TOPIC 1

MANUFACTURING ACCOUNTS.

Manufacturing accounts are accounts prepared by organization engaged in manufacturing of goods or services. It means organization buys raw materials and convert that raw materials into finished goods. The finished goods are then sold in the market.

THE PURPOSE OF MANUFACTURING ACCOUNTS ARE:-

• To find the cost of goods manufactured
• To calculate the amount of any profit realized in the manufacturing process.

FEATURE OF MANUFACTURING ACCOUNTS

1)     Price cost: This is cost of raw material consumed, direct wages and any other direct expenses.

2)     Factory cost: These are indirect expenses which are incurred it includes: salaries, factory power, rent, rates insurance, depreciation of plants.

3)     Working progress: This is the cost of those items which remain incomplete at the end of accounting period. The difference between work in progress W/P at start and work in progress at the W/P at the end is added to factory cost.

Factory profit:- Goods manufactured during the period are transferred to the trading account. These may be transferred as under:

a)      At the actual factory cost (factory cost of goods manufactured) In this case will, DR. Trading account, CR. Manufacturing account.

b)     At the market value are inflated price. In this case the goods manufactures are transferred at a specific price which include the factory cost and profit on manufacturing process. This profit is called manufacturing margin or profit. 

In this case we DR. Manufacturing account and CR. Profit and Loss account.

FORMAT OF MANUFACTURING ACCOUNT STATEMENT.

KBC Manufacturing statement for the year ended 31 Dec, XXX

Stock of R.M at start       XX

Add Purchases of R.M      XX

Add carriage inward of R.M      XX

Less return outward of R.M      XX

Less stock of R.M at the end     XX

COST OF RAW MATERIALS USED  XXX

Add direct wages       XX

Add direct expenses       XX

PRIME COST       (XXX)

Factory overhead expenses

Fuel and power       XX

Wages         XX

Lubricants        XX

Rent         XX

Depreciation of plants       XX

Factory cost        XX

Add W/P at start       XX

Less W/P at close      (XX)

COST OF GOODS MANUFACTURED   (XXX)

Example:- KBC had the following information.

1^st January, 1997 stock of raw materials    8,000

31^st December, 1997 stock of raw materials   10,500

1^st January, 1997 W/P      3,500

31^st  December, 1997 W/P     4,200

Wages. Direct       39,600

              Indirect       25,500

Purchases of raw materials     87,000

Fuel and power      9,900

Direct expenses      1,400

Carriage inward R.M      2,000

Rent and Rates of factory     7,200

Depreciation of factory plant     4,200

General factory expenses     9,600

Required: Prepare manufacturing statement account at 31 December, 1997 for KBC.

Solution:

KBC MANUFACTURING ACCOUNT/STATEMENT AT 31DECEMBER, 1997.

Opening stock R.M            800

Add purchases       87,000

Carriage inwards         2000

        97,000

Less stock R.M at end                (10,500)

COST OF RAW MATERIAL CONSUMED   86,600

Direct wages       39,600

Direct expenses         1400

PRIME COST                127,500

Factory overhead expenses     

Fuel and power        9,900

Indirect wages       25,500

Rent and rates         7,200

Depreciation of plant        4,200

General expenses        9,600

                 183,900

Add W/P at start        3,500

                 187,400

Less W/P at close       (4,200)

COST OF GOODS MANUFACTURED             183,200

FORMAT FOR TRADING ACCOUNT OF MANUFACTURING ACCOUNT

Opening stock finished goods   XX   Sales    XX

Add Cost of goods manufactured   XX   Return in ward  XX

Less: Closing stock of finished goods  XX   Net sales  XX

COST OF GOODS SOLD   XXX 

  GROSS PROFIT c/d  XXX

      XXX      XXX                

FORMAT FOR TRADING PROFIT AND LOSS ACCOUNT FOR MANUFACTURING ACCOUNT.

Opening stock finished goods   XX   Sales   XX

Add: Cost of goods manufactured   XX   Return inward  XX

Less: Closing stock of finished goods XX   Net sales  (XXX)

Cost of goods sold    XXX

Gross profit c/d    XX

Expenses        Gross profit b/d XX

Advertisement     XX

Insurance      XX

Transport     XX etc.

