Periodic Inventory System - Year-end Transactions

This post looks at the year-end transactions under the Periodic inventory system. Click here for the regular transactions that occur during the year.

Year-end Transactions

Some new accounts

There are some new accounts under the periodic system that do not exist under the perpetual system. We have already seen the first two when handling the transactions that take place during the year. These new accounts are:

• Trading Stock or Trading Inventory
• Purchases
• Carriage on Purchases
• Opening Stock
• Closing Stock

In the list of new accounts, I've included Trading Stock. I prefer the name "Trading Inventory" because it makes it clear that this is a different account to the "usual" Trading Stock account, but some textbooks use the same name. The important thing is that you know that Trading Stock under the perpetual inventory system and Trading Stock under the periodic inventory system are very different.

Note that there is no Cost of Sales account under the periodic inventory system!

The beginning of the year: Opening Stock

It turns out that before we look at the end of the year, it's useful to look at what happen right at the very beginning. At the start of the year, the business has trading stock on hand. This is shown in the balance brought down in the Trading Inventory account. The first thing we do at the start of the year is to close off Trading Inventory to the Opening Stock account. At this point, it means that trading stock is now entirely in the nominal accounts of the business, and that there is no reflection of trading stock as an asset.

This first transaction looks like this:

Closing off Opening Stock at the start of the year.

Note that Opening Stock is an expense.

The end of the year: Closing Stock

At the end of the year, a stock-taking will be done. This will reveal the actual value of the stock on hand in the business. This amount is placed into the Trading Inventory account and its contra-account is Closing Stock.

Calculating Cost of Sales

Under the Perpetual Inventory System, we close off Sales and Cost of Sales to the Trading Account. Under the the Periodic Inventory System, we don't have a Cost of Sales account, but we do have to calculate Cost of Sales. As you should have seen elsewhere, we can calculate Cost of Sales using a formula:

Cost of Sales = Opening Stock + Net Purchases + Carriage on Purchases - Closing Stock

It turns out that this formula applies in the General Ledger as well, and we get to it by closing off Opening Stock, (Net) Purchases, Carriage on Purchases, and Closing Stock to the Trading Account.

Sales

Sales is treated the same way under both inventory systems. We first close Debtors' Allowances off to Sales, and then close Sales off to the Trading Account.

<<<>>>

Opening Stock

This is closed off the Trading Account:
<<<>>>

Net Purchases

Some textbooks create a separate account called Creditors' Allowances. If you have done this, you must first close it off to Purchases. Then we close Purchases off to Trading Account:

<<<>>>

Carriage on Purchases

This also gets closed off to the Trading Account:

<<<>>>

Closing Stock

This also gets closed off to the Trading Account. Note that it will appear on the credit side:

Periodic Inventory System - Transactions during the year

This post is suitable for Grades 11 and 12. It looks only at transactions during the year. For year-end transactions for the periodic inventory system, look elsewhere.

Periodic Inventory System: Regular transactions

Under the periodic inventory system, changes to trading stock are only recorded periodically (hence the name!).

When trading stock is purchased, this is recorded in an expense account called Purchases. When trading stock is sold, no adjustment is made to Trading Stock -- only Bank or Debtors' Control and Sale are affected. This means that there is no Cost of Sales. If you are only used to the perpetual system, this way of doing things may be strange, but it is much easier when we sell stock.

Another big difference under the periodic system is the way that carriage on purchases is dealt with. A separate expense account called Carriage on Purchases is created and used every time that the business incurs carriage costs.

Note that both Purchases and Carriage on Purchases do not appear when using the Perpetual Inventory System. Similarly, there is not Cost of Sales account when using the Periodic Inventory System.

Purchasing Trading Stock

As mentioned above, every time we record a purchase of Trading Stock, we record it into an expense account called Purchases. When it comes to buying stock, this account behaves similarly to accounts like Stationery Expense or Consumable Stores.

For example, during the month of January, the business buys R14 500 of stock on credit, and pays cash for another R9 700 of goods. It will be recorded in the general ledger as follows:

Carriage on Purchases

Carriage on purchases is recorded in a separate expense account called Carriage on Purchases. Suppose that the business pays cash for carriage on purchases of R1 500. The accounts in the general ledger would look like this:

Note that Carriage on Purchases could also be on credit, or be paid with Petty Cash.

Sales of Trading Stock

This is where things get easy. When we sell trading stock, we don't record Cost of Sales. This means that there is no affect on Purchases or any Trading Stock account. For example, if merchandise was sold for R30 000, we would record it as follows:

Notice how the Purchases account remains unaffected!

