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The Trading and Profit and Loss Account and the Balance Sheet

The Trading and Profit and Loss Account and the Balance Sheet. hink Corner. uiz Corner. What’s Inside ?. Learning Objectives. Net purchases and net sales. Trading and profit and loss account. Capital account. 1. 2. Departmental accounts. Trading account.

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The Trading and Profit and Loss Account and the Balance Sheet

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  1. The Trading and Profit and Loss Account and the Balance Sheet

  2. hink Corner uiz Corner What’s Inside ? Learning Objectives Net purchases and net sales Tradingand profit and loss account Capital account 1 2 Departmental accounts Trading account Trading and profit and loss account

  3. Learning Objectives After reading this chapter, you will be able to:  Describe the flow of preparing final accounts.  Prepare the trading account and calculate the cost of goods sold and gross profit or gross loss.  Prepare the trading account with appropriate adjustments for sales and for items affecting the cost of goods sold.  Prepare the profit and loss account and calculate the net profit or net loss.  Prepare the trading and profit and loss account.

  4. Learning Objectives After reading this chapter, you will be able to:  Balance off the capital account at the year end.  Draw up the balance sheet and put relevant account balances under appropriate headings.  Prepare the final accounts in vertical format.  Prepare departmental accounts for companies having several departments.  Prepare a profit and loss account for a business in the service sector that is not trading in goods.

  5. Flow of preparing final accounts When business transactions occur, we need to enter these transactions into _______. accounts At the end of each month, the accounts need to be _____ to have an overview of the business. closed At the end of the financial year, the accounts need to be closed to prepare the ___________. final accounts A __________ needs to be drawn up before the final accounts are prepared. trial balance A _____________ and a ___________________ are prepared to calculate the profit or loss made by the firm. trading account profit and loss account The ______ account needs to be closed by transferring the net profit / loss and the drawings against it. capital A ___________ can then be drawn up. balance sheet Learning Objectives

  6. Trading account and cost of goods sold A trading account is an account in which __________ or ________ is calculated. gross profit gross loss Gross profit is the excess of ____ over the _______ _________ for the period. sales cost of goodssold Gross loss is the excess of _______________ over ____ for the period. cost of goods sold sales Gross profit = Sales – Cost of goods sold Gross loss = Cost of goods sold – Sales Trading account is a double entry account where the left-hand side is the _________ and the right-hand side is the _________. debit side credit side

  7. Trading account and cost of goods sold At the end of a financial year, businesses usually have unsold goods; we call this __________. An annual _________ is usually held at the end of a financial year to ascertain the value of closing stock. closing stock stocktaking Closing stock is carried forward to the next financial year; we call this the ___________. opening stock A ____ account is opened to record closing stock and opening stock. stock Cost of = Opening stock + Purchases – Closing stock goods sold Total stock available Stock remained unsold

  8. Trading account and cost of goods sold Example 1: Flora Company’s financial year ended on 31 December 20X8. Here is the information extracted from her books: $ Sales 100,000 Purchases 60,000 Opening stock 8,000 Closing stock 10,000 The steps for preparing the trading account are as follows:

  9. tep Sales 20X8 $ 20X8 $ Dec 31 Total for the year 100,000 Trading $ $ Trading account and cost of goods sold Close the sales account and transfer the credit balance to the trading account. Dec 31 Trading 100,000 Sales 100,000

  10. Purchases 20X8 $ 20X8 $ Dec 31 Total for the year 60,000 tep Sales 100,000 Trading $ $ Trading account and cost of goods sold Close the purchases account and transfer the debit balance to the trading account. Dec 31 Trading 60,000 Purchases 60,000

  11. Stock 20X8 $ 20X8 $ Jan 1 Balance b/f 8,000 18,000 18,000 Trading tep $ $ Purchases 60,000 Sales 100,000 Trading account and cost of goods sold Calculate the cost of goods sold by transferring the opening and closing stock from the stock account to the trading account. Dec 31 Trading 8,000 Dec 31 Trading 10,000 “ 31 Balance c/f 10,000 Opening stock 8,000 Closing stock 10,000

  12. Trading $ $ Purchases 60,000 Sales 100,000 Opening stock 8,000 Closing stock 10,000 110,000 110,000 tep Trading account and cost of goods sold Balance off the trading account and transfer the balance to the profit and loss account. Gross profit 42,000 Transferred to the profit and loss account

  13. Trading account and cost of goods sold Example 2: On 31 December 20X7, Panda Company had the following account balances: $ Sales 70,000 Purchases 80,000 Opening stock 4,000 Closing stock 5,000 The accounts would be closed as follows:

