ABSTRACT

At present the Manufacturing Companies and Trading Companies are following Financial Accountancy and Cost Accounting to maintain their Books of Accounts. In this situation I am introducing a concept which I named as “Methodical Business Book Keeping”that mainly focuses Manufacturing Companies. I have written this concept which combines Inventory Maintenance, Cost Accounting, Department-wise Maintenance as well as Financial Positions of a company in Books of Accounts itself. In this concept Inventory Maintenance takes place as “Inventory Account” which reports inventory movements between one manufacturing department to another as well as the closing balances of Raw Materials and Work-in-Progress. Cost Accounting takes place as “Manufacturing Cost Account”, reports proper postings of manufacturing cost in each department as well as finds the cost of Finished Products. To report trading activities I have written “Business Account”which includes sales and finished goods movements of a company. Profit & Loss A/c shows the net profit. And finally “Financial Status Report”shows the financial position of a manufacturing company by reporting new aspects of financials. The important aspect of this concept is flexibility. It can be prepared periodically like production-wise, month-wise and yearly.

INTRODUCTION

In modern world accounts handling is an essential part of companies to know the financial position. At present we are following the Financial Accounting to handle accounts i.e. double entry book keeping for both manufacturing companies and trading companies, in this situation I am introducing a new concept to handle accounts especially for manufacturing concerns. I have named this accounting procedure as Methodical Business Book Keeping.

DESCRIPTION

Methodical Business Book-Keeping is an advanced procedure of Financial Accounting. It undertakes the entire double entry book keeping procedures, which help to maintain accounts in a proper way. The object of Methodical Business Book-Keeping is to find out the accurate profitability and to provide accurate information about the business position of a concern. Five Principal Statements of Methodical Business Book-Keeping which are follows

1. Inventory Account

2. Manufacturing Cost Account

3. Business Account

4. Profit & Loss Account

5. Financial Status Report

Those statements of Methodical Business Book-Keeping can be prepared for a particular month or for a particular period or for a particular production.

INTRODUCTION OF NEW LEDGER ACCOUNTS

The advanced procedure of Methodical Business Book-Keeping is maintaining each and every transaction by newly created ledger accounts are as follows

a) Trade Discount – Input A/c

b) Trade Discount – Output A/c

c) Profit Reserve A/c (Closing balance of Trade Discount)

d) Trade Discount Income Earned A/c (Proportionate to stock transferred for manufacturing)

e) Stock Transferred to Department X – (WIP)

f) Process Completed Materials and Finished Goods

g) Tax Expenditure A/c (determine the amount of Stock Utilized for manufacturing)

h) Tax Input A/c (From Purchases of Raw Materials)

Methodical Business Book Keeping processes are explained in below Illustration

Financial Status Report of Previous Month Production Closure of XYZ Company

Liabilities Amount Assets Amount
Capital A/c 15,00,000 Fixed Assets
Add: Profit 2,27,500 Plant & Machinery – Dept I 7,50,000
Plant & Machinery – Dept II 2,00,000
Current Liabilities Office Premises 2,50,000
Sundry Creditors 8,09,250 Furniture & Fittings 75,000
Duties & Taxes 37,000 Computers 1,25,000
Bank CC A/c 8,75,000
Current Assets
Provisions Closing Raw Materials 2,75,000
Profit Reserve 27,500 Closing Finished Goods 4,25,500
Sundry Debtors 6,10,000
Bank A/c 6,35,000
Cash in Hand 27,500
Departments (WIP)
Production Dept – I 35,000
Production Dept – II 27,000
Reserve for Tax
Expenditure
Tax Expenditure 41,250
Total 34,76,250 Total 34,76,250

Current Month Production Cost

Factory Overheads: 34,350
Wages of Foreman 2,500
Power Charges (EB) 12,000
Storekeeper Wages 3,000
Oil & Water 1,500
Factory Rent 1,500
Repair & Maintenance Machinery 1,350
Factory Lighting 1,500
Consumable 7,750
Labor & Wages 3,250
Selling & Distribution Expenses: 17,375
Carriage Outward 1,375
Salesmen Salary 12,500
Traveling & Conveyance 750
Advertisement 1,150
Warehouse Charges 1,600
Administrative Overheads: 53,575
R & M Office Building 2,750
Office Lighting 500
Power Charges Office (EB) 6,350
Managers’ Salary 15,000
Director’s Fee 17,500
Office Stationary 650
Telephone Charges 1,325
Postage & Courier 750
Office Staff Salary 8,750

