CIMA - C2 Fundamentals of Financial Accounting
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310 20: The accounts of unincorporated organisations (income and expenditure accounts)⏐ Part C Final accounts and audit
Chapter roundup
• The receipts and payments account is effectively a summary of an organisation's cash book. For small clubs with a few
straightforward transactions, this statement may be sufficient. For larger concerns it will be used to prepare an income
and expenditure account and statement of financial position.
• An income and expenditure account is the name given to what is effectively the income statement of a non-trading
organisation, eg sports clubs, social clubs, societies, charities and so on. The principles of 'accruals' accounting (the
matching concept) are applied to income and expenditure accounts in the same way as for income statements.
• In a non-trading organisation the result for the year is described as a surplus or deficit, not a profit or loss, and the
capital of the organisation is known as the accumulated fund.
• Netting off expenditure against income for like items means that where some sources of income have associated costs,
the net surplus or deficit should be shown in the income and expenditure account.
• Before looking at an example of an income and expenditure account we need to look at each of the following items in
some detail.
• Membership subscriptions
• Bar trading account
• Life membership
• Subscriptions received in advance are treated as a current liability.
• Subscriptions in arrears are treated as a current asset.
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Part C Final accounts and audit ⏐ 20: The accounts of unincorporated organisations (income and expenditure accounts) 311
Quick quiz
1 Three differences between the accounts of a non-trading organisation and those of a business are:
(1) ______________________________________________________
(2) ______________________________________________________
(3) ______________________________________________________
2 If a 'not for profit' organisation does make a surplus it will be?
A Credit to capital
B Credit to the accumulated fund
C Repaid to the contributions or members
D Added to the bank account balance
3 A club has 150 members who pay $10 each for membership. The opening subscription receivable was $70 and 5
members had paid subscriptions in advance at the year end. How much money was collected from members?
A $1,500
B $1,740
C $1,620
D $1,520
4 The assets and liabilities of a social club were (at 31.12.20X1) equipment $1,500, premises $16,000, bar inventory
$1,300, bar payables $1,100, managers wage owing $250, subscriptions in arrears $500, prepaid subscriptions $350,
cash $1,900. The accumulated fund is:
A $21,200
B $19,650
C $19,500
D $200,000
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312 20: The accounts of unincorporated organisations (income and expenditure accounts)⏐ Part C Final accounts and audit
Answers to quick quiz
1 (1) A non-trading organisation does not make profits, so the income statement is replaced by an income and
expenditure account.
(2) The 'capital' account is the accumulated fund.
(3) There is no separate trading account.
2 B Correct.
A Non trading organisations such as clubs and societies refer to their capital as 'accumulated funds'.
C Incorrect, unless in the unlikely event of the club or society specifying this is to happen.
D Incorrect.
3 C Correct. Subscriptions A/C
Balance b/f
70
Bank
1,620
I&E (subscriptions)
150 × $10
1,500
Bal c/f 5 × $10
50
1,620
1,620
A Incorrect, you have not adjusted for opening subscriptions in arrears or closing prepaid subscriptions.
B Incorrect, you have posted subscription income to the credit of the subscription a/c incorrectly.
D Incorrect, the closing prepayment of subscriptions must be treated as a payable.
4 C Correct, $1,500 + $16,000 + $1,300 – $1,100 – $250 + $500 – $350 + $1,900 = 19,500.
A Incorrect, this is the amount of the total assets of the club.
B Incorrect, you have treated the subscriptions incorrectly.
D Incorrect, you have treated the outstanding wages as an asset.
Now try the questions below from the Question Bank
Question numbers Page
92–93 409
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313
Topic list Syllabus references
1 Manufacturing accounts D (7)
Manufacturing
accounts
Introduction
So far in our studies of accounts preparation we have confined ourselves to the accounts of
trading organisations. Britain has been called a nation of shopkeepers, but we would be a
very hungry nation if no one actually made things. In Section 1 of this chapter we consider
the problems of preparing accounting statements for manufacturing firms.
The most obvious difference between a manufacturing and a trading firm is that the former
has many more different types of expense. The purchases of the trading firm are replaced by
the myriad expenses that arise when, for example, a willow tree is converted into a cricket
bat. The traditional way of showing the cost of goods produced is the manufacturing
account.