Returns by Customers

When customers return goods to us, we only have to adjust Debtors' Control (because they owe us less) and Debtors' Allowances (to represent the cancelled Sales). Since no stock values were adjusted when the goods were sold, we don't have to adjust stock when there is a return. For example, if a debtor returned stock that was sold for R1 500, it would look like this in the General Ledger:

<<<>>>

Notice how the Purchases account remains unaffected!

Returns to Suppliers

If we return goods to suppliers, there are two possible ways of recording this transaction, although the end result is the same. I will only examine one of the ways here. If we return goods to a supplier, we will debit Creditors' Control, as we owe them less, and we credit Purchases to "cancel" the original purchases expense. For example, if we return stock that we paid R900 for, we would record it in the general ledger as follows:

<<<>>>

Donations of Stock

If we donate goods to someone, we decrease the purchases account directly. This means that we will debit Donations, as it is an expense, and we will credit Purchases. For example, if we donate R350 of stock to the SPCA, it will be recorded in the General Ledger as follows:

<<<>>>

Drawings of Stock

If the owner of the business takes trading stock for personal use, Drawings is debited and Purchases is credited. For example, if the owner withdraws R160 of stock for his own use, we record it in the General Ledger as follows:

<<<>>>

These transactions are all ones that occur during the course of the year. For the year-end transactions, please see the post on the year-end transactions for the periodic inventory system.

GAAP concepts

This post is appropriate for Grades 10 to 12.

GAAP concepts

At school level we don't normally worry too much about GAAP concepts, but there are some concepts that are very important and that you are expected to know right from Grade 10.

Accrual Basis

When we prepare financial statements on the accrual basis, incomes and expenses are recorded in the period in which they occur, and not when cash is received or paid. 

This means that if we incur an expense, but do not pay for it, it is still recorded as an expense. Conversely, if we pay for an expense, but have not yet incurred it (such as when we pay an account in advance), we do not record it as an expense for this period. In the next financial period, we will then record it as an expense.

This concept is particularly important when we draw up income statements, as we will only record incomes and expenses that were earned or incurred in the period.

The "opposite" of using the accrual basis is the cash basis, which we use for Cash Budgets (Gr 10 - 12) and for Cash Flow Statements (Gr 12).

Going Concern

We assume that we are doing the books of a business that is a going concern. In other words, it is a business that will carrying on running as normal for the foreseeable future, and not one that might stop running (for whatever reason).

Historical Cost

The historical cost basis of valuing assets is that they are recorded at their original cost price.

(In practice, at school we record assets at the lower of historic cost price or net realisable market value, although you only use this very seldom. In the real world there are other ways of valuing assets too, but we limit ourselves to the historic cost at school or the net realisable market value if it's lower.)

Prudence

Prudence basically means that we are cautious or careful when we record things in the books of a business. This is not the same as being pessimistic; rather, we are just being careful. The important part of being prudent is that assets and income should not be overstated, and expenses and liabilities should not be understated.

Note that most of the information on this page is derived from the Framework for the Preparation and Presentation of Financial Statements published by the Accounting Standards Board. Note that this document itself is outside the scope of school accounting.

South African School Accounting: Fundamental Definitions

These definitions are not usually required as such, but are of immense important for all grades.

Fundamental Definitions in Accounting

Note that these definitions are slightly relaxed for the school level.

The Five Elements of Accounting

Assets

Assets are resources that a business owns or controls (due to a past event) that will result in an inflow of future economic benefit.

Assets are normally broken into two types: current assets, which have a "life-span" of a year or less, and non-current assets, which have a life-span of more than a year.

Examples of current assets are cash, money in the bank, trading stock, and debtors.

Examples of non-current assets are long-term investments (like fixed deposits), land and buildings, equipment, and vehicles.

Equity

Equity is the value of the business, or alternatively the owner's/owners' share of the business. It is calculated as the value of all the business's assets less its liabilities. This ties in with the Accounting Equation, shown in the next section.

Liabilities

Basically, a liability is something that we owe. More formally, it is a present obligation due to a duty, responsibility, or legally binding contract that occurred due to a past event.

Liabilities are broken up into current liabilities, which are liabilities that have to be paid back in the short-term (less than one year) like the business's creditors, and non-current liabilities, which are ones that only have to be paid back after a year or more.

Income

An income is when equity increases due to either an increase in assets or a reduction in liabilities.

