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 750

Accounts Payable—TLM Co. 750

Purchase materials from TLM

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 Ref. Debit Credit

20X0

May 31 Direct Labor 1,000

Federal Income Taxes Payable 150.00

FICA Taxes Payable 76.50

Credit Union Payable 50.00

Wages Payable 723.50

Record TK wages

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 depreciation—building.

General Journal

Date Account and Title Description Ref. Debit Credit

20X0

May 31 Factory Depreciation Expense 9,500

Accumulated Depreciation—Building 9,500

Record factory building depreciation

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 Account and Title Description Ref. Debit Credit

C1 Raw Materials Inventory (Ending) 5,800

Work-in-Process Inventory (Ending) 9,800

Manufacturing Summary 15,600

Adjust inventory balances

C2 Manufacturing Summary 270,600

Raw Materials Inventory (Beginning) 6,200

Work-in-Process Inventory (Beginning) 10,200

Raw Materials Purchases 49,400

Date Account and Title Description Ref. Debit Credit

Direct Labor 125,600

Indirect Materials 4,100

Indirect Labor 43,700

Depreciation—Factory Building 9,500

Depreciation—Factory Equipment 5,400

Insurance—Factory 12,000

Property Taxes—Factory 4,500

Close manufacturing accounts and adjust inventory balances

C3 Income Summary 255,000

Manufacturing Summary 255,000

Close manufacturing summary

C4 Finished Goods Inventory (Ending) 12,600

Sales 427,000

Interest Revenue 5,100

Date Account and Title Description Ref. Debit Credit

Income Summary 444,700

Close revenue accounts and adjust inventory

C5 Income Summary 169,875

Finished Goods Inventory (Beginning) 14,500

Sales Salaries Expense 65,300

Depreciation—Sales Equipment 21,000

Office Salaries Expense 35,000

Depreciation–Office Equipment 12,000

Insurance Expense 9,000

Office Supplies Expense 2,400

Income Tax Expense 10,675

Close operating expense accounts and adjust inventory

C6 Income Summary 19,825

Retained Earnings 19,825

 Date Account and Title Description Ref. Debit Credit

Close income summary

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

Manufacturing Summary

C2 270,600 15,600 C1

255,000

255,000 C3

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