A-LEVEL ACCOUNTING (9706)
1. Financial Accounting
1.1 Preparation of Financial Statements
→ Manufacturing businesses
● Manufacturing account: an a/c prepared at the end of a financial period to calculate the production cost
of manufactured goods
○ Only includes information about the factors & actual manufacturing process
○ All other non-production costs (ie. administration, finance, distribution costs) recorded in IS
○ COP = Factory overheads + prime cost
○ Factory profit: percentage added to the factory cost of production to arrive at the transfer price
○ Work in progress: inventory of partly finished goods in the factory at any point in time
○ Prime cost/direct cost: the total of direct materials, direct labour & direct expenses
○ Factory overheads/indirect costs: costs incurred from factory operations
■ Includes indirect factory wages & depreciation of factory machinery
● Transfer price: production cost of completed goods plus a percentage mark-up
● Factory/manufacturing profit: profit made from manufacturing the goods compared to the cost
buying-in
○ Percentage added to COP as profit from manufacturing
○ “Manufacturing profit” & “gross profit on trading”
■ Must be kept separate until they are aggregated in the profit & loss a/c
○ If the COP exceeds the cost of buying the goods, we get a factory loss
○ Treatment of manufacturing profit/loss
■ If there is a manufacturing profit
● Add factory profit to COP
● Add factory profit to operating profit
■ If there is a manufacturing loss
● Deduct factory loss from COP
● Deduct factory loss from operating profit
● Unrealised profit from unsold inventory
○ Unrealised profit: profit which is not recognised until the inventory is sold & a contract of sale
has been negotiated
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑓𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝑔𝑜𝑜𝑑𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑢𝑛𝑟𝑒𝑎𝑙𝑖𝑠𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
■ 100+𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑝𝑟𝑜𝑓𝑖𝑡
× 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑝𝑟𝑜𝑓𝑖𝑡
■ If transfer price is used, finished inventories will include unrealised profit
■ Unrealised profit is the factory profit that is attached to the finished goods
■ Not recorded in SOFP (against realisation, prudence & IAS 2)
■ Provision for unrealised profit used to:
● Remove unrealised profit from the IS
○ Profits are overstated by the amount of unrealised profit
● Remove unrealised profit from the inventory of finished goods within the
current assets on the SOFP
○ Inventories aren’t overvalued; valued at cost, not cost + percentage
mark-up
■ Recording provision for unrealised profit (same format as provision for doubtful debt)
● Increase in provision
○ Dr IS
○ Cr Provision a/c with the amount of the increase
● Decrease in provision
○ Dr Provision a/c
○ Cr IS with the amount of the decrease
■ Prudence, realisation & consistency
● Profits/assets not overstated
● Profit is unrealised because the finished goods haven’t been sold to third party
● Increase/decrease in PFUP is adjusted in IS
● PFUP is deducted from the transfer value of finished goods inventory
○ Reflects true cost of the finished goods inventory
, ○ Inventory of finished goods are at transfer price (ie. cost plus factory profit)
■ Must remove the factory profit (hasn’t been earned yet)
Advantages Disadvantages
● Production department continues to be treated as profit ● Not acceptable for external reporting
centre ● Risk of unrealistic view of profitability
● Facilitates pricing unless researched
● COP department is better controlled ● Fixed percentage may fail to motivate
● Compare efficiency, reward efficient managers managers (esp if bonuses are
● Facilitates a system of responsibility accounting dependant)
● Doesn’t increase profits ● Time consuming to calculate
○ Identified profits made by cost centres
● Allows comparison of unit cost of goods manufactured to the
cost of buying in completed products
○ Helps evaluate a make/buy decision
→ Not for profit organisations
● Introduction
○ Not for profit organisations exist to provide facilities for their members
■ Eg. sports & social clubs, dramatic societies & music clubs
○ Making profit is not their main purpose; carry fundraising events to provide better facilities for
the members
○ Organisation is owned by all its members (not just one person/partnership)
○ Records of money received & spent are kept by a club member (often not an accountant)
● Bar/restaurant/shop trading account
○ Profit/loss generated transferred to income & expenditure a/c
● Income & expenditure account: account prepared to determine if the non-profit making organisation
has made a surplus/deficit
○ IS equivalent
○ Surplus of income over expenditure: equivalent of PFTY
■ Opposite is deficit of income over expenditure
● Accumulated fund: equivalent of capital for profit making organisation
● Receipts & payments a/c: bank a/c of the non-profit making organisation
○ Doesn’t distinguish between cash & bank transactions
○ No accruals & prepayments
○ No distinctions made between capital receipts & revenue receipts
○ No distinction made between capital expenditure & revenue expenditure
○ Non-monetary items such as depreciation aren't included
● Ancillary activities in a club
○ Activities other than the main activity
○ Purposes of ancillary activities
■ Raising additional funds
● Can indicate that subscriptions are lower than if profitable activities were not
undertaken
■ Keeping members interested at times when major club activities are quiet
● Eg. cricket club may organise activities (eg. dinner/dance) during the winter
month
○ Club treasurer should calculate whether the activity is profitable or not
■ Include profit/loss in the income & expenditure a/c
● Subscriptions: amount paid by members to be part of the club/society
○ Main source of income for non-profit making concerns
○ Equivalent of sales
○ Subscription in arrears (Current Asset)
○ Subscription in advance (current liability)
○ Subscription written off- bad debts
