Home News FORM ONE STUDY NOTES BOOK KEEPING TOPIC 5-7.

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:
Debit Income Statement
Credit Inventory
Closing inventory at the period end is recorded as follows:
Debit Inventory
Credit Income Statement
The Inventory Ledger Account therefore would appear as follows:
Inventory Account
Debit $ Credit $
Balance b/f 100 Income Statement 100
Income Statement 200 Balance c/d 200
300 300
The inventory adjustments in respect of opening and closing inventory appear in the Cost of Goods Sold as follows:
Opening Inventory 100
Add: Purchases 500
Less: Closing Inventory (200)
Cost of Goods Sold 400
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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