1. 50% of Finished Products Sold with 25% Margin

2. Expenses Paid by Cash 15,375/- and Paid by Bank 89,925/- and Purchases 3,57,500/-

3. 80% of Raw Materials transferred to each department in 50-50 ratio

4. 75% of opening WIP materials process completed in each departments

5. 100% of opening finished goods sold with 25% margin

6. Expenses are shared 60-40 ratio for each department

7. Sales Tax @ 15%

8. Depreciation 60% on Computers and 10% on all other assets

9. Depreciation percentages per annum and all other expenses are one month value

10. Prepare Departments A/c, Inventory A/c, Manufacturing Cost A/c, Business A/c and Profit & Loss A/c and Financial Status Report for One Month. (or else we can take a particular production period)

SOLUTION

-DEPRECIATION CALCULATION

In Methodical Business Book Keeping concept the Financial Status is prepared for production period-wise (or month-wise or as per our convenience), hence the depreciation is calculated for a particular period of production or else production period-wise. It is explained in the following statement, to know the depreciation value of the particular production period. Depreciation Calculation

Assets Value Depreciation per annum per month
Plant & machinery – Department I 7,50,000 10% 75,000 6,250
Plant & machinery – Department II 2,00,000 10% 20,000 1,667
Office Premises 2,50,000 10% 25,000 2,083
Furniture & Fittings 75,000 10% 7,500 625
Computers 1,25,000 60% 75,000 6,250

 

Journal Voucher Debit Amount Credit Amount
By Depreciation for One Month Dr 16,875
To Depreciation on Fixed Assets 16,875
Total 16,875 16,875
(Being Calculated depreciation for one month production)

-DEPARTMENT WISE ACCOUNTS MAINTENANCE

The major benefit of this concept is maintaining books of accounts in department-wise. Transferring raw materials to production units can be shown in the books of accounts, we can maintain works-in-progress raw materials in books of accounts. The Department Books will be shown in the Financial Status Report in Asset Side. This ledger account helps to provide the value of Opening balance and closing balance of Work-In-Progress, exact value of Raw Material received for processes and the process completed materials value we can also transfer the process completed materials for further processes to other departments. The expenses which are incurred in departments need not to be maintained as opening balance and closing balance only inventory is enough for proper maintenance.

Report / Ledger of Department I

Particulars Amount Particulars Amount
Opening WIP Material 35,000   Process Completed Materials Transfer 26,250
Raw Material Received 1,10,000 Closing WIP materials 1,18,750
Total 1,45,000 Total 1,45,000

Report / Ledger of Department II

Particulars Amount Particulars Amount
Opening WIP Material 27,000   Process Completed Materials 46,500
Raw Material Received 1,10,000 Closing WIP materials 1,16,750
Received FG Transferred to Dept II 26,250
Total 1,63,250 Total 1,63,250

Journals for Reference

Department Postings Amount Amount
By Department I 1,10,000
By Department II 1,10,000
To Work in Progress Department I 1,10,000
To Work in Progress Department II 1,10,000
Total 2,20,000 2,20,000
By Work in Progress Department I 26,250
By Work in Progress Department II 20,250
To Department I 26,250
To Department II 20,250
Total 46,500 46,500
Being process completed materials received from department I & II

-PROCESS COMPLETED MATERIALS

The process completed materials value will be arrived by the departments by undertaking the raw materials received value. And the process completed materials can be transferred from one department to another department for further processes. After completing the final process or the finished goods will be stored in ware house or finished goods go down. The Process Completed Material value is the closing balance of Inventory A/c and it is carry down to the Manufacturing Cost A/c to value cost of goods. The processes are explained.

Department I process completed material value 26,250
Department II process completed material value 20,250
Total 46,500

 

Journal Voucher (for reference) Debit Amount Credit Amount
By Inventory 46,500
To Process Completed Materials 46,500
Total 46,500 46,500

Department I Ledger A/c

Particulars (Dr) Amount Particulars (Cr) Amount
Opening Balance 35,000 Work In Progress Dept – I A/c 26,250
Work In Progress Dept – I A/c 1,10,000 Balance c/d 1,18,750
Total 1,45,000 Total 1,45,000
Balance b/d 1,18,750

Department II Ledger A/c

Particulars (Dr) Amount Particulars (Cr) Amount
Opening Balance 27,000 Work In Progress Dept – II A/c 20,250
Work In Progress Dept – II A/c 1,10,000 Balance c/d 1,16,750
Total 1,37,000 Total 1,37,000
Balance b/d 1,16,750

WORK IN PROGRESS

In this concept the work-in-progress value will be shown in the books of accounts as Department book balance. And the Work-In-Progress has the Opening balance and Closing balance the difference between opening and closing balance of WIP will be treated as Process Completed Materials and reducing the value of Scrap from the process completed material value. The work-in-progress value is excluding scrap materials value. WIP materials value will be shown in Financial Status Report Asset side.

