Accounting treatment for unrealized profit in amalgamation
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Manufacturing accounts
So far, we have considered the final accounts of sole traders who do not make the goods that they sell. In all prior examples, the firms generate profits by purchasing stock and then selling this stock for a price higher than the cost meaning a profit has been earned - i.e. the difference between sales and the cost of those goods that were sold. In reality, most firms do not act in this way. Even if a firm does not make its own products, it is likely to add something to the products themselves.
If a firm actually produces the goods that they sell then there will be no obvious 'purchases' figure to include in the trading account. The costs incurred in the production of goods will appear instead and these will be calculated in a manufacturing account.
A manufacturing account shows the cost of producing the goods that are sold during an accounting period. It is split into the following sections:
Prime cost - Direct costs of physically making the products (e.g. raw materials)
Overhead cost - Other indirect costs associated with production but not in a direct manner
The cost of manufacturing the products will be the total of the prime cost and the overhead cost added together. This total factory cost (or production cost) will then be transferred to the trading account where it will appear instead of the 'normal' purchases figure.
So far, we have considered the final accounts of sole traders who do not make the goods that they sell. In all prior examples, the firms generate profits by purchasing stock and then selling this stock for a price higher than the cost meaning a profit has been earned - i.e. the difference between sales and the cost of those goods that were sold. In reality, most firms do not act in this way. Even if a firm does not make its own products, it is likely to add something to the products themselves.
If a firm actually produces the goods that they sell then there will be no obvious 'purchases' figure to include in the trading account. The costs incurred in the production of goods will appear instead and these will be calculated in a manufacturing account.
A manufacturing account shows the cost of producing the goods that are sold during an accounting period. It is split into the following sections:
Prime cost - Direct costs of physically making the products (e.g. raw materials)
Overhead cost - Other indirect costs associated with production but not in a direct manner
The cost of manufacturing the products will be the total of the prime cost and the overhead cost added together. This total factory cost (or production cost) will then be transferred to the trading account where it will appear instead of the 'normal' purchases figure.
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