CONSIDERATION OF INDIVIDUAL ITEMS

There is no uniform practice as to which items should be included in the Trading and which in the Profit and Loss section of the final account. Each case must be evaluated based on its own individual merits. In manufacturing concerns, a Manufacturing or Working Account is often employed either in addition to or instead of a Trading Account: these will be considered later in Chapter 23. In non-manufacturing concerns where goods are purchased for resale, and in manufacturing concerns where no separate Manufactur- Working Account is prepared, the Trading Account should include only those expenses which are directly attributable to putting the goods in a saleable condition: all selling, distribution and overhead expenses will be included in the Profit and Loss Account. The most important point is that treatment must be consistent so that the rate of Gross Profit may be compared from one period to another.

1. Stock. Opening and Closing Stock of goods held for sale will be included in the Trading Account as already described. It is important that these items be confined to stock of goods purchased for resale or for manufacturing into saleable condition. This will exclude the following: (a) Expenses Stock. This has already been dealt with (see p. 0517). (b) Stock in Special Circumstances. Goods which are in possession of the trader are not necessarily his property, e.g. they may be goods received on sale or return. on consignment for sale, or as agent. The treatment will vary according to circumstances, but it may be stated as a general rule that unless the goods have been definitely purchased they should be excluded from the stock; and if they have been definitely purchased a corresponding entry will be, or ought to have been, made in the Purchases Account, Conversely, when goods have been bought and the seller dates forward the invoice (e.g. goods bought on 15th July 19... may be invoived as on 15th August 19..) the purchase should be duly recorded in July and the goods included in stock (unless sold), as such arrangement is merely one whereby the purchaser obtains extended credit. Thus, the following goods must not be included in Stock:

1. Goods held by the business as agent or consignee, or sold awaiting delivery to the purchaser.

2. Goods held by the business as security.

3. Goods out on Sale or Return, when the title thereto has passed to

the sendee.

Conversely, the following must be included:

1. Goods purchased and entered, including goods in transit or stored. 2. Goods purchased and entered which are in the hands of agents and

Consignees.

or held as security.

ACCOUNTANCY

3. Goods purchased and entered which are out on Sale or Return unless the title thereto has passed to the sendee. [If already entered out as Sales, an entry must be made to eliminate the sale, e.g. by debiting Sales and crediting Goods out on Sale or Return, the latter being deducted from Debtors in the Balance Sheet (see Chapter 09).]

4. Goods at Branches, unless dealt with in separate Branch Accounts.

Stocktaking. Where practicable Stock should be taken on the expiry of the business accounting period. Often this is not possible and the actual stocktaking may have to be done during the last day of the year, or may extend into the next few succeeding days.

In many re ail businesses the Stock is evaluated at the retail selling prices and reduced to cost by a deduction of the gross profit percentage on selling prices, otherwise the valuation will be at cost.

In all cases the necessary revision to net realizable value if lower than cost will be required.

The principles to be followed are:

(a) That the goods purchased and the invoices therefor are passed through the books in the same accounting period, so that the liability is taken into account in the same accounting period as the appropriate asset.

(b) That where goods are sold, although not actually delivered, they should be included in the Sales but excluded from stock.

(c) That where goods, although not in its physical possession, belong to the business they must be included in Stock (and Rule 1 observed).

(d) Where Stocktaking takes place during the time sales are being effected, care must be taken to avoid inclusion of goods as Stock on hand and in the Cash (or Debtors), e.g. if a retailer takes Stock during, say, the last day of the year the Cash received in respect of goods taken into Stock must be reduced to Cost and deleted from Stock; if the Stocktaking takes place during the day after the close of the accounting period the whole of the takings for that day must be added to Stock either at cost, or, if evaluations are based on retail selling prices less percentage deduction, then the cash takings augment the Stock at selling price and the deduction is taken from the total..

Illustration 18

X's financial year ends on the last Wednesday in September, but actual a aboog amwallon 5d and stock is not taken until the following Saturday, when it is ascertained at b £33,500. You find that:

1. Sales are entered in the Sales Journal on the same day as despatched, and Returns Inwards in the Returns Journal the day the goods are received back.

