Question

I NEED POINTERS TO STUDY FOR MIDTERMS

COURSE: FINANCIAL ACCOUNTING (UNIVERSITY)

CHAPTER 1 to 6 (excluding financial ratios)

Thank you!

Or just key pointers about ACCRUAL ACCOUNTING & FIFO AND AVERAGE WEIGHT METHOD OF INVENTORY & PERIODIC VS PERPETUAL ACCOUNTING PLEASE!

Answer 1

Accrual method of Accounting:

• In accrual method of accounting sales and expenses are recorded in books of accounts as and when they incurred but not when they paid.
• Creation of provisions for expenses is a part of accrual method of accounting. In cash basis method of accounting expenses are recorded when they are paid. But in accrual method of accounting expenses are debited to profit and loss account when they incurred even when they not paid.
• Another perfect example is accounting the credit sales. Credit sales are accounted in books when they issued invoice i.e when they get right to receive money from customer.
• Accrual method of accounting is largely followed by large business.

FIFO and Average method of accounting:

FIFO method: First in First Out

• FIFO is method of accounting of stock where the basic assumption is stock which are purchased first will be consumed first.
• Most of the companies normally this method.
• In this method if costs are increasing, goods which are sold first will be cheaper than the goods which are produced later

Average method of accounting:

• In this method, Closing stock and Cost of goods sold will be calculated using the average cost per unit.
• Average cost per unit = Total cost of inventoryTotal no. of units in inventory

Example:

A ltd’s details as follows

Feb, 1 Purchased 2 units @ 20 ach

Feb,5 purchased 5 units @ 25 each

Feb,6 Sold 5 units

Feb,7 Purchased 1 unit @ 27

Feb,9 Purchased 5 units @ 22

FIFO Method

Closing Stock = 2+5-5+1+5= 8 units

As per this assumption first units are first sold, closing stock of 8 units represent units purchased on Feb9(5) , Feb7(1), Feb5(2)

Closing stock value = 2*25+1*27+5*22 = 187

Average cost method

Date	Purchases			Issues			Closing Stock
Feb 1	2	20	40	-	-	-	2	20	40
Feb 5	5	25	125	-	-	-	7	23.57	165
Feb 6	-	-	-	5	23.57	117.85	2	23.57	47.15
Feb 7	7	27	189	-	-	-	9	26.23	236.15
Feb 9	5	22	110	-	-	-	14	24.725	346.15

Closing stock value = 8 units*24.725 = 197.8

Periodic and perpetual method of accounting:

• In perpetual method of accounting inventory check is done on continual basis where as in periodical method of accounting inventory check is done on periodical basis say once in a year or month.
• In perpetual method of accounting purchase and sale of stock are recorded immediately. Purchase returns and sales returns are also recoded immediately. Closing stock and stoc of goods sold are calculated automatically.
• In periodical method of accounting, when purchase is done, purchase cost will be debited to purchases account. Inventory account and cost of goods sold in updated periodically say once in a month or quarter or year.