Net profit     XXX

      XXX      XXX  

Example:

From the following details extruded from the books of Amanda prepare the manufacturing trading profit and loss account for the year ended 31 December, 2012

1^st January, 2012 Raw materials     18,410

       Finished goods    56,970

Purchases of raw materials    138,430

Direct expenses         9,140

Sales of finished goods    597,560

Factory power – Light and heat       8,930

Office power – light and heat           960

Rate (  factory,   office)       5,550

Insurance (  factory   office)          700

Carriage on raw materials          970

Carriage on sales        2,890

Direct wages                 147,480

Office        17,800

Salesman      24,350

Indirect salaries (factory)    48,000

Administration salaries    22,000

Commission salesman     47,140

Depreciation machinery    31,500

  Furniture         860

Advertising       25,500

Stock 31 December,

  Raw materials    16,980

  Finished goods   51,860

Example 2.

1 Jan. 1997 stock of raw materials     8,000

31 Dec. 1997 stock of raw materials   10,800

1 Jan. 1997 Work in Progress      3,500

31 Dec. 1997 Work in Progress     4,200

Wages Direct       39,600

 Indirect     25,500

Purchase of raw – materials    87,000

Fuel and power       9,900

Direct expenses        1,400

Carriage inward on raw materials     2,000

Rent and rates of factory      7,200

Depreciation of factory plant and machinery    4,200

General factory expenses      9,600

Prepare Manufacturing a/c

MANUFACTURING TRADING AND PROFIT AND LOSS a/c OF BWIKA LTD. ON DEC. 31. 1997.

Stock at January, 1997     184,500

Work in progress      236,000

Finished goods      174,700

Purchases raw materials     643,000

Carriage on raw materials       16,050

Direct labour       658,100

Office salaries       169,200

Rent and rates         27,000

Office lighting and air condition      57,600

Depreciation works machinery      83,000

  Office equipment       19,500

Sales                2,006,000

Factory fuel and power       59,200

Rent and rates are to be apportioned

Factory   office 

31 Dec. 1997 stock of raw materials     202,100

  Work in progress    173,900

  Finished goods    214,850

Example:

30 Dec. 1993      1994

Stock of raw materials at cost        84,600    109,700

Work in progress         30,700      24,600

Finished goods stock        123,800    145,200

Raw materials purchased       387,200

Manufacturing wages        209,700

Factory expenses        126,500

Depreciation

Plant and machinery          75,600

Delivery vans           30,400

Office equipments            8,070

Factory power                      61,200

Advertising           50,800

Office and administration expenses        59,100

Sales men’s salaries and expenses        64,200

Delivery van expenses         58,900

Sales       1,346,100

Carriage inwards          27,200

TOPIC 2

CONSIGNMENT ACCOUNTS

Nature of consignment:

It is common for trader to sells goods directly to customers when they are within or outside the country these are ordinary sells.

But when traders send goods to an agent to sell them for him, these goods are said be sent on consignment.

Common terminologies:-

a)      Consignment of goods: Is the sending of goods by the owner the (consignor) to his agent (consignee) who agrees to collect store and sell the goods on behalf of the owner.

b)     Consigner: The owner or person who send goods on consignment.

c)      Consignee: an agent who sell goods on behalf of owner with anticipation of getting commission.

d)     Delcrelere commission: Is an additional commission paid to an agent who guarantees the debts incurred by customers supplied by him. This is the form of credit insurance to consigner.

e)      Pro – foma invoice: Is an invoice sent to a customer who is required to pay for goods before they are delivered to him or her. It is used when the supplier does not know the credit worthiness of customer. In consignment means a value to be used for overseas custom purposes or minimum selling.

f)       A consignment account: Is a combined trading profit and loss account related solely to the consignment.

Below is the format of consignment account.

                                 DR                            Consignment account        CR

FEATURES OF CONSIGMENT.

• The consigner send goods to consignee. The goods do not belong to consignee (agent) his job is to sell the goods.
• Consignee store the goods until they are sold by him.
• Consignee will receive the commission from consignor for his work.
• The consignee will called money from his/her customers to whom he/she sells the goods. He / she will pay this over to the trader after deducting his/her expenses and commission. The statement from agent / consignee to consignor showing these is known as account of sales.

Consignment account is common to overseas trade. 

Accounting for consignment.

Goods consigned and Expenses paid by the consigner.

• Goods consigned

DR. Consignment a/c 

CR. Goods sent on consignment a/c

• Expenses paid

DR. Consignment account

CR. Cash book.

EXPENSES OF AGENT (Consignee) AND SALES RECEIPTS.

When the sales have been completed the consignee will send account of sales to the owner/consignor.

Bellow is format of account of sales.

