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TRADING, PROFIT AND LOSS ACCOUNT (ANNUAL ACCOUNTS)


The trading and profit and loss accounts is a final summary of such accounts which affects the profit or loss position of the business. in other words, the account   contains the items of incomes and expenses  relating  to a particular period. the  accounts is prepared  in two parts
v  Trading account, and 
v profit & loss account
THE  TRADING ACCOUNT
The trading account  gives overall  results  of  trading, ie purchases and selling of goods. It is a 
means of determining the   grass profit or  gross loss of  the business for the period under review . It takes  into account the cost of goods sold on the one side and   on the other, the value for which those goods were   sold (ie sales ). in case the sales value is higher  than  the cost of goods sold, there will be gross profit, while  in  a reverse case, there will be a gross loss.
They following equations can be derived for preparing the trading account
Gross profit = sales -  cost of  goods sold
Cost of  goods sold = opening  stock + purchases + direct  expenses – closing stock
Therefore,  Grass profit = sales – (opening stock – Purchases +  direct  expenses – closing stock)
Note:  the term direct  expenses includes all direct expenses included in buying  the goods  and transporting them to the business premises  eg transport fares, market tolls, import duty,  repackaging  etc. on the basis of the above equation the trading  account is  prepared in the form  of A ‘T’ account having on  the  debit side: 
v opening stock
v purchases (less:  returns outwards)
v closing stock (subtracted from purchases), an 
v Carriage inwards  and   other direct expenses ) and  on  the credit side
v sales (less sales returns or returns inwards )
a  proforma of trading account is shown below

DR  trading account for the year ended  31st  Dec,  2009  Cr

Particulars
N
N
Particulars
N
N
Opening stock

Xxx
Sales

Xxx
Add: purchases
Xxx

Less:  returns inwards

Xx
Less:  returns outwards
xx
Xxx


Xxx
Add: carriage inward

Xx



Amount of goods  available for sale

Xxx



Less closing stock

Xx





xxx



Add wages

Xx



Cost of goods sold

Xxx



Gross profit c/d

Xxx





Xxx


Xxx



Gross profit b/d

Xxx
Illustration
Prepare the trading accounts of john awoke for  the year ended  31st December,  2008

N
Sales
16,500
Opening stock of  1st jan, 2007
1,200
Purchases
10,760
Closing stock 31sst dec,  2008
1,800
Wages
1,000
Returns inwards
290
Returns outwards
150
Carriage inwards
675

Solution:
John  awoke
Dr trading account for the year ended  31st dec, 2008 cr
Particulars
N
N
PARTICULARS
N
N
Stock at start 

1,200
Sales
16,500

Purchases
10760

Less:  returns inwards
290
16,201
Less:  returns outward
150




Add. Carriage inwards
10610




Wages
675




Less: closing stock
1000
12285



 Cost of goods sold

1800



Gross profit c/d

10485





5725





16,210




Profit and loss account
The profit and loss account is another statement which forms part of annual  accounts and it is usually presented  immediately after the trading account. The  purpose of  the profit and loss account is to  show the net results of the operations during a given period, usually a year. All expenses include in running the business during   the year a charged against gross  profit to arrive at  a net profit or  loss. Net profit   arises if  the  gross   profit  is  greater than the sum of the  expenses incurred during  the  year, and a net loss   results if it is less.
Illustration
Prepare a trading, profit and loss  account  of  John Awoke  for the year  ended  31st Dec,  2008 from the following  information 

N
Sales
16,500
OPENING STOCK AT  1/1 2007
1,200
PURCAHSES
10,760
CLOSING STOCK  31/12/2008
1,800
Returns inwards
290
Wages
1,000
Discount  received
4,000
Returns outwards
150
Carriage inwards
675
Rents &  rates
1809
Salaries
2,000
General expenses
400
Discount  allowed
45
Electricity
580
Solution:
John  awoke
Dr trading and profit and loss A/C  for the year ended  31/12/2008 cr
 