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314 21: Manufacturing accounts ⏐ Part C Final accounts and audit
1 Manufacturing accounts
A manufacturing account is an account in which the costs of producing finished goods are calculated. It is prepared for
internal use.
Direct factory costs are factory costs which change every time an extra unit is made. For example, direct factory wages
are wages paid to production workers who are paid per unit made.
Production overheads or indirect factory costs are factory costs which do not change every time an extra unit is made. For
example, indirect factory wages are wages paid to production managers who are paid the same each month regardless of how
many units are made.
Prime cost is raw material costs plus direct factory costs.
1.1 Cost of goods sold
A company's trading account will usually include a cost of goods sold derived as the total of opening inventory plus
purchases, less closing inventory. This is particularly suitable for a retail business which buys in goods and sells them
on to customers without altering their condition. But for a manufacturing company it would be truer to say that the cost
of goods sold is as follows.
$
Opening inventory of finished goods
X
Plus cost of finished goods produced in the period
X
X
Less closing inventory of finished goods
(X
)
Cost of finished goods sold
X
A pro-forma manufacturing account is set out on the next page with illustrative figures. Make sure you learn the format.
FA
S
T F
O
RWAR
D
Assessment
focus point
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Part C Final accounts and audit ⏐ 21: Manufacturing accounts 315
MANUFACTURING ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 20X6
$
$
Raw materials
Opening inventory
4,000
Purchases (net of returns)
207,000
211,000
Less closing inventory
23,000
188,000
Direct factory wages
21,000
Prime cost
209,000
Production overhead
Factory power
4,000
Plant depreciation
3,000
Plant maintenance
1,500
Rent and insurance
2,500
Light and heat
3,000
Sundry expenses
5,000
Factory manager's salary
9,000
Building depreciation
1,000
29,000
Production cost of resources consumed
238,000
Work in progress
Opening inventory
8,000
Closing inventory
(17,000)
Increase in work in progress inventory
(9,000
)
Production cost of finished goods produced
229,000
1.2 Work in progress
At the reporting date, there will be work in progress in the production departments, ie work which has been partly
converted but which has not yet reached the stage of being finished goods.
The value of this work in progress is the cost of the raw materials, the wages of employees who have worked on it plus a
share of overheads. To arrive at the cost of finished goods produced, an increase in work in progress must be deducted
from the total production costs. Of course, if the value of work in progress had fallen during the period, this fall would
be an increase in the cost of finished goods produced.
1.3 Example: manufacturing account and income statement
The manufacturing account is needed to calculate the cost of finished goods. This figure is then carried forward into the
income statement to replace purchases in the cost of sales calculation.
A manufacturing company has its factory and offices at the same site. Its results for the year to 31 December 20X5 were:
$
Sales 179,000
Purchases of raw materials 60,000
Direct labour 70,000
Depreciation of equipment 10,000
Rent 5,000
Assessment
focus point
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316 21: Manufacturing accounts ⏐ Part C Final accounts and audit
$
Depreciation of building 2,000
Heating and lighting 3,000
Telephone 2,000
Other manufacturing overheads 2,300
Other administration expenses 2,550
Other selling expenses 1,150
Shared overhead costs are to be apportioned as follows.
Manufacturing Administration Selling
Depreciation of equipment 80% 5% 15%
Rent 50% 30% 20%
Depreciation of building 50% 30% 20%
Heating and lighting 40% 35% 25%
Telephone – 40% 60%
The values of inventories are as follows.
At At
1 January 20X5 31 December 20X5
$ $
Raw materials 5,000 3,000
Work in progress 4,000 3,000
Finished goods 16,000 18,000
Required
Prepare the manufacturing account and income statement of the company for the period to 31 December 20X5.
