Week 5 and 6 – SS1 Third Term Financial Accounting Notes

 WEEK 5 – 6
TOPIC: FINAL ACCOUNTS OF A SOLE TRADER
CONTENTS

1. Contents of the Final Accounts of a Sole Trader
2. The Trading Account – Contents and Preparation
3. The Profit and Loss Account – Contents and Preparation

The Final Accounts of a Sole Trader consist of the following:

1. The Trading Account
2. The Profit and Loss Account
3. The Balance Sheet

THE TRADING ACCOUNT
The Trading Account is prepared to ascertain the Gross Profit or the Gross Loss of the business for the trading period.

1. The Gross Profit is the difference between the Sales revenue and the Cost of Goods Sold
2. The Cost of goods sold is derived by adding the Opening Stock to the Net Purchases and deducting the Closing Stock from the ensuing total.
3. Net Purchases is derived by deducting Returns Outwards (i.e. Purchases Returns) from the Purchases figure.
4. Sales revenue (or Net Sales) is derived by deducting Returns Inwards (i.e. Sales Returns) from the Sales figure.
5. It is usual to add the cost of transporting the goods to the trader’s shop i.e. Carriage Inwards to the Purchases figure when deriving the Cost of Goods Sold
6. The Cost of goods sold is also referred to as the Cost of Sales

 The Trading Account must have a heading which includes the period of time covered by the statement (or account). It is also usual to include the name under which the business trades. There are two ways in which a Trading Account can be prepared – horizontal and vertical.

1. The horizontal format or T – format is similar to a traditional ledger account. Using this method, the Sales revenue is shown on the credit side and the Cost of goods sold on the debit side. The difference (or balance) between the two sides equals the Gross Profit or Gross Loss for the period.

   The Gross Profit is carried down to the Profit and Loss Account

2. A Trading Account can also be prepared using the vertical format. This is the format used by most businesses. A Trading Account prepared using this method contains the same information as in a horizontal format, but looks like an arithmetic calculation.

Illustration:
The following balances were extracted from the books of Tunde Enterprises for the year ended 31st December, 2017.
N
Stock (1st January, 2017) 8,000
Purchases 18,000
Rent 2,000
General Expenses 1,700
Discounts Allowed 158
Advertising 732
Insurance 500
Sales 50,000
Returns Inwards 2,320
Discounts Received 500
Rates 250
Returns Outwards 357
Carriage Inwards 135
Interest on Loan 726
The value of Stock at close on 31st December, 2017 was N9,500
You are required to prepare the Trading Account for the year ended 31st December, 2017.

1. Using the horizontal or T – format:

Tunde Enterprises
Trading Account for the year ended 31st December, 2017
N NN N
Opening Stock 8,000 Sales 50,000
Purchases 18,000 less: Returns Inwards2,320
Add: Carriage Inwards 135 47,680
18,135
Less: Returns Outwards 357
17,778
Cost of goods available for sale 25,778
Less: Closing Stock 9,500
Cost of Goods Sold 16,278
Gross Profit c/d 31,402
47,680 47,680

1. Using the vertical format:

   Tunde Enterprises
   Trading Account for the year ended 31st December, 2017
   N N N

Sales 50,000
Less: Returns Inwards 2,320
47.680
Cost of goods sold :
Opening Stock 8,000
Purchases 18,000
Add: Carriage Inwards 135
18,135
Less: Returns Outwards 357
17,778
25,778
Less: Closing Stock 9,500
16,278
Gross Profit 31,402

 EVALUATION

1. List three features of the Trading Account
2. State three components of the final accounts of a sole trader.

  THE PROFIT AND LOSS ACCOUNT
The Profit and Loss Account is concerned with profits and losses, gains and expenses. Its purpose is to calculate or ascertain the Net Profit or Net Loss for the period.
The formula for calculating net profit is : Net Profit = Gross Profit + other income – Expenses
The Profit and Loss Account must have a heading which includes the period of time covered by the statement. It is also usual to include the name under which the business trades.
As with a Trading Account, a Profit And Loss Account can be prepared using either the horizontal or the vertical method. Using the horizontal format, the gross profit and any other income are shown on the credit side and the expenses are shown on the debit side. The difference (or balance) between the two sides equals the Net Profit or Net Loss for the year.
The Net Profit /Net Loss is transferred to the Capital Account.
Illustration: Using the list of balances shown in the earlier illustration, prepare the Profit and Loss Account for the year ended 31st December, 2017.

1. Using the horizontal format:

   Tunde Enterprises
   Profit and Loss Account for the year ended 31st December, 2017
   N N
   Rent 2,000 Gross Profit b/d 31,402
   General Expenses 1,700 Discounts Received 500
   Discounts Allowed 158
   Advertising 732
   Insurance 500
   Rates 250
   Interest on loan 726
   Net Profit 25,836
   31,902 31,902

    

2. Using the vertical format:

   Tunde Enterprises
   Profit and Loss Account for the year ended 31st December, 2017
   N N
   Gross Profit 31,402
   Add: Discounts Received 500
   31,902
   Less: Expenses
   Rent 2,000
   General Expenses 1,700
   Discounts Allowed 158
   Advertising 732
   Insurance 500
   Rates 250
   Interest on loan 726 6,066
   Net Profit 25,836
   EVALUATION

   1. List four features of the Profit and Loss Account
   2. List three similarities and two differences between the Trading Account and the Profit and Loss Account

   READING ASSIGNMENT

   1. Simplified and Amplified Financial Accounting Page 180 – 187
   2. Business Accounting 1 Page 49 – 57

   GENERAL EVALUATION QUESTIONS

   1. List five source documents that are used in preparing the Cash Book
   2. State five advantages of using the Imprest system to keep petty cash transactions
   3. List five benefits of keeping accounting records
   4. State ten uses of the General Journal
   5. List eight contents of the Trading Account of a sole trader.

   WEEKEND ASSIGNMENT

   1. Carriage inwards as an expenses of a business is treated in the ………..…(a) Trading Account (b) Profit and Loss Account (c)Balance Sheet (d) Appropriation Account.

      Use the following information to answer question 2 to 5
                                           N
      Purchases                                168,000
      Sales                                183,400
      Opening Stock                             20,100
      Closing Stock                             48,900
      Carriage Outwards                             2,400
      Carriage Inwards                             5,000
      Return Inwards                             10,000
      Expenses                                15,000
      Return Outwards                            8,000

   2. The gross profit is………. (a) N47,200 (b) N42,200 (c) N37,200 (d) N19,800
   3. The net profit is…………(a) N42,200 (b) N37,200 (c) N19,800 (d) N47,200
   4. The cost of goods sold is ………..(a) N185,100 (b) N139,200 (c) N136,200 (d) N131,200
   5. The cost of goods available for sale was……….. (a) N188,100 (b) N173,000 (c) N193,100 (d) N190,700

       THEORY

      1. List three uses of each of the following financial records /information.
         1. Cash Book (b) Profit and Loss Account
      2. List ten items of expenses that are charged (or debited ) to the Profit and Loss Account of a sole trader.