Sales     XX

Less: Expenses  XX

         Commission XX

     XXX

Balance how paid    XXX

Double entry record:

(i) Sales

 DR. Consignee a/c

 CR. Consignment a/c

(ii) Expenses of Consignee

 DR. Consignment a/c

 CR. Consignee a/c

(iii) Commission of consignee.

 DR. Consignment a/c

 CR. Consignee’s a/c

(iv) Cash received from consignee

 DR. Cash

 DR. Consignee a/c

Example.

Clarisa of Sweden whose financial year ends 31 Dec. consigned goods to Omolo his Agent in Nairobi on 16^th Jan. 2012. Clarisa purchased the goods for Shs. 500,000/= and had paid shs. 50,000/= on 28.02 for carriage and freight to Nairobi. Omolo paid shs. 25,000 import duty and shs. 30,000/= distribution expenses. He sold the goods for shs. 750,000/= He deducted his disbursement at the rate of 6% of the sales.

On April 2012 he remitted the balance to Clarisa.

 Required: Show the necessary accounts and account of sale.

Soln:

                                    DR              Consignment to Omolo (Nairobi) a/c                        CR

                                     DR                            Goods sent on consignment a/c                          CR

                                     DR                                              Omolo a/c                                     CR

                                     DR                     Profit and Loss on consignment a/c                          CR

Sales a/c

Sales       750,000

Less: Agent disbursements

Import duty    25,000

Distribution costs   30,000

Commission    40,000  100,000

Bank sight draft     650,000                                                                                                     

Example:

John of London whose financial year ends on 31 Dec. consigned goods to Adams his agent in Canada. All transactions were started and completed in 1998.

16^th Jan. John consigned goods costing Tshs. 500,000/= to Adams

Adam sends the account of sale on 31^st July when all the goods have been sold with the following details.

• Sales amounted Tshs. 750,000/=
• Adam expenses:- Import duty Tshs. 25,000/=
• Distribution expenses Tshs. 30,000/=
• Commission of 6% of Tshs. 45,000/=
• Balance owing Tshs. 650,000/=

INCOMPLETE CONSIGNMENT.

The above example have looked at consignments which all goods were sold by the agent before the end of financial year. Sometime this is not the case. i.e. consignee may still have unsold goods at the end of financial year, this is called incomplete consignment at the date of balance sheet.

In this case the value of unsold consignment should be determined and recorded in balance sheet as current asset. On other hand it should appear in the consignment to agent credit side.

HOW TO CALCULATE THE VALUE OF ICOMPLETE CONSIGNMENT.

1. Find or determine the proportion of unsold stock e.g. 20% or 10 cases out 100.
2. Calculate the total costs of consignment by consignor. This includes costs of consignment plus cost incurred by consignor to deliver goods to consignee.
3. Take total costs incurred by consignee, excluding sales and distribution costs like commission and bad debts.
4. Then take proportion of unsold stock multiply by total cost above.

i.e.     (Total costs by consignor + costs by consignee excluding distribution and selling expenses and commission.

Example:

Brown of London consigned 300 cases of soap @ 1200 to Green of Canada on 10^th Jan. 2004. On 25^th Dec. 2004 Green forwarded an account sales with a draft for the balance showing the following transactions.

• 250 case sold for 590,000
• Forty and duty charges 72,000
• Storage charges 41,000
• Commission sales 5% + 1% delcredere.

Additional information.

 Consignor incurred 100,000 for insurance and 27,000 for freight when goods sent to Green.

Required: Prepare the consignment outwards show the profit on consignment.

Solution:

                               DR.                                 Consignment outward a/c                                        CR

                               DR                          Consignment to Green in Canada a/c                               CR

                                DR                                                  Green a/c                                                 CR

Workings:

(i) Expenses on unsold stock

 =   Total expenses excluding selling expenses, commission and distribution cost.

 i.e.     (100,000 + 27,000 + 41,000)

 =     240,000 = 40,000

(ii) Unsold stock value = No of unit Unsold   cost price per unit

     = (300 – 250)   1,200

     = 50  1,200

     = 60,000

EXERCISE:

1. Define consignment and explain the feature of consignment.
2. Define the following terms:-

      Consignment

      Consignee

      Consignor

      Pro foma invoice

      Delcredere commission

3. What is the relationship between consignor and consignee
4. How does consignment differ from sales
5. A consignee sold goods for Tshs. 400,000/=. His commission is 5% and expenses of 20,000/=. Prepare the account of sales.
6. On 15 Nov. 2013 Chagula consigned 300 cases of Wooden goods to Jerome of Bukoba. On 31 Dec. 2013 Jerome forwarded an account of sales with a draft for the balance showing the following transactions

      250 cases sold at 2,000 and 50 cases sold at 1800 @

      Port duty charges Tshs. 72,000/= storage and carriage charges Tshs. 41,000/=

      Commission on sales 5% + 1% Delcredere.