Note that income is not the same as just receiving money! Incomes are also called revenues, but at school they will only be referred to as incomes.

Expenses

An expense is when equity decreases due to either a decrease in assets or an increase in liabilities.

Note that expenses are not the same as spending money!

The Accounting Equation

The Accounting equation is given by:

Equity = Asset - Liabilities

or

Assets = Equity + Liabilities

This follows from the definition of equity... or perhaps the definition of equity follows from this! This does make sense intuitively though: assets represent the total value of the business. This value is split between the people who own the business, and the people to whom the business owes money.

A lot of people forget that the accounting equation is actually an equation. That means that if we make a change to one side, we must make the same change to the other side. The following are some valid examples:

• If Assets increase, then Assets can also decrease. For example, if we pay cash for equipment: cash decreases, and equipment increases.
• If Assets increase, then Equity can increase. For example, the business is paid cash for services rendered: cash increases, and equity increases (because we this is an income).
• If Assets increase, then Liabilities can increase. For example, if the business takes out a loan from the bank: assets will increase, because the business received cash, and liabilities will increase because the business owes money to the bank.
• If Owner's Equity decreases, then Liabilities can increase. For example, if the business uses the telephone but doesn't pay the bill on time: equity decreases, because the telephone account is an expense, and liabilities increase, because the business owes the telephone bill. (This ties is with the concept of <<<Accrual>>>.)

In the last case, note how nothing happens to assets... but nothing happens (in total) to the other side of the accounting equation either, because the "plus" and the "minus" cancel out.

South African School Accounting: Depreciation

This section is suitable for Grades 10 through to 12.

Depreciation

Depreciatiarerrrrrrrrrrrrrrr is the loss of value of an asset over time due to wear and tear. This means that it only refers to the loss in value of an asset from day-to-day use, and not from a loss in value due to other causes. So, for example, if someone blows up the business's car, that decrease in value is not depreciation.

Depreciation is an expense, because it is a decrease in equity due to the decrease in value of an asset. Unlike most other expenses, depreciation does not involve any money being paid out, and as such is called an imputed expense.

There are two methods we use to calculate depreciation. Regardless of which method we use, we must use a fixed depreciation percentage rate for the life of the asset.

Definitions

Cost Price (or Historic Cost Price). This is the amount that the business actually paid for the asset when they bought it. This is the value that the asset is recorded at in the asset's ledger account in the General Ledger

Accumulated Depreciation. This is the total depreciation of the asset over its whole life.

Book value or Carrying Value. This is the (theoretical) value of the asset to the business. It's calculated as:

Book value = Cost price - Accumulated Depreciation

Depreciation rate. This is the percentage rate that we use to depreciate our assets.

Methods of Calculating Depreciation

The Straight-line Method

When we use the straight-line method to calculate depreciation, we calculate depreciation for each year using the following formula:

Depreciation for the year = Cost Price x Depreciation Rate.

For example, if we purchased a vehicle on the first day of 2001 for R250 000, and the depreciation rate is 20% p.a., the depreciation each year will be 250 000 x 0.2 = R50 000. We can show the value of this asset over the first ten years of its life as follows:

Value of a vehicle that is depreciated on the straight line value. Note how it has a default salvage value of R1.

It's easy to see that the carrying value decreases steadily by R50 000 each year... until it should hit zero. As you'll see in the section below on salvage value, by convention we never let an asset depreciate to zero. Instead we leave it with a book value of R1. This means that at the end of 2005, the book value of the vehicle is R1, and we don't depreciate it after this.

Note that when we use the straight-line method, depreciation will be the same every year over the lifespan of the asset.

The Diminishing Balance Method

For this method, depreciation is calculated using the following method:

Depreciation for the year = Book Value x Depreciation Rate.

For the first year in an asset's life, the depreciation calculated under either method is the same. It's only after that there is a difference.

For example, suppose that a vehicle was purchased on the first day of 2001 for R250 000, and the depreciation rate is 20% p.a. If we calculate the depreciation using the diminishing balance method, the following table shows the depreciation and accumulated depreciation for the first 10 years (we assume that the financial year-end is 31 December):

Value of an asset over 10 years, if it's depreciated using the diminishing balance method.

Examine the table above and try and notice the patterns. In particular, note that the depreciation each year decreases, as long as the cost price stay the same.

Recording Depreciation

Depreciation is recorded in the General Journal, which is then posted through to the General Ledger. It is very important to remember that depreciation is an imputed expense, and so no money is paid or owed.

