2 GOALS OF LECTURE Part A: Journal Part B: Stock A/c Drawings Carriage Inwards & Carriage OutwardsSome Basic Ratios
3 ACCOUNTING PROCESS AND RECORDS ▲ Accounting records are any listing or book which records the transactions of a business in a logical manner. This is achieved by the use of books of prime entry and the Ledger.Journals ( Journal is one of the books of prime entry) is a detail diary in which the transactions of each day are recorded. They are used as an initial ‘store’ of information of the business transactions prior to storing the information in the ledger accounts.Step 1Step 2TransactionsjournalsLedgeraccountsTrial BalanceFinancialstatements
4 The Accounting Process Transaction Journal General Ledger (T-Accounts) Trial Balance Financial Statements (Income Statement and Balance Sheet)Documents verifying a transaction:Bank deposit documentationInvoicesChequesStock certificates
5 ACCOUNTING RECORDS ▲ The journal is called a book of prime entry meaning the ‘first book’. A Journal is prepared in a specific format as shown in the next slide.
7 Journal Four parts: a)Date of transaction b)Title of account debited with dollar amountc)Title of account credited with dollar amountd)Brief explanation of transaction
8 To sum up: the Journal and the Ledger Chronological record of transactionsOrganized by dateLedgerThe book holding all the accounts and their balancesOrganized by account
9 Other Books of Prime Entry Book of Prime EntryTransaction typeSales Day BookCredit SalesPurchases Day BookCredit PurchasesSales Returns day BookReturns of goods sold on creditPurchases returns day bookReturns of goods bought on creditCash BookAll bank transactionsPetty Cash BookAll small cash transactions
10 Example of Journal: Ned Brown opened a medical practice in San Diego, California. 1 Record the preceding transactions in the journal of Ned Brown, M.D., P.C. Include an explanation.Jan 1: The business received $29,000 cash and issued common stock.Jan 2 Purchased medical supplies on account, $14,000.Jan 2 Paid monthly office rent of $2,600.Jan 3 Recorded $8,000 revenue for service rendered to patients on account.
11 Jan 1: The business received $29,000 cash and issued common stock Cash received indicates cash increases Cash is an Asset; Assets increasewith debits .Issued common stock; indicates equity is increasing Increaseequity with creditsDATEDESCRIPTIONDEBITCREDITJAN 1Cash29000Common StockIssued stockJan. 2: Purchased medical supplies on credit, $14,000.Medical Supplies, an asset, is increasing .Assets increase with debits. On credit increases accounts payable, a liability Increase liabilities with creditsDATEDESCRIPTIONDEBITCREDITJAN 2Medical supplies14000Accounts payablePurchased supplies on account
12 Jan. 2: Paid monthly office rent of $2,600 Jan. 2: Paid monthly office rent of $2,600 .Paid rent, an expense, expense is increasing .Expenses increase with debits .Paid cash, cash is an asset ,decrease assets with creditsDATEDESCRIPTIONDEBITCREDITJAN 2Rent Expense2600CashPaid Office RentJan. 3: Recorded $8,000 revenue for service rendered to patients on credit. On credit indicates Accounts receivable increase .Accounts receivable is an Asset, Assets increase with debits .Rendered services, services are revenues, indicates revenues are increasingIncrease revenues with creditsDATEDESCRIPTIONDEBITCREDITJAN 3Accounts receivable8000Service RevenuePerformed service on account
15 The Stock Account and the double entry bookkeeping with the Trading Account The Opening Balance goes to trading account and the Closing Balance comes from the trading accountDr Name of Account CrDate B/ce B/d X € Date Trading A/c X€Date Trading A/c Y€ Date B/ce C/d Y €Date B/ce B/d Y €
16 Carriage Inwards and Carriage Outwards Carriage refers to the costs of transporting goods to and from the firm.From the buyer’s point of view, the delivery charge would he referred to as “carriage inwards”. Any such carriage charges should be debited to the carriage inwards account in the general ledger.The carriage inwards account is written off to the trading account at the end of the accounting period.
17 When the buyer sells the goods to his customer, he incurs further delivery charges. This cost is referred to as ‘carriage outwards”. These costs are debited to the carriage outwards account in the general ledger.Any carriage outwards charges are usually included in an item called ‘selling and distribution costs”. Since this cost is incurred after the goods have been made ready for sale, the account is written off to the profit and loss account at the end of the accounting period.Each type of carriage will be an expense and therefore will have a debit balance in the trial balance. However, these two carriages will appear in different sections of the trading and profit and loss account.
18 Accounting Treatment of Carriage Inwards and Carriage Outwards Journal Entry for Carriage Inwards:Debit Carriage InwardsCredit BankJournal Entry for Carriage Outwards:Debit Carriage OutwardsTreatment in Trading, Profit and Loss Accounts:Carriage inwards Trading account expenseCarriage outwards Profit & loss account expense
19 Summary:Carriage inwards is connected with the cost of getting goods into the business and ready for sale. As a result, it will be added on in the calculation for the cost of goods sold. Carriage outwards does not have anything to do with the cost of getting goods into saleable condition. Therefore it will appear with all the other overhead expenses in the profit and loss account.Good to know:Nowadays, the price quoted for goods being purchased will usually be inclusive of any delivery charge, and so a separate charge for carriage inwards (or outwards) is not very common. In cases where separate carriage inwards charges are incurred, the cost should be added on to the cost of purchases in the trading account. Consequently, a proportion of carriage inwards charges should be added to the purchase cost when determining the cost of closing stock.
20 DrawingsAre the money or goods that the owner of the business is taking out of the company (draws) for his own personal use. The Drawings account is always debited and the account affected is credited. At the end of the year the drawings account goes to Capital Account and reduces it.If the owners takes cash out of the business:Journal Entry:Debit Drawings a/cCredit Cash/BankIf the owners takes goods out of the business:Debit Drawings a/cCredit Purchases a/c
21 Capital Account Loss for the year x B/ce b/d x Drawings x Net Profit x B/ce c/d x Cash injections xx xB/ce b/d x
23 1. Gross Margin ratio (%) =Gross Profit to Sales Or= Sales – Cost of Sales = ……..%It means that ….% of sales is gross profit. Is the percentage that a company keeps from its sales, after deducting the direct costs of producing the goods and services sold by the company.The higher is that ratio the better!!!Gross Margin Ratio is also called Gross Profit MarginMargin is profit expressed as a percentage of the sales.
24 2.Mark up ratio Mark up Ratio = Sales – Cost of Sales = ……..% OrGross Profit =……..%Cost of SalesMark-up is profit expressed as a percentage of the cost of goods sold.
25 3. Stock Turnover = Cost of Sales / Stock= ……times Indicates how rapidly inventory is being sold. Usually, the faster inventory is sold, the more profitable the firm will be. Firms with rapid turnover might include grocery stores, donut shops, etc. A larger inventory turnover number is usually preferred over a smaller number.
26 4. Net Profit to Sales Ratio Net Profit to Sales Ratio = Net Profit = …..%SalesIt means that ….% of sales is Net profit. Is the percentage that a company keeps from its sales, after deducting the direct costs of producing the goods and services sold by the company and all other expenses: selling, administrative, general expenses and interest. So after deducting all costs and expenses.