inventory is brought forward from the previous period's ledger account and charged to the income statement as follows:
DebitIncome Statement
CreditInventory
Closing inventory at the period end is recorded as follows:
DebitInventory
CreditIncome Statement
The Inventory Ledger Account therefore would appear as follows:
Inventory Account
Debit$Credit$
Balance b/f100Income Statement100
Income Statement200Balance c/d200
300300
The inventory adjustments in respect of opening and closing inventory appear in the Cost of Goods Sold as follows:
Opening Inventory100
Add: Purchases500
Less: Closing Inventory(200)
Cost of Goods Sold400
Note that the cost of goods sold is not simply the cost of purchases during the period. This is the application of the Matching Concept which requires expenses to be recognized against periods from which associated revenue from the expense is expected to be earned. Therefore, as closing inventory is not consumed at any given accounting period end, it must not be part of expense which is why it is deducted from the cost of sale. Similarly, as opening inventory is consumed in the current accounting period, it must therefore be added to the cost of goods sold.
 
TOPIC 6: ELEMENTARY TRADING PROFIT AND LOSS ACCOUNT 
Final accounts give a concise idea about the profitability and financial position of a business to its management, owners, and other interested parties. All business transactions are first recorded in a journal. They are then transferred to a ledger and balanced.
These final tallies are prepared for a specific period. The final accounts consist of trading account, profit and loss account, and balance sheet.
Trading, Profit and Loss Account
Describe what a Trading, profit and Loss account is
Trading account are those accounts prepared at the end of accounting period for the determination of gross profit or gross loss of the business.
GROSS PROFIT=SALES-COST OF GOODS SOLD
PROFIT AND LOSS ACCOUNT;
A profit and loss statement (P&L) is a financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year. These records provide information about a company's ability –or lack thereof –to generate profit by increasing revenue, reducing costs, or both. The P&L statement is also referred to as "statement of profit and loss", "income statement," "statement of operations," "statement of financial results," and "income and expense statement."
NET PROFT=NET PROFIT & OTHER INCOME-TOTAL EXPENSES.
EXAMPLE
Ashok and Tanaji are Partners sharing Profit and Losses in the ratio 2:3 respectively. Their Trial Balance as on 31st March, 2007 is given below. You are required to prepare Trading and Profit and Loss Account for the year ended 31st March, 2007 and Balance Sheet as on that date after taking into account the given adjustments.
Trial Balance as on 31st March, 2007
Adjustments:
  1. Closing stock is valued at the cost of Rs. 15,000 while its market price is Rs.18,000.
  2. On 31st March, 2007 the stock of stationery was Rs. 500.
  3. Provide reserve for bad and doubtful debts at 5% on debtors.
  4. Depreciate building at 5% and patent rights at 10%.
  5. Interest on capitals is to be provided at 5% p.a
Trading Account for the year ended 31st March 2007
Gross Profit or Gross Loss
Determine the Gross profit or Gross Loss
Profit & Loss A/c for the year ended 31st March 2007
Partner’s Capital A/c
Balance Sheet as on 31-3-2007
The Cost of Goods Sold
Determine the cost of goods sold
Activity 1
Determine the cost of goods sold
The Net Profit and the Net Loss
Determine the net profit and the net loss
Activity 2
Determine the net profit and the net loss
 
 

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