Required:- Prepare account of sales.

Show the consignment inward account in the books of Jerome.

7. On 8^th Feb 2013 Joshua consigned 120 cases of goods to Michael. The cost of goods was Tshs. 12,500/= a case. Joshua paid carriage to the port Tshs. 14,700/= and insurance Tsh. 9,3000/=. On 31 March 2013, Joshua received account of sales from Michael showing that 100 cases has been sold for Tshs. 350,000/= Michael paid freight at the rate of Tshs 200 a case and port charges amounting Tshs. 18,600/= on the same date. Michael was entitled to a commission of 5% or sales. A sight draft for net amount due was enclosed with the account sales.

 Required to:- 

(i)     Prepare books sent on consignment account

(ii)  Consignment to Michael account

(iii) Consignment account

(iv) Account of sales.

TOPIC SIX

PARTNERSHIP 

Partnership is the long term commitment or two or more people joined together operate in business to make profit. People who own partnership are called partner/s

They do not have to be based or work in the same place, though most do;

However they maintain one set of accounting records and share profit and losses in agreed ratio.

NATURE OF PARTNERSHIP

     Partnership has the following characteristics

     It is formed to make profits

     It must obey the law as given in partnership act.

     Have minimum of two and maximum of twenty partners.

     Partners who are not limited partners are known as general partners.

     Except for limited partner each partner is liable to partnership debt.

     Have partnership deed/agreement.

TYPES OF PARTNERSHIP

a)      Unlimited partnership

b)     Limited partnership

For partnership to be formed there must be prior agreement between the partners or partnership deed

CONTENT OF PARTNERSHIP DEED OR AGREEMENT.

     Partnership agreement / deed contain the following information.

     The capital to be contributed by each member

     The ratio to which profit or losses will be shared

     Rate of interest if any to be charged to partners drawings.

     Salaries to be paid to partners

     Arrangement/conditions for admission of new partners

     Procedures to be carried out when a partner retired or dies.

     Name address and location of partnership

     Name address and occupation of partners.

     Aim and objectives of partnership

Note: In case partnership in formed without partnership deed the partnership act will apply information, in partnership act include:-

     No interest on drawings

     No interest on capital

     Profit or loss should be shared 

     5% interest to loan made to partners.

ADVANTAGES OF PARTNERSHIP

a)      It is easy to form

b)     Contribution of capital is easily done by the partners.

c)      Better decision are made since they are contributed by each partners

d)     The losses are shared among partners.

e)      Partnership enjoy freedom as there is minimum interference from the government.

DISADVANTAGES OF PARTNERSHIP.

a)      Most of business partner have unlimited liabilities i.e. partners personal property may be used to offset the business debt.

b)     Profit are share this reduce amount that could be earned by one partner.

c)      Continuous misunderstandings and disagreements among the partners may lead to dissolution of the partnership business.

d)     Slow decision making because every partners has to be consulted before reaching final decision.

e)      I ease of one partner messes the other partners will suffer the consequence since they will be forced to contribute toward the mess.

f)       Capital may fail to expand since the only source of capital in partners.

g)     It lack perpetual existence since each partner may lead to dissolution of the business.

MAIN TYPES OF ACCOUNTS IN PARTNESHIP

(i)     Trading profit and loss accounts.

(ii)  Appropriation account

(iii) Partner’s current account

(iv) Partner’s capital account

(v)   Partners balance sheet, trading account.

There is no difference in preparing the trading, profit and loss account of a partnership and of any other business. Everything is treated the normal way. The aim of preparing trading profit and loss is to determine the gross profit and later the net profit or net loss attained in a given period of time.

APPROPRIATION ACCOUNT

• This account is prepared to divide the net profit obtained from the partnership business among partners as specified in partnership agreement.

                 Format two partner X and Y

    DR                              Partnership appropriation a/c                            CR

FORMAT FOR PARTNER’S CURRENT ACCOUNT.

FORMAT OF BALANCE SHEET.

