Sometimes, goods might be unsaleable for one of the following reasons:
- the goods might be lost or stolen
- the goods might be damaged, and therefore worthless
- the goods might become obsolete
When goods are lost, stolen or disposed of, the business will make a loss on them, because they will have zero sales value.
Similarly, if goods become obsolete and have to be sold at a reduced price, the business might make a loss, if the clearance sale value was less than the original purchase price.
As I mentioned, when I blogged about the prudence concept goods which have bcome worthless or worth less than their original cost, whould be written down to:
- nothing if they are worthless/disposed of
- their “net realisable value”, eg, their clearance sale price, if they are to be sold off at less than their original cost.
Carriage is the cost of transporting goods from the supplier to the business which has purchased them. Sometimes the supplier pays and sometimes the buyer pays.
If the supplier pays, the cost to the supplier is called “carriage outwards” and if the buyer pays, the cost to the buyer is called “carriage inwards”.
Carriage inwards is usually added to the cost of purchases and is therefore included in the trading account by default.
Carriage outwards is a selling and distribution expense in the profit and loss account.
The cost of goods sold is calculated as follows:
£
Opening stock value X
Add cost of purchases (or production, if manufacturing) X
Less closing stock value (X)
Equals cost of goods sold X
That is, to match sales and the cost of goods sold, you need to adjust the cost of goods sold, to allow for increases or decreases in stock levels.
Goods may be unsold at the end of an accounting period and therefore, still be in stock. The purchase cost of these goods should therefore NOT be included in the cost of sales of the period.
For example, suppose Widgets & Co (who have no stock at the start of the year) purchase 40,000 widgets for £20,000 and sold 30,000 of them for £2. Total sales for the year are therefore 30,000 x £2 = £60,000. At the end of the year, there are 10,000 unsold widgets in stock, valued at £0.50 each.
Widgets & Co have purchased 40,000 widgets, but only sold 30,000. Purchase costs of £20,000 and sales of £60,000 do not relate to the same quanitity of widgets (goods).
The gross profit for the year should be calculated by “matching” sales to the cost of those widgets that have been sold. Therefore, the gross profit is:
Sales (30,000 x £2) £60,000
Purchases (40,000 x £0.50) £20,000
Less closing stock (10,000 x £0.50) £5,000
Cost of Sales (30,000 widgets) £15,000
Gross Profit (£60,000 – £15,000) £45,000
Therefore only the purchase cost of the widgets that have been sold are actually taken into account in calculating the cost of sales and therefore, the gross profit for the period.
The cost of the unsold widgets are shown in the balance sheet.
I’ve recently been in the position of choosing accounting software, so this has been forefront of my mind. This is a (by no means exhaustive) list of things to consider (in no particular order).
- price
- functionality
- ease of use/user friendliness
- accounting knowledge
- upgradeability
- upgrade cost
- ongoing support costs
- flexibility
- does it meet your legal obligations
The whole point of using accounting software is to make your life easier by saving you time and money. Therefore, if it doesn’t and you can meet your legal requirements without it, you should question whether it’s worth the effort.
It should save you time because:
- the whole process of bookkeeping should be faster (although setting up a package can take an initial “time investment” at the start)
- you whould be able to answer queries much quicker (such as “did you pay supplier A last month, and if so, how much)
- some things should be semi or fully automated, such as bank reconciliations, VAT returns
- your “year end” should be more straightforward
It should save you money because:
- you may be able to negotiation lower accountant’s and/or bookkeeping fees.
- indirectly, you should save money by freeing up your/your bookkeeper’s time.
- you may be able to make better financial decisions as a result of better and more timely information.
In doing a journal, it is important that it is cross referenced properly so that later, if you or your accountant needs to, you can follow the original “logic” for having done the journal. Accountants refer to this as being able to follow the audit trail. This applies whether or not you actually have your accounts formally audited (the majority of small businesses are, in fact, well under the statutory audit threshold)
For example, you might keep a “hard copy” file of journals and supporting documentation, filed in some sort of order!
If a journal is being done to correct an error, you might also file a copy of the paperwork showing the original error.
It’s good practice to number each journal sequentially and use this unique number as a reference. When using a computerised accounting package, this number will be the cross reference to your “hard copy” file of journals and documentation.
A journal is usually used to correct errors that have been made. The errors must be able to be corrected by means of a double entry, to be able to put it right by journalling.
So, if £500 of sales of square widgets had been incorrectly posted to sales of round widgets, the correcting journal would be as follows:
DEBIT Sales of Round Widgets £500
CREDIT Sales of Square Widgets £500
Thus, the overall effect would be that the sales of square widgets ledger account would have a correct credit of £500 and sales of round widgets ledger account would have both a credit entry of £500 and a debit entry of £500 which would cancel eachother out.
I’ve previously blogged about day books and analysing the sales or purchases into appropriate columns. Depending on your business and grasp of accounting & bookkeeping, you might leave your record keeping at that. However, to take it to the next step in terms of bookkeeping, a journal is used to take that analysis into the double entry system.
Suppose you have total sales of £5,000, of which £3,000 are for sales of square widgets and £2,000 are for round widgets. The theory is that the overall sales would be posted as a journal as follows:
DEBIT Total debtors account £5,000
CREDIT Sales £5,000
However, a more useful method would be to have a ledger account for sales of square widgets and another one for sales of round widgets, thereby making use of the original analysis in the sales day book. The journal would be as follows:
DEBIT Debtors account £5,000
CREDIT Sales of square widgets £3,000
CREDIT Sales of round widgets £2,000
A journal is used to record any double entries that do not arise from anywhere else (such as sales, purchases, payroll).
The format of a journal is usually:
Date Folio Debit £ Credit £
Account to be debited X
Account to be credited X
