Appendix 18-- Accounting Cycle For A Manufacturing Company

The accounting cycle for a manufacturing company is the same as for a merchandising company when a periodic inventory system is used. Except for the additional manufacturing inventories and manufacturing cost accounts, the journalizing and posting of transactions is the same. Similarly, the preparation of a trial balance and the journalizing and posting of adjusting entries are the same. Some changes, however, occur in the use of a work sheet and in preparing closing entries. To illustrate the changes in the work sheet, we will use the cost of goods manufactured schedule for Olsen Manufacturing presented in Illustration 20-8 of the chapter and other assumed data. For convenience, the cost of goods manufactured schedule is reproduced below:

Work in process, January 1 Direct materials Raw materials inventory, January 1 Raw materials purchases

$18,400 $16,700 152,500

18-1

goods manufactured. The balancing amount for these columns is the cost of goods manufactured. Note that the amount, $370,000, agrees with the amount reported for cost of goods manufactured in Illustration 20A-l. This amount is also entered in the income statement debit column.
OLSEN MANUFACTURING COMPANY Work Sheet (partial) For the Year Ended December 31, 2008 Cost of Goods Adjusted Trial Balance Income Statement Dr. Cr. Dr. Cr. Dr. Cr. 42,500 71,900 24,600 18,400 16,700 724,000 278,400 100,000 40,000 5,000 200,000 205,100 680,000 152,500 175,600 14,300 12,600 10,100 9,440 8,360 114,900 92,600 20,000 1,508,500 152,500 175,600 14,300 12,600 10,100 9,440 8,360 114,900 92,600 20,000 1,508,500 418,000 48,000 370,000 418,000 370,000 622,100 77,400 699,500

Cash Accounts Receivable(Net) Finished Goods Inv. Work in Process Inv. Raw Materials Inv. Plant Assets accumulated Depr. Notes Payable Accounts Payable Income Taxes Payable Common Stock Retained Earnings Sales Raw Materials Purchases Direct Labor Indirect Labor Factory Repairs Factory Utilities Factory Depreciation Factory Insurance Selling Expense Administrative Exp. Income Tax Exp. Totals Cost of Goods Manufactured Totals Net Income Totals

Balance Sheet Dr. Cr. 42,500 71,900 19,500 25,200 22,800 724,000 278,400 100,000 40,000 5,000 200,000 205,100

24,600 18,400 16,700 25,200 22,800

19,500

680,000

418,000

699,500 699,500

905,900 905,900

828,500 77,400 905,900

The income statement and balance sheet columns for a manufacturing company are basically the same as for a merchandising company. For example, the treatment of the finished goods inventories is identical with the treatment of merchandise inventory. That is, the beginning inventory is entered in the debit column, and the ending finished goods inventory is entered in the income statement credit column and the balance sheet debit column. As in the case of a merchandising company, financial statements can be prepared from the statement columns of the work sheet. In addition, the cost of goods manufactured schedule can also be prepared directly from the work sheet.
18-2

CLOSING ENTRIES
The closing entries for a manufacturing company are different than for a merchandising company. A Manufacturing Summary account is used to close all accounts that appear in the cost of goods manufactured schedule. The balance of the Manufacturing Summary account is the Cost of Goods Manufactured for the period. Manufacturing Summary is then closed to Income Summary. The closing entries can be prepared from the work sheet. As illustrated below, the closing entries for the manufacturing accounts are prepared first. The closing entries for Olsen Manufacturing are as follows:

Dec. 31 Work in Process Inventory (Dec. 31) Raw Materials Inventory (Dec. 31) Manufacturing Summary {To record ending raw materials and work in process inventories) 31 Manufacturing Summary Work in Process Inventory (Jan. 1) Raw Materials Inventory (Jan. 1) Raw Materials Purchases Direct Labor Indirect Labor Factory Repairs Factory Utilities Factory Depreciation Factory Insurance {To close beginning raw materials and work in process inventories and manufacturing cost 31 Finished Goods Inventory (Dec. 31) Sales Income Summary (To record ending finished goods inventory and close sales account) 31 Income Summary Finished Goods Inventory (Jan. 1) Manufacturing Summary Selling Expenses Administrative Expenses Income Tax Expense (To close beginning finished goods inventory, manufacturing summary and expense accounts) 31 Income Summary Retained Earnings (To close net income to retained earnings)
18-3

25,200 22,800 48,000

418,000 18,400 16,700 152,500 175,600 14,300 12,600 10,100 9,440 8,360

19,500 680,000 699,500

622,100 24,600 370,000 114,900 92,600 20,000

77,400 77,400

After posting, the summary accounts will show the following:

Dec. 31

Manufacturing Summary Close 418,000 Dec. 31 Close 31 Close

48,000 370,000

Dec. 31

Close Close

Income Summary 622,100 Dec. 31 77,400

Close

699,500

These data precisely track the closing entries. It also would be possible to post each account balance to the Manufacturing Summary account.

18-4