Solution
MANUFACTURING ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20X5
$
$
Opening inventory of raw materials
5,000
Purchases
60,000
65,000
Closing inventory of raw materials
3,000
Raw materials used in production
62,000
Direct labour
70,000
Prime cost
132,000
Manufacturing overheads
Depreciation of equipment (80% of $10,000)
8,000
Rent (50% of $5,000)
2,500
Depreciation of building (50% of $2,000)
1,000
Heating and lighting (40% of $3,000)
1,200
Other expenses
2,300
15,000
Manufacturing costs during the year
147,000
Add opening inventory of work in progress
4,000
Less closing inventory of work in progress
(3,000
)
Reduction in inventory of work in progress
1,000
Cost of finished goods fully produced,
transferred to income statement
148,000
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Part C Final accounts and audit ⏐ 21: Manufacturing accounts 317
INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 20X5
$
$
$
Sales
179,000
Opening inventory of finished goods
16,000
Cost of finished goods produced
148,000
164,000
Closing inventory of finished goods
18,000
Cost of goods sold
146,000
Gross profit
33,000
Selling expenses
Depreciation of equipment (15% of $10,000)
1,500
Rent (20% of $5,000)
1,000
Depreciation of building (20% of $2,000)
400
Heating and lighting (25% of $3,000)
750
Telephone (60% of $2,000)
1,200
Other expenses
1,150
6,000
Administration expenses
Depreciation of equipment (5% of $10,000)
500
Rent (30% of $5,000)
1,500
Depreciation of building (30% of $2,000)
600
Heating and lighting (35% of $3,000)
1,050
Telephone (40% of $2,000)
800
Other expenses
2,550
7,000
13,000
Net profit
20,000
Question
Manufacturing account and income statement
The following information has been extracted from the books of account of the Marsden Manufacturing Company for the
year to 30 September 20X4.
$
Advertising 2,000
Depreciation for the year to 30 September 20X4
Factory equipment 7,000
Office equipment 4,000
Direct wages 40,000
Factory: insurance 1,000
heat 15,000
indirect materials 5,000
power 20,000
salaries 25,000
Finished goods (at 1 October 20X3) 24,000
Office: electricity 15,000
general expenses 9,000
postage and telephones 2,900
salaries 70,000
Raw material purchases 202,000
Raw material inventory (at 1 October 20X3) 8,000
Sales 512,400
Work in progress (at 1 October 20X3) 12,000
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318 21: Manufacturing accounts ⏐ Part C Final accounts and audit
Notes
(a) At 30 September 20X4 the following inventories were on hand.
$
Raw materials 10,000
Work in progress 9,000
Finished goods 30,000
(b) At 30 September 20X4 there was an accrual for advertising of $1,000, and it was estimated that $1,500 had been
paid in advance for electricity. These items had not been included in the books of account for the year to 30
September 20X4.
Required
Prepare Marsden's manufacturing account and income statement for the year to 30 September 20X4.
Answer
MANUFACTURING ACCOUNT AND INCOME STATEMENT
FOR THE YEAR ENDED 30 SEPTEMBER 20X4
$
$
Raw materials
Opening inventory
8,000
Purchases
202,000
210,000
Less closing inventory
10,000
200,000
Factory wages
40,000
Prime cost
240,000
Indirect production expenses
Insurance
1,000
Heat
15,000
Indirect materials
5,000
Power
20,000
Salaries
25,000
Depreciation of factory equipment
7,000
73,000
313,000
Work in progress
Opening inventory
12,000
Less closing inventory
9,000
3,000
Factory cost of goods produced
316,000
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Part C Final accounts and audit ⏐ 21: Manufacturing accounts 319
$
$
Sales
512,400
Less cost of goods sold
Opening inventory of finished goods
24,000
Factory cost of goods produced
316,000
340,000
Less closing inventory of finished goods
30,000
310,000
Gross profit
202,400
Expenses
Advertising $(2,000 + 1,000)
3,000
Depreciation of office equipment
4,000
Electricity $(15,000 – 1,500)
13,500
General expenses
9,000
Postage and telephones
2,900
Salaries
70,000
102,400
Net profit
100,000
Chapter roundup
• A manufacturing account is an account in which the costs of producing finished goods are calculated. It is prepared for
internal use.
• Direct factory costs are factory costs which change every time an extra unit is made. For example, direct factory wages
are wages paid to production workers who are paid per unit made.
• Production overheads or indirect factory costs are factory costs which do not change every time an extra unit is made. For
example, indirect factory wages are wages paid to production managers who are paid the same each month regardless of how
many units are made.
• Prime cost is raw material costs plus direct factory costs.
Quick quiz
1 The production cost of finished goods is?
A Prime cost plus production overheads plus opening WIP less closing WIP
B Prime cost plus production overheads
C Prime cost plus opening WIP less closing WIP
D Prime cost plus opening inventory of materials less closing inventory of materials plus production overheads
2 Prime cost comprises several elements of costs, excluding which of the following?
A Purchases of raw materials
B Direct wages
C Opening and closing inventories of raw materials
D Factory overheads
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