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Advanced Financial Accounting

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Advance Financial Accounting (FIN-611)
VU
LESSON # 5
SINGLE ENTRY
CALCULATION OF MARKUP AND MARGIN
Cost Structure
Cost structure stands for the percentage structure of Sales Revenue, Cost of Goods
Sold and Gross profit. Through cost structure percentage of gross profit is determined
over the cost of goods sold and over the sales revenue. It can be expressed in equation
like this:
Sales Revenue
Sales
Less
Cost of Goods Sold
or
COGS
GP
Gross profit
Markup rate
Markup rate is the rate of gross profit over the cost of goods sold, it is expressed in
%age and it is formulated like this:
G P  x100 = %
COGS
In calculating markup rate the cost of goods sold is kept equal to 100%. Suppose the
markup rate is 25% then the cost structure in markup will be like this:
Sales
125%
COGS
100%
GP
25%
Margin rate
Margin rate is the rate of gross profit over the sales revenue, it is expressed in %age
and it is formulated like this:
G P  x100 = %
Sales
In calculating margin rate the sales revenue is kept equal to 100%. Suppose the margin
rate is 25% then the cost structure in markup will be like this:
Sales
100%
COGS
75%
25%
GP
These markup/margin rates are used in calculating gross profit or cost of goods sold
or even sales, it will all depend upon the scenario. For example:
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Advance Financial Accounting (FIN-611)
VU
Scenario I
Sales Rs. 80,000
Purchases (to be found)
Opening Stock Rs. 6,000
Closing Stock Rs. 2,000
Whereas goods are sold at a markup of 25%
Solution Scenario I
The cost structure is like this:
Sales
125%
COGS
100%
GP
25%
Gross Profit = 80,000 x 25 = 16,000
125
Cost of goods sold = Sales ­ Gross profit
= 80,000 ­ 16,000
= 64,000
Direct calculation of Cost of goods sold
= 80,000 x 100 = 64,000
125
Rs.
Opening Stock (given)
= 6,000
Purchases (balancing figure)
= 60,000
Cost available for sale
= 66,000
Closing Stock (given)
= 2,000
Cost of goods sold (calculated)
= 64,000
Scenario II
Sales (to be found)
Purchases Rs. 155,000
Opening Stock Rs. 10,000
Closing Stock Rs. 15,000
Whereas goods are sold at a margin of 25%
Solution Scenario II
The cost structure is like this:
Sales
100%
COGS
75%
GP
25%
Cost of goods sold =
Opening stock 10,000
Purchases
155,000
Closing stock 15,000
150,000
Gross Profit = 150,000 x 25 = 50,000
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Sales = Cost of goods sold + Gross profit
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Advance Financial Accounting (FIN-611)
VU
= 150,000 + 50,000
= 200,000
Direct calculation of Sales
=150,000 x  100 = 200,000
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ACCOUNTING FOR NON-PROFIT ORGANIZATIONS
Introduction
Accounting is a language to communicate and understand financial information,
every organization, whether involve in business or non business activities, needs
accounting to get financial reports.
Non profit organizations are not involved in complex transactions like trading of
goods or services and manufacturing activities therefore a very simple accounting
system can work.
Mainly these organizations are engaged in welfare activities or the activities that will
entertain its members specifically and others in general. A very commonly understood
example of such organizations is mosque or church. Almost all of us use to visit our
worship place frequently and can understand very easily that it is an organization
where we can have examples of assets, liabilities, incomes and expenses as well.
But remember non profit organizations do not have owner's equity because these are
not owned by any one rather a managing committee looks after all affairs of the
organization. Therefore there is no question of owner's equity in the financial
information of non profit organizations.
Accounting Records
Cash book is prepared in a chronological sequence; it is the only book of original entry
that is maintained by the accountant of a non profit organization. At the end of the
accounting year a summary of total cash receipts and total cash payments is made
under different heads, such summary is known as Receipt and Payment Account.
Cash book will contain subscription received on different dates during the year where
as the Receipt and Payment Account will contain a single amount of total subscription
received during the year. Similarly cash book contains payment of salaries made on
different dates of the year, whereas, the Receipt and Payment Account will show the
total salaries paid during the year as a single information.
Memorandum Records
A non profit organization that has a large number of members will also maintain a
memorandum record of members, and if that organization is running activities like
providing medicines or providing library facilities or running a sports club then it will
also be maintaining memorandum record for the inventory items.
Financial Statements
Non profit organizations prepare Income and Expenditure Account that replaces
Income Statement of a business concerns to obtain surplus (excess of incomes over the
expenses) or deficit (excess of expenses over the incomes).
Incomes of a non profit organization
Incomes of a non profit organization mainly include the following:
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Advance Financial Accounting (FIN-611)
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o Subscription
o Donation
o Entrance fee
o Lockers rent
o Membership fee etc. etc.
All these incomes are measured according to the accrual concept. Actual receipts of
these incomes are recorded in the Cash Book and ultimately become part of the
Receipt and Payment account. Such receipts are then adjusted with the opening and
closing owing/advance income to get the balance of income that belongs to the
current accounting period.
