Accounting by Manufacturing Companies

The accounting cycle is the same in a manufacturing company, merchandising company, and a service company. Journal entries are used to record transactions, adjusting journal entries are used to recognize costs and revenues in the appropriate period, financial statements are prepared, and closing entries are recorded. Raw material purchases are recorded in the raw material inventory account if the perpetual inventory method is used, or the raw materials purchases account if the periodic inventory method is used. For example, using the periodic inventory method, the purchase of $750 of raw materials on account is recorded as an increase (debit) to raw materials purchases and an increase (credit) to accounts payable.

General Journal Date Account and Title Description Ref. Debit Credit 20X0 May 27 Raw Materials Purchases Accounts PayableTLM Co. Purchase materials from TLM 750 750

The entry to record payroll would include an increase (debit) to direct labor instead of wages expense and an increase (credit) to the withholding liability account and wages payable. To record $1,000 wages for T. Kaschalk, the entry would be:

General Journal Date Account and Title Description 20X0 May 31 Direct Labor Federal Income Taxes Payable FICA Taxes Payable

Ref. Debit Credit

1,000 150.00 76.50

Credit Union Payable Wages Payable Record TK wages

50.00 723.50

The factory building depreciation of $9,500 is classified as a manufacturing cost. It is recorded with an increase (debit) to factory depreciation and an increase (credit) to accumulated depreciationbuilding.

General Journal Date Account and Title Description 20X0 May 31 Factory Depreciation Expense Accumulated DepreciationBuilding Record factory building depreciation

Ref. Debit Credit

9,500 9,500

Some companies use one account, factory overhead, to record all costs classified as factory overhead. If one overhead account is used, factory overhead would be debited in the previous entry instead of factory depreciation. At the end of the cycle, the closing entries are prepared. For a manufacturing company that uses the periodic inventory method, closing entries update retained earnings for net income or loss and adjust each inventory account to its period end balance. A special account called manufacturing summary is used to close all the accounts whose amounts are used to calculate cost of goods manufactured. The manufacturing summary account is closed to income summary. Income summary is eventually closed to retained earnings. The manufacturing accounts are closed first. The closing entries that follow are based on the accounts included in the cost of goods manufactured schedule and income statement for Red Car, Inc.

General Journal Date C1

Account and Title Description

Ref.

Debit 5,800

Credit

Raw Materials Inventory (Ending)

Work-in-Process Inventory (Ending) Manufacturing Summary Adjust inventory balances C2 Manufacturing Summary Raw Materials Inventory (Beginning) Work-in-Process Inventory (Beginning) Raw Materials Purchases Direct Labor Indirect Materials Indirect Labor DepreciationFactory Building DepreciationFactory Equipment InsuranceFactory Property TaxesFactory Close manufacturing accounts and adjust inventory balances C3 Income Summary Manufacturing Summary

9,800 15,600

270,600 6,200 10,200 49,400 125,600 4,100 43,700 9,500 5,400 12,000 4,500

255,000 255,000

Close manufacturing summary C4 Finished Goods Inventory (Ending) Sales Interest Revenue Income Summary Close revenue accounts and adjust inventory C5 Income Summary Finished Goods Inventory (Beginning) Sales Salaries Expense DepreciationSales Equipment Office Salaries Expense DepreciationOffice Equipment Insurance Expense Office Supplies Expense Income Tax Expense Close operating expense accounts and adjust inventory C6 Income Summary 19,825 169,875 14,500 65,300 21,000 35,000 12,000 9,000 2,400 10,675 12,600 427,000 5,100 444,700

Retained Earnings Close income summary

19,825

The following T-accounts illustrate the impact of the closing entries on the special closing accounts and retained earnings.

Manufacturing Summary C2 270,600 255,000 255,000 C3 0 Income Summary C3 255,000 444,700 C4 C5 169,875 424,875 444,700 19,825 C6 19,825 0 Retained Earnings 19,825 C6 15,600 C1