2. Purchases are entered in the Purchases Journal as the invoices are received.

3. Sales between the Wednesday and Saturday per Sales Journal and Cash Sales Book were

1.720.

TRADING, PROFIT. LOSS ACCOUNT-BALANCE SHEET

4. Purchases between the Wednesday and Saturday per the Purchases Journal were £120, but, of these, goods amounting to £40 were not received until after the stock was taken.

5. Goods invoiced during September (prior to the last Wednesday) but not received until after the Wednesday amounted to £100 of which £70 worth were received between the Wednesday and Saturday.

6. Goods sold in the previous week £60 were returned on the Monday but did not reach X until the Thursday.

7. The rate of Gross Profit to Sales is 25 per cent.

Ascertain the value of the stock at the end of the financial year, assuming that the net realizable value is higher than cost and that the Purchases and Sales Journals are not to be amended.

CALCULATION OF STOCK VALUE AT LAST WEDNESDAY IN SEPTEMBER

B012 to he

Stock (Saturday following)

Add Sales (Wednesday-Saturday)

Less Gross Profit (25%)

33,500

DO1,720

430

1,290

Less received after stocktaking

Less Purchases entered (Wednesday-Saturday)

-34,790

120 40

34,710

Add Goods invoiced September prior to the last Wednesday not received until after stocktaking

Less Returns Inwards not entered in current financial period

34,740 45

Stock value at close of current financial period

£34,695

It will be observed that all the entries from the Journals except (6) (see below) had been made to the Wednesday when the year ended, so that no adjustments are required in the Ledgers.

As to (3), the addition to the stock is the goods sold since Wednesday to restore it to the position on that day.

As to (4), all these purchases relate to the next period, so that if any goods are received between Wednesday and Saturday they must be eliminated. This figure is £120 less £40 received after Saturday, i.e. £80.

As to (5), all these purchases belong to the financial period ended Wednesday, so that any 'late' deliveries must be added to stock. Those actually delivered between Wednesday and Saturday will automatically have been taken into stock, i.e. £70; but those which have been delivered after Saturday, i.e. £30, are not included in stock and so must be added.

As to (6), the goods returned are included in stock at a cost price of £45, so that they are included both in Stock and Debtors. Stock should therefore be reduced by £45, but as the amount in the Debtors is still at the selling price of £60), a provision of £15 should be made. The better treatment, however, which can be effected without amending the Sales Journal or

the Returns Journal is to:

(1) make no amendment to the stock figure, so that the deduction above of £45 would not be

required; and

ACCOUNTANCY

(2) adjust the Sales Account for the returned goods at selling price in the same way as making an entry for an accrual, thus:

Returns

Trading Account Returns unentered

SALES

Sales

eld

Returns unentered.

b/d

The £60 would be deducted from the Debtors' total for Balance Sheet purposes. If the goods were returned by the purchaser on the Thursday, the deduction of £45 without any further adjustment would be correct.

Stock Valuation. The valuation of stock, which embraces stock in trade and work in progress, in the final accounts of business concerns requires careful consideration, and particularly so in the case of the published accounts of limited companies. The importance attached to valuation of stock is emphasized by paragraph 11 (8B) of Schedule 2 of the Companies Act 1967, If the amount carried forward for stock in trade or work in progress is significant for members to understand the company's state of affairs or its profit or loss for the financial year, then it must be disclosed. The MANNER IN WHICH THAT AMOUNT HAS BEEN COMPUTED MUST BE STATED. It should be appreciated that whilst the foregoing requirement applies to the published accounts of limited companies its importance regarding the final accounts of all other business concerns cannot be overstressed. However, circumstances vary so widely that no single basis of stock valuation is suitable for all types of business concerns, but unless the basis adopted is appropriate to the circumstances of the particular business concern and is used consistently from period to period, the final accounts will not give a true and fair view either of the state of affairs of the business concern at balance sheet date or of the trend of its trading results from period to period.

