Week 7 and 8 – SS1 Third Term Financial Accounting Notes

WEEK 7 – 8

TOPIC : FINAL ACCOUNTS OF A SOLE TRADER

CONTENT :

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

The Trading Account and the Profit and Loss Account are usually combined to form a continuous statement.
Both the Trading,Profit and Loss Account and the Balance Sheet are referred to as Financial Statements. Financial Statements are usually prepared from a Trial Balance. Every item in a trial balance appears once in a set of financial statement. As each item is used,it is useful to place a tick ( )against the item. This ensures that no items are overlooked.
It is also common to find notes (or additional information ) accompanying a trial balance about various adjustments which are to be made in preparing the financial statements. Any note to a trial balance are used twice in a set of financial statements. To ensure that this is done, it is useful to place a tick ( ) against the notes each time they are used.
It must be emphasized that the Trading Account and the Profit and Loss Account are both part of the double entry system. Therefore any item that is debited or credited either in the Trading Account or the Profit and Loss Account must have a corresponding double entry in another ledger account.
The items appearing in the Trading, Profit and Loss Account are the ledger account balances which are transferred by means of Journal entries. The student is not usually required to prepare the Journal entries in examination questions.
Illustration:
The following trial balance was extracted from the books of Ade Molayo as at 31st December, 2015.
Ade Molayo
Trial Balance as at 31st December, 2015
Dr Cr
N N
Sales 126,000
Returns Inwards 2,000
Purchases 55,200
Returns Outwards 2,200
Discounts Received 2,340
Discounts Allowed 3,260
Wages 28,000
Rent 16,000
Heating and Lighting 3,400
Postage and Stationery 1,070
Motor Van Expenses 4,830
Interest on loan 800
Sundry Expenses 920
Land and Buildings 40,000
Motor Vehicles 14,000
Office Furniture 5,000
Sundry Debtors 7,400
Sundry Creditors 3,420
Bank 2,160
Carriage Inwards 5,000
Stock (01/01/2015) 4,000
Loan from T. Lawal (repayable in 2019) 10,000
Capital 60,000
Drawings 10,920
203,960 203,960
Additional Information :

1. Stock at 31st December, 2015 was N 2,700

   Required: Prepare Ade Molayo’s Trading, Profit and Loss Account for the year ended 31st December 2015.

    Ade Molayo
   Trading, Profit and Loss Account for the year ended 31st December, 2015
   N NN N
   Opening Stock 4,000 Sales 126,000
   Purchases 55,200 less: Returns Inwards 2,000
   add: Carriage Inwards 5,000 124,000
   60,200
   less: Returns Outwards 2,200
   58,000
   Cost of goods available for sale 62,000
   less: Closing Stock 2,700
   Cost of goods sold 59,300
   Gross Profit c/d 64,700
   124,000 124,000
   Discounts Allowed 3,260 Gross Profit b/d 64,700
   Wages 28,000 Discounts Received 2,340
   Rent 16,000
   Heating and Lighting 3,400
   Postage and Stationery 1,070
   Motor Van Expenses 4,830
   Interest on Loan 800
   Sundry Expenses 920
   Net Profit 8,760
   67,040 67,040

    NB. It should be noticed that not all the items in the Trial Balance have been used in preparing the Trading, Profit and Loss Account. The remaining balances (i.e. the items that are yet to be ticked in the Trial Balance) are assets, liabilities or capital. These will be used later when a Balance Sheet is drawn up.
   EVALUATION

   1. Explain the following: (a) cost of goods available for sale (b) cost of goods sold (c) financial statements
   2. Describe three features of each of the following financial statements:
      1. Trading Account (b) 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. Business Accounting 1
      1. Exercise 6.1, 6.2, 6.3A, 6.4A
   2. Simplified and Amplified Financial Accounting Question 4 Page 187

      WEEKEND ASSIGNMENT

      1. When the cost of goods sold is added to closing stock, the resulting figure is (a) carriage inwards (b) cost of sales (c) gross profit (d) cost of goods available for sale
      2. Which of the following is not found in a trial balance (a) opening stock (b) closing stock (c) capital (d) rent paid
      3. A statement that measures the performance of a business over a period of time is the (a) Balance Sheet (b) Bank Statement (c) Profit and Loss Account (d) Bank Reconciliation Statement
      4. The effect on profit when closing stock is understated is (a) increase in profit (b) decrease in profit (c) no change in profit (d) a doubling of profit
      5. Carriage outwards expenses of a business are treated in the (a) Balance Sheet (b) Income Surplus Account (c) Profit and Loss Account (d) Trading Account

         THEORY

         1. List three uses of the Profit and Loss Account
         2. State four differences between the Trading Account and the Profit and Loss Account.