1. Slide 6.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 6 Accounting information for trading businesses

2. Slide 6.2 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 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. Slide 6.3 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 £ Apr 1Purchase goods from manufacturer, 100 items at £2 each, paying in cash, and store in warehouse. 200 Apr 4Remove 70 items from warehouse to meet a customer’s request. Those 70 items cost £2 each on Apr 1. They are delivered to the customer, who accepts the delivery. 140 Apr 4The customer pays in cash. Selling price is £2.50 per item. 175 Analysis of transactions and events Table 6.1 Transactions of a trading company

4. Slide 6.4 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 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: £ Sale of goods (70 items)175 Cost of goods sold (70 items)140 Gross profit 35 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. Analysis of transactions and events (Continued)

5. Slide 6.5 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 TransactionsA–L=OI Purchase goods from manufacturer, 100 items at £2 each, paying in cash, and store in warehouse cash invent-tory Remove 70 items from warehouse to meet a customer’s request. Cost £2 each on Apr 1. Delivered to the customer who accepts the delivery Invent-tory (stock) expense: cost of goods sold The customer pays in cash. Selling price is £2.50 per item cash revenue Analysis of transactions and events (Continued)

6. Slide 6.6 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Transaction or eventAssetsOwnership interest CashInven- tory (stock) ExpenseRevenue Purchase goods from manufacturer, paying in cash (200)200 Remove 70 items from warehouse for sale to customer (140)140 The customer pays in cash175 Totals(25)60140175 Table 6.2 Spreadsheet analysing transactions and events into elements of the accounting equation Analysis of transactions and events (Continued)

7. Slide 6.7 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Business transactions of the entityALOI Purchase raw materials from supplier, 100 trays at £2 each, paying in cash, and place in raw materials store ↑ ↓ RM cash Remove 80 trays from raw materials store to meet production department’s request (cost £2 each) RM ↑ ↓ WIP Transactions of a manufacturing business Table 6.4 Transactions of a manufacturing company = –

8. Slide 6.8 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Carry out labour work and use production facilities to convert raw materials into finished goods. Additional costs incurred for labour and use of facilities were £1.50 per tray processed. cash ↑ ↓ WIP Finished goods are transferred to finished goods store. The job has cost £3.50 per tray in total (80 trays × £3.50 = £280) WIP ↑ ↓ FG 60 trays, which cost £3.50 each to manufacture, are delivered to a customer FG ↓ ↑ expense: ↓ cost of goods sold Transactions of a manufacturing business (Continued) Table 6.4 Transactions of a manufacturing company (Continued)

9. Slide 6.9 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 The customer pays a price of £5 cash per tray immediately on delivery cash ↓ ↑ revenue ↑ Table 6.4 Transactions of a manufacturing company (Continued) Transactions of a manufacturing business (Continued)

10. Slide 6.10 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Detailed work See further spreadsheets and charts in Chapter 6. Then work through M. Carter.

11. Slide 6.11 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 I know what I held at the start of the period Opening inventory (stock) I know what has come into the business during the period Plus Purchases This is all available to sell I know what remains unsold at the end of the period Less Closing inventory (stock) The difference must represent what has been sold Equals Cost of Goods Sold Cost of goods sold

12. Slide 6.12 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 £ Opening inventory (stock)Nil Plus Purchases11,500 Less Closing inventory (stock) (8,000) Equals Cost of Goods Sold 3,500 Calculation for M. Carter

13. Slide 6.13 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Flow of accounting information

14. Slide 6.14 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 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. Slide 6.15 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 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. Slide 6.16 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 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. Slide 6.17 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 ‘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. Slide 6.18 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 CASH RECEIVEDCASH PAID DateDescriptionL£ pDateDescriptionL£ p 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. Slide 6.19 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 CASH RECEIVEDCASH PAID DateDescriptionL£p£p DateDescriptionL£ p Jan 12WagesW1W1 100.00 W1 WAGES DATEPARTIC- ULARS PDEBITCREDITBAL-ANCE £££ Jan 12CashCB100 Cash book (Continued)

20. Slide 6.20 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Ref£ Jan 15J. BrownBr1300 Jan 20S. LennoxLe4400 Jan 25P. WatsonWa2150 JanTotalGL12 GL 24 850 Sales Journal page SJ6

21. Slide 6.21 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 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. Slide 6.22 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 J. BROWN (Br1) DebitCreditBalance Jan 15 SalesSJ 6 300 S. LENNOX (Le4) DebitCreditBalance Jan 20 SalesSJ 6 400 P. WATSON (Wa2) DebitCreditBalance Jan 25 SalesSJ 6 150 Transfers to ledger accounts (Continued)