Work In Progress Department I A/c

Particulars (Dr) Amount Particulars (Cr) Amount
Department I 26,250 Department I 1,10,000
Balance transferred to Inventory A/c 83,750
Total 1,10,000 Total 1,10,000

Work In Progress Department II A/c

Particulars (Dr) Amount Particulars (Cr) Amount
Department II 20,250 Department II 1,10,000
Balance transferred to Inventory A/c 89,750
Total 1,10,000 Total 1,10,000

Note: In this case no WIP has taken from Opening balance

Closing balance and Opening balance of Raw Materials will appear only in Inventory A/c not in Business A/c. Process completed materials value is arrived from WIP transfers from Departments. Finished Good Opening and Closing Stock appear only in Business A/c

-INVENTORY ACCOUNT

In this Methodical Business Book Keeping Concept, we can prepare Inventory A/c for maintaining inventory in books of accounts itself. In inventory a/c the raw materials value can be maintained in the purchase value. The Inventory A/c contains Opening Stock and Closing Stock of Raw Materials, Purchases of Raw Materials (or materials bought for production purpose) and Work-In-Progress (department wise). The closing balance of Raw Materials transferred to Financial Status Report, the process completed materials transferred to Production A/c. It helps to maintain the inventory as Raw Materials, Work-In-Progress and Process Completed Materials (i.e. Finished Goods’ Raw Material Value). Hence the company could get the accurate value of raw materials in various dimensions in detailed and can be prepared production wise and periodical. It has been explained below in Inventory Account.

Inventory A/c for One Month Production

Particulars Amount Particulars Amount
Opening Raw Materials 2,75,000 Work In Progress Department I 83,750
Purchases 3,57,500 Work In Progress Department II 89,750
Process Completed Materials c/d 46,500
Closing Raw Materials 4,12,500
Total 6,32,500 Total 6,32,500
Journal Voucher (Purchase) Debit Amount Credit Amount
By Purchases 3,57,500
By Sales tax @ 15% 48,263
To Trade Discount @ 10% on Purchases 35,750
To Supplier 3,70,013
Total 4,05,763 4,05,763

-PROFIT RESERVE

In Methodical Business Book Keeping concept has the additional feature of maintaining Profit Reserve. The Trade Discount which is received from supplier is accounted separately, the discount received calculated for a particular production as proportionate to the value of raw materials used or process completed raw materials, and the balance amount of trade discount received treated as Profit Reserve for next production.

Particulars Amount Particulars Amount
Income Proportionate to RM usage 4,650 Opening Reserve 27,500
Profit Reserve (Closing) 58,600 Current Inputs 35,750
Total 63,250 Total 63,250

-TAX EXPENDITURE

And also this concept introduces the Tax Expenditure Reserve Feature. The input tax value from raw materials purchases will be taken the proportionate value of raw materials used to manufacture or process completed raw materials, the balance amount of input tax will be treated as Tax Expenditure Reserve.

Particulars Amount Particulars Amount
Opening Reserve 41,250 Expenditure Calculated 6,975
Current Inputs 48,263 Tax Expenditure (Closing) 82,538
Total 89,513 Total 89,513

-MANUFACTURING COST ACCOUNT

In this concept the Manufacturing Cost A/c can be prepared to find out the Cost of Goods which including Factory Overheads and Administrative Expenses. The Expenses which is made in departments for production processes can be shown in department wise columnar basis.

The expenses which incurred in departments need not to maintain as opening and closing balance, only inventory is enough for proper maintenance. This department wise columnar basis helps to get the department expenditures. This Manufacturing Cost A/c starts with the Process Completed Materials brought down from Inventory A/c. The closing balance of manufacturing cost a/c will be treated as Finished Goods for a particular period of production. As an additional facility this can be prepared as production wise and period wise. The manufacturing a/c process is explained in below illustration.

