1.0
INTRODUCTION
Final Accounts are
prepared to achieve the objectives of Book-keeping. In order to know the profit
or loss earned by a firm, Trading and Profit and Loss account is prepared (as
one Account) balance sheet or position Statement will portray the financial
position of the business on particular date. The two statements, i.e. the
Trading and Profit and Loss Account and balance sheet are prepared to give the
final results of the business that is why both are collectively called final
Accounts and Balance Sheet.
The Balance sheet is
not an account but has to be drawn up along with the final accounts in order to
make them meaningful. The final accounts would indicate the result of
operations for the accounting period whereas the Balance sheet would show the
financial position as at the end of that period.
• understand the
meaning of final accounts
• prepare Trading
Account
• prepare Profit and
Loss Account.
3.0
MAIN CONTENT
3.1
Final Accounts - Trading and Profit and Loss Account
In this Note, we are
going to study the joint account separately. As the name of this account itself
indicates, it is made up of two accounts, i.e. Trading Account and Profit and
Loss Account. Trading concerns i.e. those business which purchase goods from
one market and sell it in another market prepare this account.
As the name implies,
the Trading Account is an account and could be prepared in the 'T' form as a
normal account. As a matter of fact, it is part of the double entry system.
Nominal accounts which are trading account items are debited or credited (as
the case may be) to close them off and the corresponding entries would appear
in the trading account.
On the debit side of
the trading account are recorded the following, the opening stock to which is
added net purchases to get total goods available for sale throughout the
period. The Net purchases is arrived at by adding cost of carriage inward to
the purchases cost and deducting from this sum, the value of returns to
suppliers. For the purpose of calculating cost of goods sold, we take into
consideration opening stock, purchases, and direct expenses on purchasing and
closing stock. The difference between the sales and cost of goods sold is gross
profit or gross loss and is transferred to the profit and loss account.
The specimen proforma
of a Trading Account is given as under:
OR Calculation
of cost of goods sold:
3.2.1
Detailed Study of the Items Posted to the Debit side of Trading Account
1. Opening Stock: This
is the amount of goods in hand at the beginning of the period for which the
trading account is prepared. This figure is available from the Trial Balance.
There will be no opening stock in case of a new business.
2. Purchases: It
includes both cash and credit purchases of good which are for resale purposes.
Purchases returns if any should be deducted from purchases in the inner column
and only net purchases are shown in the outer column.
3. Direct
Expenses: These include all expenses which have been incurred before the
goods become ready for sale and are shown on the debit side of Trading Account
3.2.2
Detailed Study of the Items Posted.129
To
the credit side of Trading Account:
1. Sales- Sales
should include both cash and credit sales of those goods which were purchased
for resale purposes. Some customers might return the goods sold to them (called
sales returns) which are deducted from the sale in the inner column and net
amount is shown in the outer column.
2. Closing Stock - It
is the amount of goods in hand at the end of the trading period.
Generally the closing
stock is given outside the Trial balance, but when purchases arc adjusted
through opening and closing stock, in that case closing stock will have debit
balance in the trial balance. If given outside the trial balance it will be credited
to the Trading Account but if it is given in the trial balance, then it appears
as asset in the Balance Sheet.
The difference
between the sales and cost of goods sold is gross profit. For the purpose of
calculating cost of goods sold, we take into consideration the following items:
i. Opening stock;
ii. Purchases;
iii. Direct expenses
on purchasing and closing stock.
The balance of this
account represents gross profit or loss and this is transferred to the profit
and Loss Account.
This account is prepared to calculate the Net profit (Net surplus) of the business. There are certain items of incomes and expenses of the business which must be taken into consideration for calculating Net profit of the business. These are of indirect nature, i.e. concerning the whole business and relating to various activities which are done by the business for the purpose of making the goods available to the consumers. Indirect expenses may be selling and distribution expenses, management expenses, financial expenses, extraordinary losses and expenses to maintain the assets into working order.
This account is
prepared from Nominal Accounts and its balances transferred to capital account
as the whole profit or less will be that of owner and it will increase or
decrease his capital.
In cooperative
organization, the net surplus (profit) will be transferred to the profit and
loss Appropriation Account. Let us now consider a comprehensive example
involving the preparation of Trading, and profit and Loss Account. (a joint
Account).
Illustration:
From the following
list of balances, prepare Trading, and profit and Loss Accounts for the year
ended 31st December, 2001.
N
Purchases
|
84,380
|
Sales
|
139,420
|
Returns
Inwards
|
2,220
|
Returns
Outwards
|
3,330
|
Discounts
Allowed
|
440
|
Discount
Received
|
350
|
Stock
(1-1-2001)
|
5,550
|
Carriage
outwards
|
2,100
|
Wages
and Salaries
|
7,890
|
Rates
and Insurance
|
1,230
|
Carriage
on Purchases
|
3,450
|
Telephone
and Postage
|
1,110
|
Electricity
and Water
|
650
|
Bad
debts written off
|
660
|
Rent
Income
|
2,820
|
Commission
Received
|
3,110
|
The
following additional information is relevant:
(a)
Provide 20% depreciation on cars and lorries valued at N13,100
(b)
Expenses due but unpaid by 31st Dec. 1989 Salaries N410 Telephone N125
(c)
Expenses paid in advance: Insurance N110, Postage N10.
(d)
Rent received in advance N280
(e)
Commission accrued but not received by 31st Dec. 1989 N390.
(f)
Stock on 31st Dec. 1989 was valued at N1, 890.
Solution
Trading
and Profit and Loss Account for the Year ended 31st Dec. 89
|
|
4.0
CONCLUSION
After preparing the
Trial Balance, it is necessary to prepare the final account at the end of
business period in order to determine the Net Profit or Net Loss of the
business.
In this note, we
discussed the joint account of Trading and Profit and Loss Account. All the
direct expenses were entered on the debit side of the Trading account, while
this account is credited with all direct incomes. The difference between the
sales and cost of goods sold is Gross profit.
The profit and Loss Account is debited
with all the indirect expenses and credited with all indirect incomes. The
excess of indirect incomes over indirect expenses is the Net Profit.
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