  14. Purchases 20X7 $ 20X7 $ Dec 31 Total for the year 80,000 Sales Trading 20X7 $ 20X7 $ $ $ Dec 31 Total for the year 70,000 Trading account and cost of goods sold Dec 31 Trading 70,000 Dec 31 Trading 80,000 Purchases 80,000 Sales 70,000

  15. 9,000 9,000 Stock 20X7 $ 20X7 $ Trading Jan 1 Balance b/f 4,000 $ $ Purchases 80,000 Sales 70,000 84,000 84,000 Trading account and cost of goods sold Dec 31 Trading 4,000 Dec 31 Trading 5,000 “ 31 Balance c/f 5,000 Opening stock 4,000 Closing stock 5,000 Gross loss 9,000 Transferred to the profit and loss account Learning Objectives

  16. hink Corner nswer You have learned that goods may be returned to suppliers or returned from customers. How do these two items affect purchases and sales? Goods returned from customers reduce sales, therefore, the actual sales would be: Net sales = Sales – Returns inwards Goods returned to suppliers reduce purchases, therefore the actual purchases would be: Net purchases = Purchases – Returns outwards Therefore, both returns inwards and returns outwards should be entered in the trading account.

  17. Returns Inwards Trading 20X8 $ $ 20X8 $ $ Dec 31 Total for the year 3,000 Sales 100,000 Opening stock 8,000 Closing stock 10,000 Purchases 60,000 Trading account and adjustments At the end of the financial year, returns accounts are closed and their balances are transferred to the _____________. trading account Example 3: Assume that the total returns inwards and total returns outwards for Flora Company for the year were $3,000 and $5,000, respectively. Dec 31 Trading 3,000 Returns inwards 3,000

  18. Returns Outwards 20X8 $ 20X8 $ Dec 31 Total for the year 5,000 Trading $ $ Purchases 60,000 Sales 100,000 Returns inwards 3,000 Opening stock 8,000 Closing stock 10,000 115,000 115,000 Trading account and adjustments Dec 31 Trading 5,000 Returns outwards 5,000 Gross profit 44,000 Since returns outwards reduce the amount of purchases, the cost of goods sold = Opening stock + Purchases – Returns outwards – Closing stock Net purchases

  19. Trading account and adjustments Items affecting the cost of goods sold: To calculate the actual cost of goods sold, besides deducting returns outwards from purchases, we should include all _______ that increase the cost of goods. expenses 1. Carriage inwards: This is the cost of delivering goods purchased from suppliers. This cost of delivery _______ the cost of buying goods; thus, it should be included in the cost of goods sold by transferring the balance in the carriage inwards account to the ____________. increases trading account

  20. Opening stock • + Net purchases • + Carriage inwards • + Cost of making goods • ready for resale • Closing stock • Cost of goods sold Trading account and adjustments Items affecting the cost of goods sold: • Cost of making goods ready for resale:Some goods may need to be processed before they are sold to customers. This cost of making goods ready for resale ________ the cost of goods sold and should be shown in the ____________. increases tradingaccount

  21. Carriage Inwards 20X8 $ 20X8 $ Dec 31 Total for the year 5,000 Trading $ $ Purchases 60,000 Sales 100,000 Opening stock 8,000 Closing stock 10,000 Returns inwards 3,000 Returns outwards 5,000 Trading account and adjustments Items affecting the cost of goods sold: Example 4: Assume that Flora Company paid $5,000 for carriage inwards and $4,000 for goods packaging during the year. Dec 31 Trading 5,000 Carriage inwards 5,000

  22. Packing Goods 20X8 $ 20X8 $ Trading Dec 31 Total for the year 4,000 $ $ Purchases 60,000 Sales 100,000 Opening stock 8,000 Closing stock 10,000 Returns inwards 3,000 Returns outwards 5,000 Carriage inwards 5,000 115,000 115,000 Trading account and adjustments Dec 31 Trading 4,000 Goods packaging 4,000 Gross profit 35,000 uiz Corner Learning Objectives

  23. uiz Corner Using the following information, prepare a trading account for the year ended 31 December 20X8. $ Sales 55,000 Purchases 41,250 Stock as at 1 January 20X8 11,500 Stock as at 31 December 20X8 10,750 Returns inwards 1,500 Returns outwards 1,200 Carriage inwards 2,100 Goods packaging 2,500

  24. Profit and loss account net profit A profit and loss account is an account in which ________ or ______ is calculated. All day-to-day running expenses and revenues are entered in this account. net loss Net profit is the excess of ___________________ _______ over _______ for the period. gross profit plus other expenses revenues Net loss is the excess of ________ over the total of __________ and ____________ for the period. expenses gross profit other revenues Net profit = Gross profit + Other revenues – Expenses Net loss = Expenses – Gross profit – Other revenues Profit and loss account is also a _________________ with a debit side and a credit side. double entry account

  25. tep Commission Receivable 20X8 $ 20X8 $ Dec 31 Total for the year 2,000 Profit and Loss $ $ Gross profit b/f 35,000 Profit and loss account Example 5: Flora Company received a commission of $2,000 and paid salaries amounting to $10,000, electricity amounting to $5,000 and $10,000 in rent during the year. Steps for preparing a profit and loss account are: Close the other revenues accounts and transfer the credit balances to the profit and loss account. Dec 31 Profit and loss 2,000 Commission receivable 2,000

  26. Electricity Salaries 20X8 $ 20X8 $ 20X8 $ 20X8 $ Dec 31 Total for the year 5,000 Dec 31 Total for the year 10,000 tep Profit and Loss $ $ Gross profit b/f 35,000 Commission receivable 2,000 Profit and loss account Close the expenses accounts and transfer the debit balances to the profit and loss account. Dec 31 Profit and loss 10,000 Dec 31 Profit and loss 5,000 Salaries 10,000 Electricity 5,000

  27. Rent Profit and Loss 20X8 $ 20X8 $ Dec 31 Total for the year 10,000 $ $ Salaries 10,000 Gross profit b/f 35,000 Electricity 5,000 Commission receivable 2,000 tep Profit and loss account Dec 31 Profit and loss 10,000 Rent 10,000 Balance off the profit and loss account. A credit balance represents a net profit and a debit balance represents a net loss. Then, transfer the debit or credit balance to the capital account.

  28. Rent 10,000 Profit and Loss 37,000 37,000 $ $ Salaries 10,000 Gross profit b/f 35,000 Electricity 5,000 Commission receivable 2,000 Profit and loss account Net profit 12,000 Transferred to the capital account Note: After the profit and loss account is prepared, the otherrevenues and expenses accounts are closed and their balances will not be carried forward to the next year.

  29. Electricity 20X8 $ 20X8 $ Dec 31 Total for the year 20,000 Profit and Loss $ $ Salaries 10,000 Gross profit b/f 35,000 Commission receivable 2,000 Rent 10,000 40,000 40,000 Profit and loss account Example 6: Assume that the electricity paid by Flora Company was $20,000, the profit and loss account would appear as: Dec 31 Profit and loss 20,000 Electricity 20,000 Net loss 3,000 Transferred to the capital account Learning Objectives

  30. Trading and profit and loss account If the final accounts are to be presented to outsiders like banks, investors and the Inland Revenue Department, we need to combine the trading account and the profit and loss accountinto one, called the ____________________________. trading and profit and lossaccount The format of the trading and profit and loss account is similar to that of the trading account and the profit and loss account; only a few changes are made to make the account more _________ and easier to _________. informative understand When the two accounts are combined, it is described as a ________________. The ____ of the company and the ______________ are shown. name financial statement period concerned Example 7: Using the information in Examples 4 and 5, the trading and profit and loss account for Flora Company would appear as:

  31. 97,000 97,000 37,000 37,000 Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 Name of the company 55,000 AddCarriage inwards 5,000 Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000

  32. 97,000 97,000 37,000 37,000 Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 55,000 AddCarriage inwards 5,000 Period concerned Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000

  33. 97,000 97,000 37,000 37,000 Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 55,000 AddCarriage inwards 5,000 Net sales Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000

  34. 97,000 97,000 37,000 37,000 Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 Net purchases 55,000 AddCarriage inwards 5,000 Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000

  35. 97,000 97,000 37,000 37,000 Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 55,000 AddCarriage inwards 5,000 Total cost of goods purchased for the year Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000

  36. 97,000 97,000 37,000 37,000 Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 55,000 AddCarriage inwards 5,000 Goods packaging 4,000 64,000 Total goods available for sale for the year 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000

  37. hink Corner nswer What are the differences between the format of the trading and profit and loss account and that of the trading account and the profit and loss account? 1. Returns inwards are put on the credit side and are deducted from sales to get the net sales figure. 2. Returns outwards are put on the debit side as a contra item and are deducted from purchases to get the net purchases figure. 3. Closing stock is deducted from the figure of total cost of goods purchased to get the figure of the cost of goods sold.