Particulars Dept I Dept II Amount Particulars Amount
Process Completed Materials b/d 46,500 Other Income
Factory Overheads Finished Goods 1,53,625
Wages of Foreman 1,250 1,250 2,500 Profit Reserve Used 4,650
Power Charges (EB) 6,000 6,000 12,000
Storekeeper Wages 1,500 1,500 3,000
Oil & Water 750 750 1,500
Factory Rent 750 750 1,500
R & M Machinery 675 675 1,350
Factory Lighting 750 750 1,500
Depn 10% on P & M 6,250 1,667 7,917
Consumable 3,875 3,875 7,750
Labour & Wages 1,625 1,625 3,250
Administrative Expenses
R & M Office Building 1,375 1,375 2,750
Office Lighting 250 250 500
Power Charge Office EB 3,175 3,175 6,350
Depn 10% Office Premise 1,042 1,042 2,083
Depn 10% Furniture 313 313 625
Depn 60% on Computer 3,125 3,125 6,250
Managers’ Salary 7,500 7,500 15,000
Director’s Fee 8,750 8,750 17,500
Office Stationary 325 325 650
Telephone Charges 663 663 1,325
Postage & Courier 375 375 750
Office Staff Salary 4,375 4,375 8,750
Tax Expenditure Used 6,975
Total 54,693 50,110 1,58,275 Total 1,58,275

 

Journal Voucher (Sales) Debit Amount Credit Amount
By Customer 6,49,867
By Trade Discount to Customer 10% 62,789
To Sales A/c 6,27,891
To Sales Tax @ 15% 84,765
Total 4,05,763 4,05,763
Calculation of Sales Amount
100% Opening Finished Goods 4,25,500
50% of Current FG (1,53,625 X 50%) 76,813
Sub-Total 5,02,313
Margin 25% 1,25,578
Sale Value 6,27,891

-BUSINESS ACCOUNT

In Methodical Business Book-Keeping Business A/c and Profit & Loss A/c prepared by undertaking the Finished Goods and Selling & Distribution expenses. Opening Stock and Closing Stock of Finished Goods and sales will be shown in Business A/c no purchase account (raw material purchases) is maintained in business a/c. The closing stock of finished goods will also be shown in Financial Status Report. In this concept there is no gross profit only the Marginal Profit takes place in Business A/c.

BUSINESS ACCOUNT FOR ONE MONTH PRODUCTION

Particulars Amount Particulars Amount
Opening FG Stock 4,25,500 Sales 6,27,89 1
FG Stock 1,53,625 Closing FG Stock 76,813
Trade Profit 1,25,579
Total 7,04,704 Total 7,04,704

-PROFIT & LOSS A/C

In this concept the profit & loss a/c is prepared to know the profit or loss on hand, the Selling & Distribution expenses will be accounted in this profit & loss a/c. the profit on hand is also shown in Financial Status Report. The difference between Marginal Profit and Selling & Distribution Expenses will be treated as profit of the concern.

Particulars Amount Particulars Amount
Selling & Distribution Expenses: Trade Profit 1,25,579
Carriage Outward 1,375
Salesmen Salary 12,500
Traveling & Conveyance 750
Advertisement 1,150
Warehouse Charges 1,600
Trade Discount 10% 62,644
Profit or Loss 45,415
Total 1,25,579 Total 1,25,579

In this concept we could maintain finished goods value in books of accounts. The finished goods closing balance is shown in the Financial Status Report as well as in business account.

FINANCIAL STATUS REPORT

Methodical Business Book-Keeping concept the Financial Status Report is the final report for production and it can be prepared Production-wise Report as well as Periodical Report. The consolidated report of production wise and periodical reports can be treated as Final Reports for a financial year. It is applicable for the all of the methodical business book keeping concept’s reports.

≥ Inventory A/c

≥ Manufacturing Cost A/c

≥ Business A/c

≥ Profit & Loss A/c

≥ Financial Status Report

Financial Status Report additionally contains Closing Stock of Raw Materials, Closing WIP Stocks and Closing Finished Goods are shown in Asset side under Current Assets and Departments respectively. The profit on hand will be shown in Liabilities side.