It is also important to remember that according to the Historic Cost Principle, we record the value of assets like Equipment and Vehicles at their cost price. Because of this, we "store" the total depreciation in an account called Accumulated Depreciation. This account can be thought of as a negative asset. It increases on the credit side, and represents the total decrease in value of the asset over time.

To illustrate this using an example, let's suppose that vehicles worth R100 000 are bought on 1 January 2010, the start of the financial year. If the vehicles are bought for cash, our first entries will be:

Buying equipment for cash

At the end of the year, we will need to process the depreciation. For this example, depreciation on vehicles is calculated at 10% p.a. on the diminishing balance. This will be recorded using the Accumulated Depreciation on Vehicles account and the Depreciation account. Notice how the Vehicles account remains unaffected:

Recording depreciation

At the end of the year, Vehicles and Accumulated Depreciation on Vehicles will have balances to be carried down, and Depreciation will be closed off. This will result in the following year-end situation (I've done the balancing transactions in blue)

Balances at the end of the year

At the end of the next year, we will need to calculate depreciation again. Because we are calculating depreciating using the diminishing balance method, we need to work out the book value first. We do this by taking the cost price minus accumulated depreciation, which would give us R90 000. 10% of this gives us our depreciation for the year, which is R9 000. The depreciation entry is marked in green.

Depreciation for the second year

Notice how, at the end of this second financial year, Accumulated Depreciation now contains the value of both years' depreciation. We continue this same procedure every year for the life of the asset, until...

Salvage or Scrap Value

If we use the straight-line method of depreciation, the book value of the asset will eventually reach zero. By convention, the minimum book value we will give an asset is R1. This means that an asset can never have a book value of zero! Note that this is a little detail that seems to like making its way into exams.

It is reasonable that, at the end of the life of an asset, it will be expected have some value. In this case, we call that value the salvage or scrap value of the asset.

This idea of an asset having a value of R1 can be a little strange to swallow. If we have a car that has depreciated down to R1, but we are still using it, and we know that we can sell it for R10 000 even though it's old, it just seems strange. This is where, amongst other things, the GAAP concept of prudence is important. We can't revalue the vehicle to R10 000 just because we think that we'll get that much money for it, because we haven't actually received that money yet. It's more prudent to record it at R1, and if we sell it for more, that's a bonus!

Depreciation for part of the year (Grade 11 and 12)

Depreciation for part of the year is not part of the Grade 10 syllabus (I think).

To calculate the depreciation for part of the year (for example, 7 months), we first calculate the full depreciation for the year, using the relevant method, and then multiply our answer by 7/12.

In general, if we have to calculate depreciation for n months in the year, we multiply our year's depreciation by n/12.

This is particularly important when an asset is bought or sold during the year, and must therefore only be depreciated for part of the year.

To see how Depreciation and Accumulated Depreciation are handled when an asset is sold, look for a post on Asset Disposal.

South African Grade 11 and 12 Accounting: Inventory Systems - Perpetual Inventory System

The Perpetual Inventory System

The perpetual inventory system is a system of recording Trading Stock. This may sound quite complicated, but the reality is that if you are in Grade 10, you have already been using the system for a year or two -- only no-one told you that that was what it was called. When we use the perpetual inventory system, we make sure that we record every transaction that affects Trading Stock as soon as we can.

This means that if we buy Trading Stock, we record it in the Cash Payments or Creditors Journal straight away. If we sell Trading Stock, we record it straight away in the Cost of Sales column of the Cash Receipts or Debtors Journal. If we return goods, or have them returned to us, we record the returns in the Creditors' Allowances or Debtors' Allowances Journal.

So what's the big deal?

It turns out that there is another inventory system that we do in Grade 11 (and it's part of the Grade 12 syllabus too), where we don't record all of these things straight away -- but for now we don't have to worry about that. The Perpetual Inventory System is just the name for what we have been doing all along.

Recording Transactions in the General Ledger using the Perpetual Inventory System

This section deals with recording transactions involving Trading Stock in the General Ledger. Note that it covered in Grade 10, and so this section should mostly be revision. If you are comfortable with Grade 10 work and don't want to read this section, at least look at the part on Carriage on Purchases.

The Trading Stock Account

Before we do the all the transactions that affect Trading Stock, it's important that we know what kind of account Trading Stock actually is.

The definition of an asset is (loosely) something that we own or control that will result in future economic benefit to the business. Trading Stock meets these criteria: we will have bought the stock, so we own it, and we will sell it in the future for a profit, which is an economic benefit. So Trading Stock is an asset. More specifically, it is a current asset.

