TRADING, PROFIT AND LOSS ACCOUNT (ANNUAL ACCOUNTS)

v  Trading account, and 

v profit & loss account

THE  TRADING ACCOUNT

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  31^st  Dec,  2009  Cr

Illustration

Prepare the trading accounts of john awoke for  the year ended  31^st December,  2008

Solution:

John  awoke

Dr trading account for the year ended  31^st dec, 2008 cr

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  31^st Dec,  2008 from the following  information 

Solution:

John  awoke

Dr trading and profit and loss A/C  for the year ended  31/12/2008 cr

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  31^st December,  2006

Illustrations:  from the following list of balances  you are required to prepare

a.  trading and profit and loss account for the   year  ended  31^st  December,  1996  and 

b.  a balance sheet as at  that date 

At  stock on  31^st dec;  1996 was valued at  N3120

DR t TRADING AND PROFIT  AN DLOSS A/C  FOR THE YEAR ENDED  1996

Balance sheet as at  31^st December,  1996

Illustration:

The following  trial balance was extracted from the   books of J.J  Okochas back yard business for the year   ended  31^st December , 2001

 required:

a.      prepare a trading and profit and loss account for the  year ended  31^st December,  2001  and

b.      a balance sheet as at that date.