For example:
Rs. 55,000 subscription received during the year ending on December 31 20x7 of which
Rs 5,000 relate to the subscription due in the year 20x6 and Rs. 2,000 was received in
advance that was relating to the year 20x8. Rs. 3,000 subscription of few members was
received in advance during the year 20x6 and Rs. 4,000 subscription relating to the
year 20x7 is still due to be received.
Rupees
Cash received during the year 20x7
55,000
Less Cash received not related to year 20x7 (5,000 + 2,000)
7,000
Add Income relating to the year 20x7 (3,000 + 7,000)
10,000
Subscription income for the year 20x7
58,000
Subscription (Income) Account
Debit
Rupees
Credit
Rupees
Opening Due
5,000 Opening Advance
3,000
Closing Advance
2,000 Cash Received
55,000
Income (balancing figure)
58,000 Closing Due
7,000
Expenses of a non profit organization
Expenses are also measured according to the accrual concept. All revenue
expenditures appearing in the payment side of the Cash Book (Receipt and Payment
Account) are adjusted with the opening and closing balances of outstanding and
prepaid expenses. This process of adjustment converts the revenue payments in
expenses. Such expenses are ultimately matched with the Incomes to calculate
surplus/deficit.
Balance Sheet is prepared to know the financial position in the same way as we
already have studied for business entities. The only difference in the balance sheet of a
non profit organization comparing with the balance sheet of a business entity is that
there will be no owner's equity instead there will be a balance of accumulated fund
also known as capital fund in the balance sheet of a non profit organization as a main
source of finance.
Accumulated Fund
Like owner's equity, accumulated fund is also a difference of Assets and Liabilities.
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Advance Financial Accounting (FIN-611)
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Accumulated Fund = Assets ­ Liabilities
Accumulated fund represents the funds that are the source of the Assets obtained or
constructed for the organization. These funds consist of grants, donations, legacies,
entry fees, life membership fees etc.
Often in the examination questions Statement of Affairs is prepared to find the opening balance
of accumulated fund.
Practice Questions
Q. 1
Following balances were disclosed by the books of Ali Shah Traders where the books
of accounts were maintained on single entry accounting system:
31.12 2007
31.12.2008
Rupees
Rupees
Cash at Bank
3,000
19,100
Cash in hand
400
850
Stocks
22,000
25,000
Debtors
?
35,000
Creditors
23,400
18,500
Fixtures and fittings
2,000
Motor Car
1,000
Cash Book analysis showed following figures amongst others:
Rupees
Rupees
Receipts from customers 135,000
Motor car repair
1,350
Discount allowed
1,400
Printing and stationery
800
Fresh capital on 1.7.2008
2,000
Drawings
6,600
Salaries upto 30.11.2008
11,000
Payments to creditors
112,000
Office rent upto 30.11.2008 2,200
Discount received
1,200
Advertising
900
Electricity charges
1,000
General expenses
600
No ready figures are available for total sales but Ali Shah maintains a steady gross
profit rate of 25% on sales.
There were outstanding bills for electricity Rs. 250, Advertising Rs. 150, and printing
Rs. 450. Provide for doubtful debts upto 5% of the debtors. Motor car and fixtures are
to be depreciated by 20% and 10% respectively.
Prepare Income Statement for the year ended 31-12-2008 and Balance Sheet as on
that date.
Hints:
1. Calculate purchases as balancing figure in creditors account
2. Calculate cash sales as balancing figure in the cash book
3. Calculate total sales with the help of cost structure
4. Calculate credit sales by subtracting cash sales from the total sales
5. Calculate opening debtors balance as balancing figure in debtors account
6. Calculate opening capital from the statement of affairs
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Advance Financial Accounting (FIN-611)
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Q2.
Given below is the receipts and payments account of Hameed Amusement Club:
Receipts and Payments Account
For the year ended 31st December, 2006
Receipts
Rs.
Payments
Rs.
Salary of secretary
3,600
Balance ­ Cash
60
Bank
3,000
3,060
Subscription
9,000
Honorarium
450
(including subscription for
2005 Rs. 150)
Sale of old furniture on Jan 1,
750
Wages
2,400
2006
Sale of old newspapers
50
Charities
2,000
Legacies
3,000
Printing and
300
stationery
Interest on investments
1,200
Postage
100
(cost of investment Rs. 20,000)
Endowment fund receipts
10,000
Rent and taxes
1,200
Proceeds of concerts
800
Upkeep of land
500
Advertisement in year book
40
Sports material
2,500
Balance
14,850
27,900
27,900
Current assets and liabilities as on 31st December, 2005 and 31st December, 2006 are as
follows:
31.12.2005
31.12.2006
Rs.
Rs.
Subscription in arrears
200
450
Subscription in advance
300
600
Furniture
2,000
1,080
Depreciation was 10% p.a. on the furniture left after selling a part of it. It was decided
that half of the legacies may be capitalized.
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Advance Financial Accounting (FIN-611)
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Required:
Prepare income and expenditure account for the year ending 31st December, 2006 and
balance sheet as on that date.
You are also required to show calculations for the loss on sale of furniture.
Answers
(Excess of expenditure over income Rs. 630, Balance Sheet total Rs. 36,430, Capital
fund in the beginning Rs. 24,960, Loss on sale of furniture Rs. 50).
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Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet