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.