Statement of Standard Accounting Practice. Statement of Standard Accounting Practice 1/9 concerns Stocks and Work in Progress and is largely reproduced hereunder:

1. Explanatory Note

Introduction

1. The determination of profit for an accounting year involves matching costs with related revenues. Costs associated with unsold or unconsumed stocks and work in progress are incurred with the expectation of future revenue. When this revenue is expected in a future year, it is appropriate to carry forward these costs to match them with the corresponding revenue when it arises. This approach aligns with the concept of matching costs and revenues in the year the revenue is generated, rather than the year the costs are incurred. If there is no reasonable expectation of sufficient future revenue to cover the incurred costs (e.g., due to deterioration, obsolescence, or changes in demand), the irrecoverable costs should be charged to revenue in the current year. Therefore, stocks and work in progress are typically stated at cost, or if lower, at net realizable value.

2. The correlation of cost and net feasible worth should be made in regard of every thing of stock independently. Where this is unfeasible, groups.or classes of stock things which are comparable should be taken together. To think about the all out feasible worth of stocks with the absolute expense could bring about an unsatisfactory setting off of predictable misfortunes against undiscovered benefits.

3. To match expenses and income, 'costs' of stocks and work in progress ought to contain that consumption which has been caused in the typical course of business in carrying the item or administration to its current area and condition. Such costs will incorporate all connected creation overheads, despite the fact that these may build on a period premise.

4. The techniques utilized in dispensing expenses to stocks and work in progress should be chosen with the end goal of giving the most attractive conceivable approxi-mation to the use really caused in carrying the item to its current area and condition, For instance, on account of retail locations holding countless quickly changing individual things, stocks on the racks have frequently been expressed at current selling costs less the typical net overall revenue. In these specific conditions this might be acknowledge capable just like the main functional strategy for showing up at a figure which approximates to cost.

Net feasible worth

5. Net feasible worth is the sum at which it is normal that things of stocks and work in progress can be discarded without making either benefit or deficit in the extended time of offer, for example the assessed continues of offer less all further expenses for fruition and less all expenses to brought about in market. selling and conveying 'straightforwardly connected with the things being referred to.

Substitution cost

6. Things of stock and work in progress have now and again been expressed in accounts at assessed substitution cost where this is lower than net feasible worth. Where the impact is to assess a misfortune more prominent than that as would be considered normal to be caused, the utilization of substitution cost isn't viewed as satisfactory. In any case, in certain conditions (for example on account of materials whose cost has changed extensively and which have not turned into the subject of firm deals when the records are ready) substitution cost might be the best proportion of net feasible worth.

Bookkeeping

Long haul provisional labor in the works

7. Separate thought should be given to work in progress emerging from long haul contracts. Attributable to the time span taken to finish such agreements, to concede considering benefit until culmination might bring about the benefit and misfortune account reflecting not such a lot of a fair perspective on the action of the organization during the year but instead the outcomes connecting with contracts which have been finished continuously end. It is, accordingly, proper to assume acknowledgment for ascertainable benefit while contracts are progress.

8. The benefit, if any, taken up requirements to mirror the extent of the work did at the bookkeeping date and ought to consider any known imbalances of productivity in the different phases of an agreement Numerous organizations, be that as it may, do contracts where the result can't sensibly be surveyed before the finish of the agreement and in such cases taking up any profit is judicious not. Where the business does agreements and it is viewed as that their result can be surveyed with sensible sureness before their decision, then, at that point, the inferable benefit ought to be taken up, yet the judgment included ought to be practiced with judiciousness..

9. If, notwithstanding, it is normal that there will be a misfortune on an agreement all in all, arrangement should be made (as per the judiciousness idea), for the entire of the misfortune when it is perceived. This lessens the work done to date to its net feasible worth. Where unrewarding agreements are of such greatness that they can be anticipated to retain a significant piece of the organization's ability for a significant period, related organization overheads to be caused during the period to the fruition of those agreements ought to likewise be remembered for the estimation of the arrangement for misfortunes.