23. Slide 6.23 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 RECEIVABLES (DEBTORS) ACCOUNT (Ref GL 12) DebitCreditBalance JanSales JournalSJ6850850 Dr SALES ACCOUNT (Ref GL 24) DebitCreditBalance JanSalesSJ6850(850)Cr General ledger (nominal ledger)

24. Slide 6.24 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Purchases Journal page PJ8 Ref£ Feb 11L. GreenGr2140 Feb 14P. JarvisJa1610 Feb 22N. YatesYa3160 FebTotalGL15 GL 31 910

25. Slide 6.25 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 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. Slide 6.26 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 L. GREEN (Gr2) FebDebitCreditBalance 11PurchasesPJ8140(140) P. JARVIS (Ja1) FebDebitCreditBalance 14PurchasesPJ8610(610) N.YATES (Ya3) FebDebitCreditBalance 22PurchasesPJ8160(160) Transfers to ledger accounts (Continued)

27. Slide 6.27 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 TOTAL PAYABLES (CREDITORS) ACCOUNT (Ref GL 15) DebitCreditBalance FebPurchases Journal PJ8910(910)Cr PURCHASES ACCOUNT (Ref GL 31) DebitCreditBalance FebPurchasesPJ8910910 Dr General ledger (nominal ledger)

28. Slide 6.28 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Customer Goods £ 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 ledgerCreditors ledger J. Brown Dr Cr Bal 300 300 S. Lennox Dr Cr Bal 400 400 P. Watson Dr Cr Bal 150 150 P. Jarvis Dr Cr Bal 610 (610)Cr L. Green Dr Cr Bal 140 (140) Cr N. Yates Dr Cr Bal 160 (160)Cr General Ledger (Nominal Ledger) Sales Dr Cr Bal 850 (850)Cr Purchases Dr Cr Bal 910 910 Debtors Dr Cr Bal 850 850 Creditors Dr Cr Bal 910 (910)Cr Purchase invoices Sales invoices General ledger (nominal ledger) (Continued)

29. Slide 6.29 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 6 Bookkeeping supplement

30. Slide 6.30 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Rules of debit and credit Table 6.10 Rules of debit and credit Capital contributedCapital withdrawn RevenueExpenseOwnership interest IncreaseDecreaseLiability Right-hand side of the equation DecreaseIncreaseAsset Left-hand side of the equation CREDIT ENTRIES DEBIT ENTRIES

31. Slide 6.31 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 £DEBITCREDIT Purchase 100 items at £2 each for cash 200Inventory (stock) Cash Remove 70 at £2 each for delivery to the customer 140Cost of goods sold Inventory (stock) Customer pays in cash. 70× £2.50 per item 175CashRevenue Transactions of a trading company Table 6.11 Transactions of a trading company: debit and credit entries

32. Slide 6.32 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 £DEBITCREDIT Purchase raw materials from supplier, 100 trays at £2 each, paying in cash, and place in raw materials store 200Raw materials inventory (stock) Cash Remove 80 trays from raw materials store to meet production department’s request (cost £2 each) 160Work-in- progress Raw materials inventory (stock) Carry out labour work and use production facilities to convert raw materials into finished goods. Additional costs incurred for labour and use of facilities were £1.50 per tray processed 120Work-in- progress Cash Table 6.12 Transactions of a manufacturing company: debit and credit entries Transactions of a manufacturing company (Continued)

33. Slide 6.33 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Finished goods are transferred to finished goods store. The job has cost £3.50 per tray in total (80 trays × £3.50 = £280) 280Finished goods Work-in- progress 60 trays, which cost £3.50 each to manufacture, are delivered to a customer 210Cost of goods sold Finished goods The customer pays a price of £5 cash per tray immediately on delivery 300CashRevenue Transactions of a manufacturing company (Continued) Table 6.12 Transactions of a manufacturing company: debit and credit entries (Continued)

34. Slide 6.34 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 L1 Cash6,400 L2 Ownership interest49,000 L3 Buildings30,000 L4 Equipment5,750 L5 Inventory (stock of goods)8,000 L6 R. Busbynil L7 Electricity100 L8 Wages2,000 L9 Cost of goods sold3,500 L10 Sales7,000 L11 R. Welsbynil L12 Depreciation250 Totals56,000 Trial balance at 31 May for M. Carter Table 6.14 Trial balance at 31 May for M. Carter, wholesaler

35. Slide 6.35 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 M. Carter (extract) R.WelsbyCash3,000R. Welsby pays in cash SalesR.Welsby3,000Business sells goods on credit to R. Welsby SalesCash4,000Business sells goods for cash Inventory (stock) Cost of goods sold 3,500Items costing £3,500 removed from inventory (stock) for agreed sales