Capital a/c

 X    XX

 Y    XX

Current accounts  X  Y

Interest on capital xx  xx

Share of profits xx  xx

Salary   xx  xx

   xxx  xxx

Less: Drawings xx  xx

Interest on drawing xx  xx

Example

Partnership between Juma and Bura.

 Capital

 Juma 2,000

 Bura 1,000

Profit sharing ratio   : 

Interest on capital is deldeclered prior to the calculation of profit. Interest on capital in the agreement among the partners but should be equal the return which they would have revealed it they had invested the capital elsewhere.

Example:
If Juma and Bura agree to share profit equally after deducting 5% interest on capital the division of profits would become.

Summary    Juma   Bura

Interest on capital   500   250

Balance of profit   6525   6525

     7,025   5,775

• Juma has received Tshs. 250 more than Bura this being adequate return (if the partners estimation) for having invested an extra Tshs. 1000 in the firm for five years.

Interest on Drawings.

Cash withdrawn from the firm by partner follow two basic principles 

     As little as possible 

     As late as possible.

This is because the more cash that is left in the firm the more expansion can be financed, the greater the economics of having ample cash to take advantages of bargains and not missing cash discounts because cash is not available and so on.

To reduce the chances of drawing interest on drawing. Calculated from the date of withdrawal to the end of financial year was introduced. Interest charged are used to increase the amount of profit divisible between partners.

The rate of interest is agreed among partners must be sufficient but not too harsh.

Example

Juma and Bura interest on drawing was 5%. Juma and Bura made the following drawings.

  Juma      Interest 

  1^st Jan.   1000     1000       12 = 50

  1^st March 2400    240       10 = 100

  1^st May 1200     120        8 = 40

  1^st July 240              240       6 = 60

  1^st October 800    800       3 = 26

  Bura      Interest

  Drawings Tshs.    

  1^st Jan. 600     600   5%   12 month = 30

  1^st August 4800    4800   5%   5 month = 100

  1^st December 2400    2400   5%   1 month = 10

                140

Salaries to Partners.

It a partners will directly work in partnership will be castled to salary which will be deducted before sharing the balance of profit.

Performance related payments to partners.

If there is any bonus or commission related to partners etc. also deducted before sharing profit. 

Example:
X Y and Z are in partnership. They agreed to share profit and losses according the proportion of their capital. They agreed the 8% interest on capital and interest on drawings. 10% per annum.

Z entitled salary of Tshs. 75,000/= per annum and 2% commission on the net profit after charging the salary but before charging interest on capital.

Partners capital on Jan. 2012 were as follows.

 X   Y   Z

 100,000  200,000  500,000

Current accounts on 1^st January 2012 were as following:- 

 X   Y   Z

 25,000 CR  5,000 CR  10,000 DR

Drawings

30 June 2012 X Tshs.  130,000

28 February 2012 Y Tshs.  90,000

31 December 2012 Z Tshs. 120,000

Net profit for the year ended 31 December 2012 was Tshs. 365,000.

 Required to:- 

a)      Prepare profit and loss appropriation account

b)     Partners current account in columnar form

c)      Balance sheet

(a)  Solutions:

DR X, Y and Z profit and loss appropriation a/c CR.

(b) 

DR                                                               Partners Current Account                                                                CR

Balance sheet extract.

Asset     Capital and liabilities

Current account   Capital X  100,000

 X 79,200    Y  200,000

 Y 27,900    Z  500,000

 Z 137,100

Example 2:

The following balances were taken from the books of H. Muya and Mr. Komba on 31 Dec. 2003.

Capital  H. Muya  shs. 250,000

  M. Komba  shs. 200,000

Current account H.Muya  14,500  DR

   M. Komba 27,000  CR

Drawings  H. Muya  36,000

   M.Komba  12,000

Net profit for the year 2003 sh. 111,000

Partnership deed.

(i)     5% interest on capital

10% interest on drawings.

(ii)  Komba is entitled to monthly salary of shs. 2500

(iii) Profit sharing ratio Muya   and Komba 

Required to:

a)      Show the partner’s profit and loss appropriation account and current account in column for.

    DR                              Partners profit and loss appropriation a/c                             CR

Partners current a/c

REVISION QN.

1. Write a short notes on the following:-

                 Partnership

                 Partners

                 Drawing

                 Interest

                 Interest on drawing

2. Name the characteristics of partnership
3. State the advantages and disadvantage of partnership
4. Mention the content of partnership deed
5. In case no partnership deed the partnership act is used. What are the information contained in partnership act?