FINANCIAL STATUS REPORT FOR ONE MONTH PRODUCTION

LIABILITIES Amount ASSETS Amount
Capital A/c 15,00,000 Fixed Assets
Add: Profit 2,27,500 Plant & Machinery – Dept I 7,43,750
Add: Profit Current Month 45,415 Plant & Machinery – Dept II 1,98,333
Office Premises 2,47,9 17
Current Liabilities Furniture & Fittings 74,375
Sundry Creditors 11,79,263 Computers 1,18,750
Duties & Taxes 1,21,765
Bank CC A/c 8,75,000 Current Assets
Closing Raw Materials 4,12,500
Provision Closing Finished Goods 76,813
Profit Reserve 58,600 Sundry Debtors 12,59,866
Bank A/c 5,45,075
Cash in Hand 12,125
Department (WIP)
Production Department – I 1,18,750
Production Department – II 1,16,750
Reserve for Tax Expenditure
Tax Expenditure 82,538
Total 40,07,542 Total 40,07,542

-FEATURES

PROVIDES INFORMATION ABOUT THE CONCERN AS A WHOLE, AS PRODUCT-WISE AND DEPARTMENT-WISE

In Methodical Business Book-Keeping, information can be recorded for the whole concern, as product-wise and department-wise. If a concern manufactures few types of products, in this Methodical Business Book-Keeping concept we can maintain department-wise ledger accounts. The concern transfers its Raw Materials for manufacturing to its various departments to be accounted. It helps to provide information of a concern as a whole and department wise.

SUPPORTS FOR ACCURATE PRICE FIXATION

Methodical Business Book-Keeping supports in fixing accurate prices of a product as much as possible. In this concept The Purchase of Raw Materials Account reports the accurate value of Raw Materials which are transferred to manufacture, and the Production Account shows accurate amount of particular production cost and incomes which is proportionate to the Raw Materials used to manufacture.

ACCOUNTS WITH INVENTORY

In this concept the inventory maintenance in books of accounts is possible. The raw materials value will be calculated from purchase price, the movement of raw materials value will be the same till completion of production process. Vide Inventory account we could maintain raw materials and vide business account we could maintain the finished goods.

LIMITATION

The Methodical Business Book Keeping is not so much applicable to a trading company, dealership and retailers, in other words a dealer who deals with finished goods purchases and sells to the end user does not require this concept.

-OBJECTIVES

INVENTORY ACCOUNT

The Inventory Account is prepared to fulfill the company’s inventory maintenance of pre production raw materials, work in progress and post production finished goods as raw materials’ value. It helps to know the movement of raw materials in various stages.

MANUFACTURING COST ACCOUNT

The objective of preparing Manufacturing Cost Account is to bring the finished goods value in books of accounts as well as the costing. The valuation of finished goods is an essential part of a manufacturing company. The manufacturing cost a/c helps to show the costing methods and cost calculations of a company in books of accounts itself.

BUSINESS ACCOUNT

The Business Account’s object is to maintain the inventory of finished goods and sales and margin of a product in books of accounts itself. This account clearly states the margin what we have put for finished goods

PROFIT AND LOSS ACCOUNT

The objective of this statement is to calculate the profit of the concern when sales made. Various expenses will be incurred at selling and distribution of a concern, after deducting those selling & distribution expenses we could get the accurate profit of the company.

FINANCIAL STATUS REPORT

In this methodical business book keeping concept the Financial Status Report’s object is to get the financial data of a concern for a particular period or for a particular production and the consolidated financial status report for a financial year will be the financial status of the concern.

Author Bio

Qualification: Graduate
Company: Info-Drive Softare Ltd
Location: CHENNAI, Tamil Nadu, IN
Member Since: 21 Nov 2017 | Total Posts: 2

My Published Posts

More Under CA, CS, CMA

Posted Under

Category : CA, CS, CMA (3537)
Type : Articles (14975)

5 responses to “Methodical Business Book Keeping”

  1. sanjeev says:

    Dear Sir,

    The concept adopted for describe is quite impressive where are some misconception / might be over looked.

    01. point number 6 expenses are shared 60-40 ration for each department, where as it was distributed equally

    02. Trade discount showing in journal voucher
    (sales) 62789 where as in P&L it was 62644/.

    i think its editing mistake

  2. sanjeev says:

    Dear Sir,

    The concept adopted for describe is quite impressive where are some misconception / might be over looked.

    01. point number 6 expenses are shared 60-40 ration for each department, where as it was distributed equally

    02. Trade discount showing in journal voucher
    (sales) 62789 where as in P&L it was 62644/.

    i think its editing mistake

    • ranjith2k20 says:

      Dear Sanjeev,
      First i am happy that you have gone through the article fully. I apologize for the both editing mistakes. It should not happen when come into public portal. That is 50-50 ratio and TRD is 62789 in P&L. It happened when typing from Excel to word.

      Thanks
      Ranjith

  3. Deepak Dang says:

    Good & very easy.

Leave a Reply

Your email address will not be published. Required fields are marked *