This means that when Trading Stock increases, we will debit the ledger account (because assets increase on the debit side), and if it decreases, we will credit the account.

Something that is also worth mentioning here is that Trading Stock goes by quite a few names. In exercises, tests, and exams, you will be exposed to other names like "Merchandise", "Goods", "Trade Goods", "Stock", or "Trading Inventory". Regardless of the name that they use in the transaction, at school we always call the account "Trading Stock".

Opening and Closing Balances

Because Trading Stock is a current asset, and thus a Balance Sheet account, we will have a closing balance at the end of each period. At the start of the next period, we will have an opening balance representing the value of all the Trading Stock that the business actually owns. This means that usually when we do a Trading Stock account, we will have an opening balance. Because it is an asset, the opening balance will be on the debit side of the General Ledger account.

Buying Trading Stock

In order to have Trading Stock to sell, we first have to buy it. When we buy stock, we increase the amount of Trading Stock we have, and we thus debit the ledger account. At the end of the month when we post the journal totals to the General Ledger, our Trading Stock account might look something like this:

Buying Trading Stock

In the example shown, we have bought R15 000 worth of Trading Stock for cash, and R21 000 on credit. We could also increase Trading Stock in a couple of other way -- debtors could return stock, which we'll look at later, or the owner could give stock to business as a capital contribution, or we could buy stock using petty cash.

Paying for Carriage on Purchases

We also look at Carriage on Purchases in the Manufacturing Accounts section.

Carriage on purchases is the cost of transporting trading stock from our supplier to our business. Because it is required for us to actually have the stock in a condition that we can use, we include it as part of the cost of the Trading Stock. This means that when we pay for carriage on purchases, we add it to the Trading Stock column of the Cash Payments Journal straight away (or to the column in the Creditors' Journal, if we use credit).

This means that, in the General Ledger, there is no actual indication that we've paid for carriage on purchases at all. For example, if in addition to the purchases made earlier, we also pay R1000 for carriage on purchases, our ledger account will now look like this:

Paying for Carriage on Purchases as well as buying Trading Stock

In tests and exams it's a good idea to put the (21 000 + 1 000) in brackets next to Creditors' Control, as it helps the marker see where you got your figures.

Basically, when it comes to carriage on purchases, we just treat it as though we are buying some more Trading Stock.

Selling Trading Stock

The whole point of Trading Stock is to sell it. You should all be familiar with the double transaction that happens when we sell stock (for cash):

1. We receive money from our customer, which increases Bank on the debit side. Because this money is income, we also increase Sales on the credit side.
2. We give Trading Stock to the customer. This decreases Trading Stock (we credit the account) and the contra-account is Cost of Sales, which we debit because it's an expense.

In the general ledger, the cash transaction looks like this:

Selling Trading Stock for cash... now with added arrows!

If we sell on credit, i.e. we sell to a debtor, the only difference is that Debtors' Control increases instead of Bank:

Selling Trading Stock on credit

Trading Stock returned from Debtors

If debtors return goods to us, there are a couple of steps to go through. The first thing to remember is that when debtors return goods to us, it's the opposite of a credit sale. In the general ledger, the transaction will look like this:

Return from a debtor

Remember that returns from debtors are recorded in the Debtors' Allowances Journal.

Returning Trading Stock to Creditors

If the business returns goods to one of creditors, two things will happen: trading stock will decrease, as we are giving some of it back, and we will owe our creditors less. If we return goods worth R10 000 to our creditors, it will look like this in the General Ledger:

Return to a creditor

Remember that returns to creditors are recorded in the Creditors' Allowances Journal.

Donations and Drawings of Trading Stock

If we donate Trading Stock, we decrease our Trading Stock, and it results in the expense called Donations. If the business donated stock worth R4 000, the transaction will look like this in the general ledger:

Donation of Trading Stock

If the owner withdraws Trading Stock for personal use, we credit Trading Stock to decrease it, and we debit Drawings:

Drawings of Trading Stock

Note that the General Journal is used for both of these transactions.

Year-end Transactions for the Perpetual Inventory System

Trading Stock Deficit

At the end of the financial year, the business will perform a stock-taking. This is when the business physically counts all of its inventory to confirm that it actually exists. The theoretical amount (in the General Ledger) and the actual amount shown by the stock-taking are going to disagree, because stock is likely to get stolen or damaged during the year, and obviously this is not necessarily recorded.