  38. uiz Corner Below are the balances extracted from the trial balance of Gowell Company as at 31 March 20X7. Prepare a trading and profit and loss account for Gowell Company for the year ended 31 March 20X7. $ Stock as at 1 April 20X6 16,000 Purchases 66,700 Sales 93,800 Returns inwards 2,500 Returns outwards 2,000

  39. uiz Corner $ Carriage inwards 5,000 Packaging goods for resale 5,000 Stock as at 31 March 20X7 12,000 Rent received 20,000 Wages and salaries 10,000 Insurance 5,000 Learning Objectives

  40. hink Corner nswer After getting the net profit from the profit and loss acount, what should we do? You have learned that profit increases capital and loss decreases capital. After calculating the net profit/loss, we should transfer the net profit or net loss to the capital account to obtain the updated amount of capital. Old capital + Net profit = New capital Old capital – Net loss = New capital

  41. hink Corner nswer Can you think of any other items which affect the amount of capital? Drawings.Drawings reduce capital and therefore we should transfer the balance of the drawings account to the capital account in order to calculate the amount of new capital at the end of a financial year. Old capital + Net profit – Drawings = New capital Old capital – Net loss – Drawings = New capital

  42. Closing the capital account Remember, the balance of capital in the trial balance is the _____________. At the end of the year, we need to close the capital account by transferring the net profit or net loss and the drawings to get the ____________. opening balance closing balance Example 8: Assume that the opening capital balance as at 1 January 20X8 and the drawings for the year ended 31 December 20X8 for Flora Company were $50,000 and $5,000, respectively. The capital account would be closed as follows:

  43. tep Drawings Capital 20X8 $ 20X8 $ 20X8 $ 20X8 $ Dec 31 Total for the year 5,000 Jan 1 Balance b/f 50,000 Closing the capital account The steps for closing the capital account are: Close the drawings account and transfer the balance to the capital account. Dec 31 Capital 5,000 Dec 31 Drawings 5,000

  44. Dec 31 Drawings 5,000 tep Capital 20X8 $ 20X8 $ Jan 1 Balance b/f 50,000 tep 62,000 62,000 Closing the capital account Transfer the net profit or net loss from the profit and loss account to the capital account. Balance off the capital account. The balance is carried forward to the next financial year. “ 31 Balance c/f 57,000 Dec 31 Net profit for the year12,000

  45. Drawings 20X8 $ 20X8 $ Dec 31 Total for the year 5,000 Capital 20X8 $ 20X8 $ Jan 1 Balance b/f 50,000 50,000 50,000 Closing the capital account Example 9: Assume that Flora Company had a net loss of $3,000 in 20X8 and the opening capital balance and the drawings for the year ended 31 December 20X8 were $50,000 and $5,000, respectively. The capital account would be closed as follows: Dec 31 Capital 5,000 Dec 31 Drawings 5,000 “ 31 Net loss for the year 3,000 “ 31 Balance c/f 42,000 Learning Objectives

  46. Balance sheet financial A balance sheet is a statement showing the _______ ______ of a business at a ____________. After the ____________________________ is prepared, all the accounts should be closed except the _____, _______ and _____ accounts. These accounts are then listed on the ___________. position particular date trading and profit and loss account assets liabilities capital balance sheet Balance sheet is not part of the ________________; it is only a ___ of assets, liabilities and capital balances. These accounts are not closed at the year end, and the balances in these accounts are carried forward to the _________________. double entry system list next accounting year Balance sheet is a presentation of the ________________ in a statement form. accounting equation

  47. $ $ XXX XXX Balance sheet Layout of a balance sheet: Balance Sheet as at (date) Fixed Assets Capital Details of fixed assets XXX Details of capital XXX Current Assets Long-term Liabilities Details of current assets XXX Details of long-term liabilities XXX Current Liabilities Details of current liabilities XXX Assets Capital + Liabilities

  48. Balance sheet Example 10: Based on the information in Examples 7 and 8, and the following balances extracted on 31 December 20X8 (after the trading and profit and loss account was prepared and the capital account was closed), prepare a balance sheet for Flora Company as at 31 December 20X8. $ Furniture and fittings 30,000 Motor vehicles 20,000 Debtors 20,000 Bank 10,000 Cash 5,000 Long-term loan from Kowloon Bank 30,000 Creditors 8,000 Steps for preparing a balance sheet:

  49. tep Balance sheet Classify the balances remaining in our books (after preparing the trading and profit and loss account) into fixed assets, current assets, capital, long-term liabilities and current liabilities. $ Furniture and fittings 30,000 Fixed asset Motor vehicles 20,000 Fixed asset Debtors 20,000 Current asset Bank 10,000 Current asset Cash 5,000 Current asset Long-term loan from Kowloon Bank 30,000 Long-term liability Creditors 8,000 Current liability

  50. Flora Company Balance Sheet as at 31 December 20X8 tep 50,000 95,000 Balance sheet List the balances of fixed assets and current assets on the left-hand side of the balance sheet. Get their subtotals and add them up to arrive at total assets. Fixed Assets $ $ Furniture and fittings 30,000 Motor vehicles 20,000 Current Assets Stock 10,000 Debtors 20,000 Bank 10,000 Cash 5,000 45,000

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