N
N

N
N
Opening stock

1200
sales


Add purchases
10760

less:  returns inwards
16,500

Less:  returns outwards
150


290
16210

10610




Add carriage inwards
675




Add: wages
1000
12285



Goods available for sale

13485



Less: closing stock

1800



Cost of goods sold

11685



Gross profit c/d

4525





16210


16210
Rents  &  rates

180


4525
General suspense’s

400


4000
Discount allowed

45



Electricity

580



Net profit c/d

7320





8,525


8525



Net profit b/d

7320

The  balance sheet
This is the last component of the annual accounts. Although it is the component of annual account presented to the owner or owners of a business. It is  not an account in itself. It  must be understood that trading, profit and loss  accounts are ledger account and the figures  contains   therein  are a result  of   applying  double entry, principles. They involved of  copying two ledger accounts. The balance sheet is merely a listing of the balances left in the ledger at the end of the year.
Definition: balance sheet  is not an  account but a statement of assets and liabilities of a business  prepared to show a true and fair view of the financial position of a business as at a certain   date normally  at the end of a trade season.
Balance sheet is divided  into two parts liability side and assets side.
Liability  : this is what the business owes  to outsides  or indebtedness of  a business 
Liability is divided into:
a.      long  term liability: are those liabilities that  has to take long period of time before it could be met eg  5 years  loan or more.
b.      Short term liability: this is   a type  of  liability that require a short  period of time to be met eg  2 –6 months or less than that .
c.      Medium term loan:  this is a type of liability that requires  1-2 years before it could be met 

Assets:  assets is the property of the business  cash, stock of goods etc.  assets  is divided into:
a.      fixed assets: this is the assets that are of permanent in nature that are used for   the day  to day running of the business  ., example land and building , fixtures  and   fittings, equipment etc .
b.       current assets:  these are  those asset that can change its turn form time to time . eg stock, debtors, cash in hand, cash at bank etc
capital:  finance that is  provided by the   owner which is not intended to be  repaid to him in  the ordinary course of business. This is distinguished  from liabilities which are source of finance  provided  by outsiders  (non- owners ) with legal obligation to be repaid at an agreed future date. 
BALANCE SHEET EQUATION
Capita + Assets
Where all the finance is provided by the owner,  and capital +  liabilities = assets
Where  the asset is provided partly by the owner and  partly by outsider
From equation 2,  we can say that  capital =  we can say  that
Capital = Assets  - liabilities
And  liabilities =  assets -  capital
Irrespective  of the number of different source  from  which  assets are financed, the above equations  will always hold.
A  proforma of  balance  sheet is  shown below: 
Eze  nworie
 Balance sheet as at  31st December,  2006
Liability


Assets


Capital 

Xxx
Fixed  assets


Add net profit

Xx
Land &  building 
Xx

Long term  liabs
Xx
x
Motor  vehicle
Xx

5year loan 


Factures and fitting
xx
Xxx



CURRENT ASSETS


Current liab
Xx
Xx
Stock
Xx

Creditors


Debtors
Xx




Cash in hand
Xx




Cash at hand
xx
xxx


xxx


Xxx
Illustrations:  from the following list of balances  you are required to prepare
a.  trading and profit and loss account for the   year  ended  31st  December,  1996  and 
b.  a balance sheet as at  that date 

N
Capital
9600
Cash  in hand
920
Bank overdraft
600
Sales
14000
Purchases
10400
Carriage outwards
200
Sales and office  expenses
2000
Purchases returns
700
General suspense
1000
Stock  1st  june  1996
2720
Debtors
1680
Creditors
340
Motor  vehicles
7,128
At  stock on  31st dec;  1996 was valued at  N3120
DR t TRADING AND PROFIT  AN DLOSS A/C  FOR THE YEAR ENDED  1996
Particulars
N
N
Particulars
N
N
Stock at start

2720
Sales
14000

Add purchases
10400




less: returns outwards
700
9700



Goods available  for sale 

12620



Less: stock at end

3120



cost of  goods sold

9300



gross profit b/d

4700





14000


14000
carriage outwards

200


4700
Sales  & office expenses

2000



General suspense

1000



Net profit c/d

1500





4700


1700



Net profit b/d

2300

Balance sheet as at  31st December,  1996
Liability

N
Assets
N
Capital 
9,600

Fixed  assets:

Add net profit
2,300
11,900
Motor vehicles
7228
Liabilities


Current assets:

Creditors
348

Stock
3120
Bank overdraft
600
948
Debtors
1680



Cash in hand
920







12,848

12,848
Illustration:
The following  trial balance was extracted from the   books of J.J  Okochas back yard business for the year   ended  31st December , 2001
Particulars
Debit
Credit

N
N
Stock  1/1/01
23,500

Purchases and sales
106,000
208.000
Rent and rates
14200

Return inwards and outwards
17200
33900
Capital (1/1/01)

62,000
Drawings
15400

Furniture’s and fittings
22600

Discount allowed and received
17920
36300
Sundry debtors and creditors
85,000
57500
Bank balance
17,500

Salaries
34000

Insurance
10600

Postage and telephone
10300

Sundry expenses
11380

Advertising
12100





397,700
397,700
 required:
a.      prepare a trading and profit and loss account for the  year ended  31st December,  2001  and
b.      a balance sheet as at that date.

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