Summary: Final Accounts of Non-Manufacturing Entities | Principles and Practice of Accounting - CA Foundation PDF Download

Introduction

Non-manufacturing entities, operating as trading entities, specialize in buying and selling goods to generate profit without altering the form of the goods. This category of entities does not engage in the processing of goods.

Income Statement for Non-Manufacturing Concerns

Profit determination and Financial Position Assessment

• Trading Account: At the end of the fiscal year, businesses must calculate profit or loss through a two-stage process. First, by determining gross profit (or gross loss), and second, by calculating net profit (or net loss).

  • Gross Profit Calculation: Gross profit is the surplus of net sales (i.e., sales - sales returns) over the cost of goods sold.

  • Cost of Goods Sold Calculation: The cost of goods sold includes opening stock + purchases during the year + freight inward - closing stock of goods.

  • Preparation of Trading Account: In a trading firm exclusive to purchases and sales, the Trading Account is debited with the value of the opening stock, purchases made during the year, and other expenses incurred to bring purchased goods to the firm’s factory or prepare them for sale (e.g., freight, customs duty, and octroi duty on goods purchased).

  • In a Manufacturing Business: In a manufacturing setup, all expenditures until goods are ready for sale are debited to the Trading Account. This includes expenses like the purchase of raw materials, wages paid to workmen, fuel and power used to operate machinery, and carriage on purchases.

• Sales Considerations: Several considerations apply to sales transactions, including the treatment of goods sold but not yet dispatched, recognition of property transfer in goods, and handling sales on behalf of others.

  • Goods Sold but Not Dispatched: Goods sold but not yet dispatched should not be included in the closing stock and should be kept separate.

  • Transfer of Property: Property in goods not yet transferred to the buyer should not be treated as a sale. In such cases, the entry for the sale should be reversed.

  • Sales on Behalf of Others: Sales out of goods received on behalf of others should not be treated as sales; instead, these sales should be credited to the account of the consignor. If sales have already been credited to the Sales Account, a reversing entry should be passed.
    

  • Sale of Fixed Assets or of investment should be excluded from sales. Thus if old assets is sold, it must not be credited to sales Account. If it has been credited, the following entry should be passed:
    

Consignment on Approval:
The term "goods sent on approval" or "on sale or return" refers to delivering goods to customers with the option to either keep or return them within a specified timeframe. When these transactions are infrequent, they are treated as regular sales. If, at the end of the fiscal year, the goods remain with customers and the specified period hasn't elapsed, the initial entry made for the sale is reversed. Similar to regular closing stock, these goods are treated as inventory held by customers on behalf of sellers and are valued at cost.

The Profit and Loss Account commences with the credit from the Trading Account, reflecting Gross Profit, or a debit if there is a Gross Loss. Subsequently, all expenses not debited to the trading account are recorded as debits in the profit and loss account. In the presence of any incomes or gains, such as rent received on sublet premises, interest on investments, or discounts received from suppliers, these amounts are credited to the Profit and Loss Account.