1. 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. 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. 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. 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. 5 Tax Payable CrDr M. Purchase CrDr 2.3 Basic transactions in purchase accounting Case 1 A company purchases B material of 17000 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 18000 Price+Trans.C 2890 G. J. entry M purchase-B 18000 Tax payable 2890 Cash 20890 20890 2. Accounting for purchasing

6. 6 M. Purchase CrDr 18000 Tax Payable CrDr 2890 2.3 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 20890 9225 1530 G. J. entry M.purchase-C 9225 Tax payable 1530 Account payable 10755 A. Payable CrDr 10755 2. Accounting for purchasing

7. 7 Cash CrDr 20890 M. Purchase CrDr 18000 9225 Tax Payable CrDr 2890 1530 A. payable CrDr 10755 9225 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. 18000 M. Purchase 18000 18000 Material Checking 18000 Material in transit at the period end 18000 Ending Material in stock 2. Accounting for purchasing

8. 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. 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. 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. 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. 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. 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 39000 Yuan of materials for production. Thereinto, 9000 Yuan for Product A, 30000 Yuan for Product B. Direct M. 39000 Material out 39000 out 9000 out 30000 D. M 9000 D.M 30000 G.J.Entry Production C.-A 9000 Production C.-B 30000 R. Material Inv. 39000 3.2 taking material from stock Work in process inventory or

14. 14 S. Payable CrDr 3. Accounting for producing 3.3 Employee compensation Case 5 In this month the factory should pay 80000 of wages to production workers. Thereinto, 50000 Yuan is for product A, 30000 Yuan is for product B. The compensation has not been paid to workers. P. Cost CrDr 39000 P. cost-A Cr Dr 9000 P. cost-B Cr Dr 30000 G. J. Entry Production Cost –A 50000 Production Cost –B 30000 Salary payable 80000 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 80000 D.L. 80000 D. L. 50000 D. L. 30000

15. 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 18860 Yuan. M. Overhaed CrDr R. Material inv. CrDr 39000 S. Payable CrDr 80000 Cash CrDr 2640 3.3 Manufacturing overhead Case 7 M. Overhead 18860 Salary payable 18860 Case 8 Paying water expenses in cash, the amount is 2640 Yuan Case 8 M. Overhead 2640 Cash 2640 2500 18860

16. 16 O.H 24000 CrDr 2500 18860 2640 P. Cost CrDr 39000 80000 P. Cost-A Cr Dr 9000 50000 P.Cost-B Cr Dr 30000 3. Accounting for producing 3.3 Manufacturing overhead Case 9 The total overhead in this period is 24000 Yuan. The W.H of A product is 25000H. The W.H of B product is 15000H 。 Case 9 Production Cost —A 15000 —B 9000 Overhead 24000 OH. A. Rate=24000/ （ 25000+15000 ） =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. 24000 At the end of period overhead should be allocated to every product the workshop makes. The standards of allocation may be standard working hour. 24000 9000 15000

17. 17 P. Cost CrDr 39000 80000 24000 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. 74000 Production cost 74000 A total cost : Direct material 9000 Direct labor 50000 Overhead 15000 P. Cost-A Cr Dr 9000 50000 15000 74000 P. Cost-B Cr Dr 30000 9000 690000 74000 14300074000 69000 74000 0 Total 74000 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. 18 3. Accounting for producing 3.4 Product costing F. Good inv. CrDr 74000 P. Cost-A Cr Dr 9000 50000 15000 W.I.P.Inv. CrDr 39000 80000 24000 74000 P. Cost-B Cr Dr 30000 9000 690000 14300074000 69000 74000 0 Cash CrDr 2640 S. Payable CrDr 80000 18860 O.H. 24000 CrDr 2500 18860 2640 24000 R.M inv. Cr Dr 39000 2500 Subsidiary Accounts 74000 24000

19. 19 F.G. inv. CrDr Balance 74000 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 23664 Yuan. Case 11 Cash 162864 Sales revenue 139200 Tax payable (VAT) 23664 Case 12 The manufacturing cost of above product A is 59200 Yuan (74*800). Case 12 Cost of good sold 59200 Finished good inv. 592000 059200 14800 59200 Cash CrDr Sales R. CrDr T.P. (VAT) CrDr 162864 139200 23664 Loss & Profit Account CrDr 80000 Profit Expenses 59200 59200 139200 Revenue 139200

20. 20 Loss & Profit Account CrDr 5. Accounting for profit and its distribution Sales R. CrDr 139200 Cost of G.S. CrDr 58200 Selling Exp. CrDr 4000 Administrative Exp. CrDr 13000 Financial Exp. CrDr 1000 139200 Income tax Exp. CrDr 3000 Net income 60000 4000 13000 1000 3000 4000 13000 1000 3000 Dividends payable CrDr 40000 Retained Earnings CrDr 20000 LiabilityEquity 58200 60000 40000 Case-1

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

22. 22 6. Financial statements

23. 23 6. Financial statements

24. 24 6. Financial statements

25. 25 6. Financial statements

26. 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 2,000 120 1,800 3,000 12,000 21600 2,000 200 600 9,000 2,900 $56,740 $2,000 1,600 3,820 2,900 600 2,400 1,000 42,000 120 300 $56,740