South African Grade 11 and 12 Accounting: Manufacturing Accounts - Ledgers at the Year-End

This post looks at the year-end transactions of a manufacturing business. It follows on from other posts on different types of costs, as well as the recording of buying direct and indirect raw materials in the general ledger.

Year-End Transaction in the General Ledger

In Grade 10 we saw how businesses closed off accounts at the end of the financial year: Sales and Cost of Sales were closed off to the Trading Account, which was in turn closed off to the Profit and Loss account. All other income and expenses were closed off to the Profit and Loss account, which was then closed off to the Capital account.

In a manufacturing business, we still follow a process related to the one we learnt in Grade 10, but there are some new accounts that we have to deal with when closing off.

The following diagram shows us how all the accounts will be closed off, or the "flow" of the accounts:

To help with understanding and remembering all this, I've used different shapes and colours to represent the different types of accounts.

The most important new accounts that we have to know about are the Cost Accounts. There are five that we use: Direct Materials Cost, Direct Labour Cost, Factory Overhead Cost, Administration Cost, and Selling and Distribution cost. The first three deal with production costs (and are all closed off to Work-in-Progress stock), while the last two deal with non-production costs (and are closed off to Profit and Loss).

One question that I am sometimes asked is why the expenses related to production don't appear in the Profit and Loss Account. Remember that the Trading Account has Sales and Cost of Sales in it -- and Cost of Sales is all the combined costs of production of the goods that we have sold. The cost of production of goods that we haven't sold is still contained in the Finished Goods Stock account.

Notice how the final transaction of all is to close the Profit and Loss account off to Capital -- just like we did in Grade 10. This represents the Net Profit that has been made over the past year. Because the owner owns the business, the Net Profit belongs to him or her, and thus gets added to Capital.

The best way to understand this process is to practise it. Don't think that you'll have remembered everything just by reading this!

The flow of accounts shown above is only an image; for higher quality pdfs, click here for colour and here for black and white.