10. Subsequently, the net measure of long haul provisional labor in progress ought to be expressed in accounts at cost in addition to inferable benefits (if any) less predictable misfortunes (if any). In showing up at a choice concerning whether there are inferable benefits, an organization ought to consider whether, having respect to the idea of the agreements embraced, predicting benefits ahead of the fulfillment of the contracts is sensible.

Revelation in account

11. A reasonable depiction of the sum at which stocks and work in progress are expressed in records may be at the lower of cost and net feasible worth' or, on account of long haul provisional labor underway at cost in addition to inferable benefit [if any] less predictable misfortunes [if any] and

progress installments got and receivable'.

12. To give a sufficient clarification of the undertakings of the organization the bookkeeping strategies continued in showing up at the sum at which stocks and work in progress are expressed in the records ought to be set out in a note. Where varying bases have been taken on for various kinds of stocks and work in progress the sum remembered for the records in regard of each sort should be expressed.

Exchanging. Benefit, Misfortune Record Accounting report

On account of long haul provisional labor underway, the particulars of an agreement ordinarily include progress installments which diminish the sum at which the agreement is expressed in the records. The monetary place of an organization might be physically reliant upon the result of such agreements regardless of this decreasing of their obvious importance. A connected note ought to, in this manner, show how much headway installments got and receiv-capable independently from the net measure of cost in addition to inferable benefit, less predictable misfortunes as suitable.

2. Meaning of Terms

14. The accompanying meanings of terms are utilized with the end goal of this Assertion.

Stocks and work in progress Chileship gi

15. Stocks and work in progress contain:

(a) products or different resources bought for resale;

(b) consumable stores;

(d) items and administrations in moderate phases of fulfillment; and (e) completed merchandise.

Cost

16. Cost is characterized according to the various classifications of stocks and work underway similar to that consumption which has been brought about in the typical course of business in carrying the item or administration to its current area and condition. This use ought to incorporate, notwithstanding. cost of procurement (as characterized in section 17) such expenses of transformation (as characterized in passage 18) as are proper to that area and condition.

Cost of procurement

17. Cost of procurement involves price tag including import obligations. transport and dealing with costs and some other straightforwardly inferable expenses, less exchange limits, refunds and subsidies.olls), mes so

Cost of change

3058

Djupes at stand da nos sidom no boungmins 19 and how

(a) costs which are explicitly inferable from units of creation, i.c.

18. This contains: od 36 lo show to nonego od direct work, direct costs and sub-contracted work: (b) creation overheads (as characterized in passage 19); and (e) different overheads, if any, inferable in the specific conditions of the business to carrying the item or administration to its current area and condition.

770

Creation overheads
Bookkeeping

19. Creation overheads contain overheads brought about in regard of materials, work or administrations for creation, in light of the typical degree of action, requiring one year with another. For this reason every above ought to be characterized by capability (for example creation, selling or organization) to guarantee the consideration in cost of transformation of those overheads (counting deterioration) which connect with creation, notwith standing that these may gather completely or halfway on a period premise.

Net feasible worth

20. This is the genuine or assessed selling value (net of exchange yet before settlement limits) less:

(a) all further expenses for fulfillment; and

(b) all expenses to be caused in showcasing, selling and disseminating.

Long haul contract

21. A drawn out agreement is an agreement placed into for production or working of a solitary significant element or the arrangement of a help where the time taken to fabricate, construct or give is with the end goal that a significant extent of all such provisional labor will reach out for a period surpassing one year.

Inferable benefit

22. Inferable benefit is that piece of the absolute benefit right now assessed to emerge over the length of the agreement (subsequent to considering likely expansions in costs such a long ways as not recoverable under the provisions of the agreement) which reasonably mirrors the benefit owing to that piece of the work performed at the bookkeeping date. (There can be no inferable benefit until the result of the agreement can be surveyed with sensible cer-tainty.)

Predictable misfortunes

23. These are misfortunes which are at present assessed to emerge over the length of the agreement (subsequent to considering assessed healing and support expenses, and expansions in costs such a long ways as not recoverable under the details of the agreement). This gauge is required regardless of:

(a) regardless of whether or not work has yet started on such agreements;

(b) the extent of work completed at the bookkeeping date; and