This means that our recorded, theoretical amount of Trading Stock is more than the actual amount of Trading Stock. To take this into account, we decrease Trading Stock until the closing balance is the same as the stock-taking amount, and we create an expense called Trading Stock Deficit to record this decrease.

For example, suppose that at the end of the year, our balance in Trading Stock is R150 000. Stock-taking reveals that R147 000 worth of stock is on hand. This means that there is a R3 000 discrepancy, which we take into account as follows:

Trading Stock deficit at the end of the year

Note how the final balance is the same as the amount revealed by the stock-taking.

Sales

At the end of the year, we close Debtors' Allowances off to Sales. Note that some textbooks suggests closing Debtors' Allowances off to the Trading Account instead. It makes no difference in the end, but check with your teacher which method he or she prefers.

<<<>>>

Once Debtors' Allowances has been closed off to Sales, we close off Sales to the Trading Account:

<<<>>>

Cost of Sales

At the end of the year, we close off the total Cost of Sales to the Trading Account:

<<<>>>

Trading Account and Profit and Loss

The Trading Account is closed off to the Profit and Loss account. Depending on the type of business, different things will happen from here: (note that final transactions for different types of businesses are covered elsewhere in more detail)

• Sole Trader (Grade 10): All other incomes and expenses are closed off to the Profit and Loss account. This is then closed off to the Capital Account.
• Partnerships (Grade 11): All other incomes and expenses are closed off to the Profit and Loss account, except for the partners' salaries and their interest on capital. The Profit and Loss is closed off to the Appropriation account. See the posts on partnerships for more details.
• Companies (Grade 12): All other incomes and expenses are closed off to the Profit and Loss account, except for Ordinary Share Dividends and Income Tax. The Profit and Loss account is then closed off to the Appropriation Account. See the posts on companies for more details.

South African Grade 11 and 12 Accounting: Manufacturing Accounts - Production Cost Statement

This post assumes that you are familiar with the ledger accounts of a manufacturing business. This post and this post look at the ledger accounts.

The Production Cost Statement

At the end of the year, we will make a new financial statement that summarises some of the information from the manufacturing accounts in the General Ledger. This is to help people reading the financial statement understand how certain key figures -- such as Cost of Sales -- were arrived at. By putting it into a financial statement, we make the information more accessible to people, as everything is explained quite clearly. Imagine having to dig through the ledgers every time you wanted to work out the net operating expenses, for example, and you'll quickly see the benefit!

In order to show manufacturing information in an accessible way, we draw up a couple of statements and notes to those statements.

Production Cost Statement

The first statement drawn up is a production cost statement. This is essentially the Work-in-Progress Account, but in the form of a statement.

For example, suppose we have a Work-in-Progress Stock account as follows:

An example Work-in-Progress Stock account

The resulting Production Cost Statement would look like this:

An example Production Cost Statement

Note that the coloured "+", "-", and "=" are there to help with understanding, and are not normally part of the statement.

Notes to the Financial Statements for the Production Cost Statement

Also note that the statement refers to notes for Direct Materials Cost, Direct Labour Cost, and Factory Overhead Cost. These are drawn up as notes to the financial statements, and are also essentially ledger accounts in statement form. The Direct Materials Cost note is based on the Raw Materials Stock account, the Direct Labour Cost note is based on the Direct Labour Cost account, and the Factory Overhead Cost note is based on the Factory Overhead Cost account. Continuing the above example, the notes would look like this (the notes are empty for now, but I'll put numbers in when I get a chance):

Example Notes to the Financial Statements for the Production Cost Statement - error in note 1 to be corrected!

Note that any custom duties would be added in Note 1 above.

Again, note that the coloured signs on the left of each note are just there to help, and are not usually included!

Cost of Finished Goods Sold

This note bridges the gap between the Production Cost Statement and the Trading Statement (or Income Statement). It is essentially the Finished Goods Stock ledger account in the form of a statement:

Example of the Cost of Finished Goods Sold note.

The cost of finished goods sold is the same as Cost of Sales.

Once again, the coloured signs on the left are not normally included. Also, note that the "Total Cost of Production of Finished Goods" amount is the total from the Production Cost Statement.

Trading Statement

The trading statement is the last of these additional statements, and is just used to show how the Gross Profit is calculated. It is essentially the same as the first three lines of an income statement.

Example of a Trading Statement

An important reminder

Marks are sometimes deducted in tests and exams if negative amounts are not shown in brackets. For example, in the Trading Statement, the Cost of Finished Goods Sold amount should be enclosed in brackets, because it represents an expense.