○ Plus Minus Method:
1. Financial Accounting
1.1 Preparation of Financial Statements
→ Manufacturing businesses
● Manufacturing account: an a/c prepared at the end of a financial period to calculate the production cost
of manufactured goods
○ Only includes information about the factors & actual manufacturing process
○ All other non-production costs (ie. administration, finance, distribution costs) recorded in IS
○ COP = Factory overheads + prime cost
○ Factory profit: percentage added to the factory cost of production to arrive at the transfer price
○ Work in progress: inventory of partly finished goods in the factory at any point in time
○ Prime cost/direct cost: the total of direct materials, direct labour & direct expenses
○ Factory overheads/indirect costs: costs incurred from factory operations
■ Includes indirect factory wages & depreciation of factory machinery
● Transfer price: production cost of completed goods plus a percentage mark-up
● Factory/manufacturing profit: profit made from manufacturing the goods compared to the cost
buying-in
○ Percentage added to COP as profit from manufacturing
○ “Manufacturing profit” & “gross profit on trading”
■ Must be kept separate until they are aggregated in the profit & loss a/c
○ If the COP exceeds the cost of buying the goods, we get a factory loss
○ Treatment of manufacturing profit/loss
■ If there is a manufacturing profit
● Add factory profit to COP
● Add factory profit to operating profit
■ If there is a manufacturing loss
● Deduct factory loss from COP
● Deduct factory loss from operating profit
● Unrealised profit from unsold inventory
○ Unrealised profit: profit which is not recognised until the inventory is sold & a contract of sale
has been negotiated
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑓𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝑔𝑜𝑜𝑑𝑠 𝑖𝑛𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑢𝑛𝑟𝑒𝑎𝑙𝑖𝑠𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
■ 100+𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑝𝑟𝑜𝑓𝑖𝑡
× 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑝𝑟𝑜𝑓𝑖𝑡
■ If transfer price is used, finished inventories will include unrealised profit
■ Unrealised profit is the factory profit that is attached to the finished goods
■ Not recorded in SOFP (against realisation, prudence & IAS 2)
■ Provision for unrealised profit used to:
● Remove unrealised profit from the IS
○ Profits are overstated by the amount of unrealised profit
● Remove unrealised profit from the inventory of finished goods within the
current assets on the SOFP
○ Inventories aren’t overvalued; valued at cost, not cost + percentage
mark-up
■ Recording provision for unrealised profit (same format as provision for doubtful debt)
● Increase in provision
○ Dr IS
○ Cr Provision a/c with the amount of the increase
● Decrease in provision
○ Dr Provision a/c
○ Cr IS with the amount of the decrease
■ Prudence, realisation & consistency
● Profits/assets not overstated
● Profit is unrealised because the finished goods haven’t been sold to third party
● Increase/decrease in PFUP is adjusted in IS
● PFUP is deducted from the transfer value of finished goods inventory
○ Reflects true cost of the finished goods inventory
, ○ Inventory of finished goods are at transfer price (ie. cost plus factory profit)
■ Must remove the factory profit (hasn’t been earned yet)
Advantages Disadvantages
● Production department continues to be treated as profit ● Not acceptable for external reporting
centre ● Risk of unrealistic view of profitability
● Facilitates pricing unless researched
● COP department is better controlled ● Fixed percentage may fail to motivate
● Compare efficiency, reward efficient managers managers (esp if bonuses are
● Facilitates a system of responsibility accounting dependant)
● Doesn’t increase profits ● Time consuming to calculate
○ Identified profits made by cost centres
● Allows comparison of unit cost of goods manufactured to the
cost of buying in completed products
○ Helps evaluate a make/buy decision
→ Not for profit organisations
● Introduction
○ Not for profit organisations exist to provide facilities for their members
■ Eg. sports & social clubs, dramatic societies & music clubs
○ Making profit is not their main purpose; carry fundraising events to provide better facilities for
the members
○ Organisation is owned by all its members (not just one person/partnership)
○ Records of money received & spent are kept by a club member (often not an accountant)
● Bar/restaurant/shop trading account
○ Profit/loss generated transferred to income & expenditure a/c
● Income & expenditure account: account prepared to determine if the non-profit making organisation
has made a surplus/deficit
○ IS equivalent
○ Surplus of income over expenditure: equivalent of PFTY
■ Opposite is deficit of income over expenditure
● Accumulated fund: equivalent of capital for profit making organisation
● Receipts & payments a/c: bank a/c of the non-profit making organisation
○ Doesn’t distinguish between cash & bank transactions
○ No accruals & prepayments
○ No distinctions made between capital receipts & revenue receipts
○ No distinction made between capital expenditure & revenue expenditure
○ Non-monetary items such as depreciation aren't included
● Ancillary activities in a club
○ Activities other than the main activity
○ Purposes of ancillary activities
■ Raising additional funds
● Can indicate that subscriptions are lower than if profitable activities were not
undertaken
■ Keeping members interested at times when major club activities are quiet
● Eg. cricket club may organise activities (eg. dinner/dance) during the winter
month
○ Club treasurer should calculate whether the activity is profitable or not
■ Include profit/loss in the income & expenditure a/c
● Subscriptions: amount paid by members to be part of the club/society
○ Main source of income for non-profit making concerns
○ Equivalent of sales
○ Subscription in arrears (Current Asset)
○ Subscription in advance (current liability)
○ Subscription written off- bad debts
○ Plus Minus Method:
