1 The types of companies: 1. Understanding The Business Service Company: A company that provides intangible services, rather than tangible products Merchandising Company: A company that buys ready-made inventory for resale to customers Manufacturing Company: A company that uses labor, plant, equipment to convert raw material into new finished products

2 The main procedures of Mf. Company: 1. Understanding The Business Purchasing: the procedure in which raw material is purchased from suppliers Producing: the procedure in which raw material is converted into finished product Selling: the procedure in which finished product is sold to customers

3 VAT: Value Added Tax Is a tax imposing on the value added of product 1. Understanding The Business Let: Value added=ΔV; Price=P; Material consumed= C VAT rate = % ΔV=P-C VAT=ΔV× % VAT= （ P-C ） ×% VAT=P×% - C ×% P ×% called sales item tax (selling tax) C ×% called purchasing item Tax (purchasing tax)

4 2.1 The cost of raw materials includes: （ 1 ） the purchase price (excluding VAT ) （ 2 ） shipping cost (transport cost) （ 3 ） other cost 2. Accounting for purchasing 2.2 The accounts may be used in purchase accounting Cash Account payable Notes payable Raw Material inv. Material Purchase Tax payable

5 Tax Payable CrDr M. Purchase CrDr 2.3 Basic transactions in purchase accounting Case 1 A company purchases B material of Yuan. The amount of VAT included in is 2890 Yuan. In addition relevant transport cost is 1000 Yuan. The material has not been checked into the stock, but all purchase amount has been paid already. Cash CrDr Price+Trans.C 2890 G. J. entry M purchase-B Tax payable 2890 Cash Accounting for purchasing

6 M. Purchase CrDr Tax Payable CrDr Basic transactions in purchase accounting Case 2 The company purchases C material of 9000 Yuan. The amount of VAT on the special invoice is 1530 Yuan. The relevant transport cost is 225 Yuan in all. All relevant amount has not been paid yet. Cash CrDr G. J. entry M.purchase-C 9225 Tax payable 1530 Account payable A. Payable CrDr Accounting for purchasing

7 Cash CrDr M. Purchase CrDr Tax Payable CrDr A. payable CrDr R. Material ivn. CrDr 2.3 Basic transactions in purchase accounting Case 3 the B material of above Material purchase has been checked into the stock, but the C material hasn’t. G. J. entry R. Material inv M. Purchase Material Checking Material in transit at the period end Ending Material in stock 2. Accounting for purchasing

8 3. Accounting for producing 3.1 some important cost concepts Cost object: Anything for which a separate measurement of costs is desired. Direct cost: A cost that can be specifically traced to a cost object. Indirect cost: A cost that can not be specifically traced to a cost object. Product costs: the cost of producing or purchasing tangible products intended for sale.

9 3. Accounting for producing 3.1 some important cost concepts Full product costs: The costs of all resources that are used throughout the value chain for a product. Inventoriable costs: All costs of a product that are regards as an asset for external financial reporting. (Manufacturing cost) Period costs: Operating costs that are expensed in the period in which they are incurred.

10 3. Accounting for producing Manufacturing cost (M.C.): the inventoriable cost in the manufacturing company is also called Manufacturing cost. M.C. normally is classified three major categories as follows: （ 1 ） Direct materials are the materials that become a physical part of a finished product and whose costs are separately and conveniently traceable through the manufacturing process to a finished product. 3.1 some important cost concepts

11 3. Accounting for producing （ 2 ） Direct labor is the compensation of employees who physically convert materials into the company’s products and is directly traceable to finished products. （ 3 ） Manufacturing overhead, also called factory overhead or indirect manufacturing cost, is the manufacturing costs except direct costs. 3.1 some important cost concepts

12 M. Overhead CrDr Indirect costs (In workshop) OH. transfered 3. Accounting for producing 3.2 taking material from stocks Production cost Accounting for the cost of product P. Cost The cost of W.I.P. CrDr Direct M. Direct L. Overhead Finished P. Cost Accounts for production accounting Manufacturing overhead Accounting for indirect M. cost

13 P. cost-A Cr Dr P. cost-B Cr Dr R. M.-X Cr Dr R. M-y Cr Dr P. Cost CrDr R. Material inv. CrDr 3. Accounting for producing Case 4 C workshop takes Yuan of materials for production. Thereinto, 9000 Yuan for Product A, Yuan for Product B. Direct M Material out out 9000 out D. M 9000 D.M G.J.Entry Production C.-A 9000 Production C.-B R. Material Inv taking material from stock Work in process inventory or

