MANUFACTURING ACCOUNT

 7.6 MANUFACTURING ACCOUNT

Look at Figure 7.5 for the proforma of a Manufacturing Account.

You will observe that the stock of finished goods has not been shown in the Manufacturing Account. As stated earlier, it is to be taken to the Trading Account, Now, suppose the sales for the year 1987 were Rs. 1,60,000, the Trading Account will appear as follows: 

You have learnt that a ma4fact&ng concern has to prepare Manufacturing Account before preparing the Trading and Profit and Loss Account. Though considered desirable but many firms do not do so because it is not compulsory. You will also generally be asked to prepare only the Trading Account without preparing the Manufacturing Account. In such a situation you will show all items of Manufacturing Account in the Trading Account itself. In other words, cost of raw materials consumed, expenses on purchases of raw materials, all manufacturing expenses, the opening and closing work-in-progress, sale of scrap, etc. will also be shown in the Trading Account. But, as per common practice, the items like depreciation and repairs to plant .and machinery and factory building will be shown in the Profit and Loss Account and not in the Trading Account,

7.7 LET US SUM UP

At the end of the accounting year the businessman prepares the final accounts with the help of a Trial Balance. The final accounts consist of (i) Profit and Loss Account and (ii) Balance Sheet. The Profit and Loss Account is prepared for ascertaining the net profit/net loss of the business during the year and the Balance Sheet is prepared for ascertaining its financial position as at the end of the year.

The Profit and Loss Account is divided into two sections, The first section called Trading Account reveals the gross profit or gross loss and the second section called - Profit and Loss Account shows the net profit or net loss. Gross profit is dbfined a the excess of sales revenue over the cost of goods sold which also includes the direct expenses. The net profit is worked out by crediting the Profit and Loss Account with the amount of gross profit and other incomes and debiting it with all indirect expenses and losses, In practice, we usually prepare a combined Trading and Profit and Loss Account. It is also necessary to pass closing entries for transferring all expenses and incomes to the Trading and Profit and Loss Account. 

The Brllance Sheet shows all assets and liabilities of the business. The assets represent the debit balances of the real and petsonal accounts plus the unwritten off amounts of deferred revenue expenses. The liabilities, on the other hand, represent the credit balances of real and personal accounts including capital, The total assets should always be equal to the total of liabilities.

 The manufacturing concerns may also prepare a Manufacturing Account for ascertaining the cost of goods produced, which is then transferred to the Trading Account for ascertaining the cost of goods sold and the gross profit. This, however, is , not compulsory. Most manufacturing concerns prepare the Trading Account directly . by showing all expenses incurred in the factory (including cost of raw materials Consumed) in the Trading Account itself.