SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN

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ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS >>

Advance Financial Accounting (FIN-611)

LESSON # 5

SINGLE ENTRY

CALCULATION OF MARKUP AND MARGIN

Cost Structure

Cost structure stands for the percentage structure of Sales Revenue, Cost of Goods

Sold and Gross profit. Through cost structure percentage of gross profit is determined

over the cost of goods sold and over the sales revenue. It can be expressed in equation

like this:

Sales Revenue

Sales

Less

Cost of Goods Sold

COGS

Gross profit

Markup rate

Markup rate is the rate of gross profit over the cost of goods sold, it is expressed in

%age and it is formulated like this:

G P x100 = %

COGS

In calculating markup rate the cost of goods sold is kept equal to 100%. Suppose the

markup rate is 25% then the cost structure in markup will be like this:

Sales

125%

COGS

100%

25%

Margin rate

Margin rate is the rate of gross profit over the sales revenue, it is expressed in %age

and it is formulated like this:

G P x100 = %

Sales

In calculating margin rate the sales revenue is kept equal to 100%. Suppose the margin

rate is 25% then the cost structure in markup will be like this:

Sales

100%

COGS

75%

25%

These markup/margin rates are used in calculating gross profit or cost of goods sold

or even sales, it will all depend upon the scenario. For example:

Advance Financial Accounting (FIN-611)

Scenario I

Sales Rs. 80,000

Purchases (to be found)

Opening Stock Rs. 6,000

Closing Stock Rs. 2,000

Whereas goods are sold at a markup of 25%

Solution Scenario I

The cost structure is like this:

Sales

125%

COGS

100%

25%

Gross Profit = 80,000 x 25 = 16,000

125

Cost of goods sold = Sales Gross profit

= 80,000 16,000

= 64,000

Direct calculation of Cost of goods sold

= 80,000 x 100 = 64,000

125

Rs.

Opening Stock (given)

= 6,000

Purchases (balancing figure)

= 60,000

Cost available for sale

= 66,000

Closing Stock (given)

= 2,000

Cost of goods sold (calculated)

= 64,000

Scenario II

Sales (to be found)

Purchases Rs. 155,000

Opening Stock Rs. 10,000

Closing Stock Rs. 15,000

Whereas goods are sold at a margin of 25%

Solution Scenario II

The cost structure is like this:

Sales

100%

COGS

75%

25%

Cost of goods sold =

Opening stock 10,000

Purchases

155,000

Closing stock 15,000

150,000

Gross Profit = 150,000 x 25 = 50,000

Sales = Cost of goods sold + Gross profit

Advance Financial Accounting (FIN-611)

= 150,000 + 50,000

= 200,000

Direct calculation of Sales

=150,000 x 100 = 200,000

ACCOUNTING FOR NON-PROFIT ORGANIZATIONS

Introduction

Accounting is a language to communicate and understand financial information,

every organization, whether involve in business or non business activities, needs

accounting to get financial reports.

Non profit organizations are not involved in complex transactions like trading of

goods or services and manufacturing activities therefore a very simple accounting

system can work.

Mainly these organizations are engaged in welfare activities or the activities that will

entertain its members specifically and others in general. A very commonly understood

example of such organizations is mosque or church. Almost all of us use to visit our

worship place frequently and can understand very easily that it is an organization

where we can have examples of assets, liabilities, incomes and expenses as well.

But remember non profit organizations do not have owner's equity because these are

not owned by any one rather a managing committee looks after all affairs of the

organization. Therefore there is no question of owner's equity in the financial

information of non profit organizations.

Accounting Records

Cash book is prepared in a chronological sequence; it is the only book of original entry

that is maintained by the accountant of a non profit organization. At the end of the

accounting year a summary of total cash receipts and total cash payments is made

under different heads, such summary is known as Receipt and Payment Account.

Cash book will contain subscription received on different dates during the year where

as the Receipt and Payment Account will contain a single amount of total subscription

received during the year. Similarly cash book contains payment of salaries made on

different dates of the year, whereas, the Receipt and Payment Account will show the

total salaries paid during the year as a single information.

Memorandum Records

A non profit organization that has a large number of members will also maintain a

memorandum record of members, and if that organization is running activities like

providing medicines or providing library facilities or running a sports club then it will

also be maintaining memorandum record for the inventory items.

Financial Statements

Non profit organizations prepare Income and Expenditure Account that replaces

Income Statement of a business concerns to obtain surplus (excess of incomes over the

expenses) or deficit (excess of expenses over the incomes).

Incomes of a non profit organization

Incomes of a non profit organization mainly include the following:

Advance Financial Accounting (FIN-611)

o Subscription

o Donation

o Entrance fee

o Lockers rent

o Membership fee etc. etc.

All these incomes are measured according to the accrual concept. Actual receipts of

these incomes are recorded in the Cash Book and ultimately become part of the

Receipt and Payment account. Such receipts are then adjusted with the opening and

closing owing/advance income to get the balance of income that belongs to the

current accounting period.

