Unit-7 Final Accounts I

In this unit you will learn about the basic framework of final accounts including their presentation in vertical form.

Distinguish between: a) Cost of Goods Sold and Cost of Goods Processed, b) Gross Profit arid Net Profit, c) Direct Expenses and Indirect Expense, d) Trading Account and Manufacturing Account, e) Profit and Loss Account and Balance Sheet?

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Learning Pundits Content Team

Written on Apr 16, 2019 4:09:57 PM

a) Cost of Goods Sold and Cost of Goods Processed

Cost of goods processed is the sum of all the cost spent to procure a raw material , store it and till it consumed . All such costs are added with the actual cost of raw material purchased to arrive at the cost of materials consumed. Whereas all the cost from procuring the raw material to advertise and selling adds up to be called as the cost of goods sold.

b) Gross Profit arid Net Profit

The concepts of gross and net income have different meanings, depending on whether a business or a wage earner is being discussed. For a company, gross income equates to gross margin, which is sales minus the cost of goods sold. Thus, gross income is the amount that a business earns from the sale of goods or services, before selling, administrative, tax, and other expenses have been deducted. For a company, net income is the residual amount of earnings after all expenses have been deducted from sales. In short, gross income is an intermediate earnings figure before all expenses are included, and net income is the final amount of profit or loss after all expenses are included.

c) Direct Expenses and Indirect Expense

  • The cost which is easily apportioned to a particular cost object is known as Direct Cost. Indirect Cost is the cost that can’t be charged to a particular cost object.
  • Direct Cost benefits the single product or project. Conversely, Indirect Cost benefits multiple product or projects.
  • The total of all the direct cost results in prime cost whereas the result of all the indirect cost is known as overheads.
  • Direct Cost is traceable while Indirect Cost is not.
  • Direct cost is subdivided into the direct material, direct labor, direct expenses. On the other hand, indirect cost is subdivided into production overheads, administration overheads, selling & distribution overheads.

d) Trading Account and Manufacturing Account

The manufacturing account helps to better the cost-effectiveness of manufacturing activities. After the ascertainment of the costs of finished goods, we need to transfer this cost to Trading Account. The trading account shows Gross Profit. Whereas, the Manufacturing Account depicts the cost of goods sold and also includes direct expenses. Manufacturing account addresses the raw material and work in progress and does not deal with the finished goods. We debit all the direct production expenses such as depreciation on plant and machinery and factory building, repairs on plant and machinery and factory building, salary to the factory manager, wages, cartage on raw-materials, etc. Thus, the cost of finished goods includes the cost of raw materials and all direct expenses.

e) Profit and Loss Account and Balance Sheet

Balance Sheet, or otherwise known as position statement, is a statement which shows the financial position of the company on a specific date. It lists all the ownership, i.e. assets and owing, i.e. liabilities of the company. Profit & Loss Account, on the other hand, also known as income statement is the account that shows the revenue earned and expenses sustained by the company, during the course of business, in a financial year.

The two statements are an integral part of the financial statement, meaning that financial statement cannot be reported without these two. These are useful to the interested parties in knowing the overall performance, profitability, and position of the company, so as to enable them to make a decision.

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