14 S. Payable CrDr 3. Accounting for producing 3.3 Employee compensation Case 5 In this month the factory should pay of wages to production workers. Thereinto, Yuan is for product A, Yuan is for product B. The compensation has not been paid to workers. P. Cost CrDr P. cost-A Cr Dr 9000 P. cost-B Cr Dr G. J. Entry Production Cost –A Production Cost –B Salary payable Payroll (Employee compensation) takes different forms: Salary is pay stated at a yearly, monthly, or weekly. Wages are employee pay amounts that are stated at an hourly figure. Commission are computed as the percentage of the sales the employee has made. Bonus is amount over and above regular compensation payroll D.L D. L D. L

15 3. Accounting for producing Case 6 Taking 2500 of material for E. repair Case 6 M. Overhead 2500 R. Material 2500 The indirect costs in workshop should be summarized in the account of M. Overhead. Examples: Indirect M., Indirect L., Plant utilities, Plant repairs, Plant rent, insurance on plant, Depreciation on plant and equipment Case 7 Basing computation the salary of administrative management should be paid Yuan. M. Overhaed CrDr R. Material inv. CrDr S. Payable CrDr Cash CrDr Manufacturing overhead Case 7 M. Overhead Salary payable Case 8 Paying water expenses in cash, the amount is 2640 Yuan Case 8 M. Overhead 2640 Cash

16 O.H CrDr P. Cost CrDr P. Cost-A Cr Dr P.Cost-B Cr Dr Accounting for producing 3.3 Manufacturing overhead Case 9 The total overhead in this period is Yuan. The W.H of A product is 25000H. The W.H of B product is 15000H 。 Case 9 Production Cost —A —B 9000 Overhead OH. A. Rate=24000/ （ ） =0.60 Yuan/h OH for A =25000*0.6=15000 Yuan OH for B =15000*0.6=9000 Yuan On the subsidiary account of Production cost account the product cost can be calculated by summarizing the data of Dr side At the end of period overhead should be allocated to every product the workshop makes. The standards of allocation may be standard working hour

17 P. Cost CrDr F. Good inv. Cr Dr 3. Accounting for producing 3.4 Product costing Case 10 All product A are finished ， Volume is 1000 ； No P. B is finished, they are all Work in process. Case 10 Finish good inv Production cost A total cost : Direct material 9000 Direct labor Overhead P. Cost-A Cr Dr P. Cost-B Cr Dr Total Unit cost = 74000/1000=74 Yuan/Unit Work in process If all products are finished at the end of the period, Then, the total expenses in the subsidiary P.C.A. is the total cost of the product. The unit cost can get by dividing total cost by the volume. If no product is finished at the end of the period, then, the total expenses in the subsidiary P.C.A. is the expenses of Work in process. If some products are finished and the others are not, then, the total expenses in the account should be divided between finish product and work in process.

18 3. Accounting for producing 3.4 Product costing F. Good inv. CrDr P. Cost-A Cr Dr W.I.P.Inv. CrDr P. Cost-B Cr Dr Cash CrDr 2640 S. Payable CrDr O.H CrDr R.M inv. Cr Dr Subsidiary Accounts

19 F.G. inv. CrDr Balance Cost of G.S. CrDr 4. Accounting for sales and cost of good sold Case 11 The company sells A product of 800 units at the price of 174 Yuan/unit to customers in cash. In addition the relevant VAT is Yuan. Case 11 Cash Sales revenue Tax payable (VAT) Case 12 The manufacturing cost of above product A is Yuan (74*800). Case 12 Cost of good sold Finished good inv Cash CrDr Sales R. CrDr T.P. (VAT) CrDr Loss & Profit Account CrDr Profit Expenses Revenue

20 Loss & Profit Account CrDr 5. Accounting for profit and its distribution Sales R. CrDr Cost of G.S. CrDr Selling Exp. CrDr 4000 Administrative Exp. CrDr Financial Exp. CrDr Income tax Exp. CrDr 3000 Net income Dividends payable CrDr Retained Earnings CrDr LiabilityEquity Case-1

21 6. Financial statements Financial statements Balance sheet Income statement Retained earning statement Cash flow statement An example ofexample listing company in China

22 6. Financial statements

23 6. Financial statements

24 6. Financial statements

25 6. Financial statements

26 6. Financial statements Please prepare financial statements basing following data. EIC-1 Hosey Company has the following adjusted trial balance at December 31, 2003.No dividends were declared. However,400 additional shares were issued during the year for $2,000: Cash Accounts receivable Interest receivable Prepaid insurance Notes receivable Equipment Accumulated depreciation Accounts payable Accrued expenses payable Income taxes payable Unearned rent revenue Contributed capital (500 shares) Retained earnings Sales revenue Interest revenue Rent revenue Wages expense Depreciation expense Utilities expense Insurance expense Rent expense Income tax expense Total 1,500 2, ,800 3,000 12, , ,000 2,900 $56,740 $2,000 1,600 3,820 2, ,400 1,000 42, $56,740