For example:

Rs. 55,000 subscription received during the year ending on December 31 20x7 of which

Rs 5,000 relate to the subscription due in the year 20x6 and Rs. 2,000 was received in

advance that was relating to the year 20x8. Rs. 3,000 subscription of few members was

received in advance during the year 20x6 and Rs. 4,000 subscription relating to the

year 20x7 is still due to be received.

Rupees

Cash received during the year 20x7

55,000

Less Cash received not related to year 20x7 (5,000 + 2,000)

7,000

Add Income relating to the year 20x7 (3,000 + 7,000)

10,000

Subscription income for the year 20x7

58,000

Subscription (Income) Account

Debit

Rupees

Credit

Rupees

Opening Due

5,000 Opening Advance

3,000

Closing Advance

2,000 Cash Received

55,000

Income (balancing figure)

58,000 Closing Due

7,000

Expenses of a non profit organization

Expenses are also measured according to the accrual concept. All revenue

expenditures appearing in the payment side of the Cash Book (Receipt and Payment

Account) are adjusted with the opening and closing balances of outstanding and

prepaid expenses. This process of adjustment converts the revenue payments in

expenses. Such expenses are ultimately matched with the Incomes to calculate

surplus/deficit.

Balance Sheet is prepared to know the financial position in the same way as we

already have studied for business entities. The only difference in the balance sheet of a

non profit organization comparing with the balance sheet of a business entity is that

there will be no owner's equity instead there will be a balance of accumulated fund

also known as capital fund in the balance sheet of a non profit organization as a main

source of finance.

Accumulated Fund

Like owner's equity, accumulated fund is also a difference of Assets and Liabilities.

Advance Financial Accounting (FIN-611)

Accumulated Fund = Assets Liabilities

Accumulated fund represents the funds that are the source of the Assets obtained or

constructed for the organization. These funds consist of grants, donations, legacies,

entry fees, life membership fees etc.

Often in the examination questions Statement of Affairs is prepared to find the opening balance

of accumulated fund.

Practice Questions

Q. 1

Following balances were disclosed by the books of Ali Shah Traders where the books

of accounts were maintained on single entry accounting system:

31.12 2007

31.12.2008

Rupees

Cash at Bank

3,000

19,100

Cash in hand

400

850

Stocks

22,000

25,000

Debtors

35,000

Creditors

23,400

18,500

Fixtures and fittings

2,000

Motor Car

1,000

Cash Book analysis showed following figures amongst others:

Rupees

Receipts from customers 135,000

Motor car repair

1,350

Discount allowed

1,400

Printing and stationery

800

Fresh capital on 1.7.2008

2,000

Drawings

6,600

Salaries upto 30.11.2008

11,000

Payments to creditors

112,000

Office rent upto 30.11.2008 2,200

Discount received

1,200

Advertising

900

Electricity charges

1,000

General expenses

600

No ready figures are available for total sales but Ali Shah maintains a steady gross

profit rate of 25% on sales.

There were outstanding bills for electricity Rs. 250, Advertising Rs. 150, and printing

Rs. 450. Provide for doubtful debts upto 5% of the debtors. Motor car and fixtures are

to be depreciated by 20% and 10% respectively.

Prepare Income Statement for the year ended 31-12-2008 and Balance Sheet as on

that date.

Hints:

1. Calculate purchases as balancing figure in creditors account

2. Calculate cash sales as balancing figure in the cash book

3. Calculate total sales with the help of cost structure

4. Calculate credit sales by subtracting cash sales from the total sales

5. Calculate opening debtors balance as balancing figure in debtors account

6. Calculate opening capital from the statement of affairs

Advance Financial Accounting (FIN-611)

Q2.

Given below is the receipts and payments account of Hameed Amusement Club:

Receipts and Payments Account

For the year ended 31st December, 2006

Receipts

Rs.

Payments

Rs.

Salary of secretary

3,600

Balance Cash

Bank

3,000

3,060

Subscription

9,000

Honorarium

450

(including subscription for

2005 Rs. 150)

Sale of old furniture on Jan 1,

750

Wages

2,400

2006

Sale of old newspapers

Charities

2,000

Legacies

3,000

Printing and

300

stationery

Interest on investments

1,200

Postage

100

(cost of investment Rs. 20,000)

Endowment fund receipts

10,000

Rent and taxes

1,200

Proceeds of concerts

800

Upkeep of land

500

Advertisement in year book

Sports material

2,500

Balance

14,850

27,900

Current assets and liabilities as on 31st December, 2005 and 31st December, 2006 are as

follows:

31.12.2005

31.12.2006

Rs.

Subscription in arrears

200

450

Subscription in advance

300

600

Furniture

2,000

1,080

Depreciation was 10% p.a. on the furniture left after selling a part of it. It was decided

that half of the legacies may be capitalized.

Advance Financial Accounting (FIN-611)

Required:

Prepare income and expenditure account for the year ending 31st December, 2006 and

balance sheet as on that date.

You are also required to show calculations for the loss on sale of furniture.

Answers

(Excess of expenditure over income Rs. 630, Balance Sheet total Rs. 36,430, Capital

fund in the beginning Rs. 24,960, Loss on sale of furniture Rs. 50).

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