TRADING, PROFIT

1
TRADING, PROFIT LOSS ACCOUNTS AND BALANCE SHEETS

• Further Considerations

2
Returns Inwards and Returns Outwards.

• The Sales account and the Returns Inwards
  account, deal with goods sold and goods returned
  by customers, respectively.
• The Purchases account and the Returns Outwards
  account deal with goods purchased and goods
  returned to the supplier, respectively.

3
Returns Inwards and Returns Outwards.

• When gross profit is calculated, returns also
  have to be taken into account.
• Remember B. Swifts trial balance.

4
B. SwiftTrial Balance as at 31 December 2005

• Dr Cr
• Sales 3,850
• Purchases 2,900
• Rent 240
• Lighting expenses 150
• General expenses 60
• Fixtures and Fittings 500
• Debtors 680
• Creditors 910
• Bank 1,510
• Cash 20
• Drawings 700
• Capital 2,000
• 6,760 6,760

5
Returns Inwards Outwards

• Suppose that in the trial balance of B. Swift,
  rather than simply containing a sales account
  balance of 3,850 and a purchases account balance
  of 2,900, the balances showing stock movements
  were as follows

6
B. SwiftTrial Balance as at 31 December 2005

• Dr Cr
• Sales 4,000
• Purchases 3,120
• Returns inwards 150
• Returns outwards 220
• Rent 240
• Lighting expenses 150
• General expenses 60
• Fixtures and Fittings 500
• Debtors 680
• Creditors 910
• Bank 1,510
• Cash 20
• Drawings 700
• Capital 2,000
• 7,130 7,130

7
Returns Inwards Outwards

• Both, in fact, amount to the same thing, as far
  as gross profit is concerned.
• In the original version, sales were 3,850.
• In the amended version, returns inwards should be
  deducted to obtain the correct figure for goods
  sold to customers and KEPT by them, i.e. 4,000 -
  150 3,850.

8
Returns Inwards Outwards

• Similarly, purchases were originally shown as
  being 2,900.
• In the amended version, returns outwards should
  be deducted to obtain the correct figure for the
  actual goods purchased and KEPT, by B. Swift for
  resale.
• Remember the previous financial statement, i. e.
  the Trading, Profit and Loss Account.

9
B. SwiftTrading, Profit and Loss AccountYear
Ended 31 December 2005

• Sales 3,850
• Less Cost of Sales
• Purchases 2,900
• Closing stock ( 300)
• (2,600)
• GROSS PROFIT 1,250
• Less EXPENSES
• Rent 240
• Lighting 150
• General 60
• ( 450)
• NET PROFIT 800

10
Returns Inwards Outwards

• The revised Trading, Profit and Loss account,
  will provide the same information, but will look
  slightly different, as shown next.

11
B. SwiftTrading, Profit and Loss AccountYear
Ended 31 December 2005

• Sales 4,000
• Less Returns inwards ( 150)
• 3,850
• Less Cost of Sales
• Purchases 3,120
• Less Returns outwards ( 220)
• Closing stock ( 300)
• (2,600)
• GROSS PROFIT 1,250
• Less EXPENSES
• Rent 240
• Lighting 150
• General 60
• ( 450)
• NET PROFIT 800

12
Carriage

• When goods are delivered by suppliers or sent to
  customers, the cost of delivering the goods is
  often an additional cost of the goods purchased,
  or an additional cost to the business for
  delivering the goods to the customer (free of
  charge), respectively.
• In accounting, this is referred to as the COST of
  carriage.

13
Carriage

• When a COST is incurred for delivery of goods
  purchased, it is called carriage inwards.
• When a COST is incurred for the delivery of goods
  to customers, it is called carriage outwards.
• In order to ensure that the correct cost of
  buying goods for resale, is always included in
  the calculation of GROSS PROFIT (Remember, gross
  profit is the difference between the total cost
  of the goods acquired for resale, and the selling
  price of the goods to the customer), carriage
  inwards is always added to the cost of purchases
  in the trading account (it is part of the cost of
  buying the goods for resale).

14
Carriage

• If the business decides to deliver goods to
  customers, free of charge (when a business does
  not add an amount on to the standard selling
  price to cover the cost of delivering the goods
  to the customer), this COST (carriage outwards)
  should be included in the calculation of net
  profit, as carriage outwards is effectively an
  expense, and therefore included in the Profit and
  Loss account.

15
Stock and the second year of a business.

• At the end of his second year of trading, on 31
  December 2006, B. Swift draws up another trial
  balance, which is shown below

16
B. SwiftTrial Balance as at 31 December 2006

• Dr Cr
• Sales 6,700
• Purchases 4,260
• Rent 240
• Lighting Heating expenses 190
• Wages shop assistant 520
• General expenses 70
• Carriage outwards 110
• Buildings 2,000
• Fixtures and Fittings 750
• Debtors 1,200
• Creditors 900
• Bank 120
• Cash 40
• Drawings 900
• Capital 3,100
• Stock 300

17
OPENING STOCK

• The closing stock, as of 31 December 2005, has
  become the opening stock for the year ended 31
  December 2006 and appears in the trial balance at
  this date.
• Remember what stock is. Goods the business owns
  for resale (A CURRENT ASSET).
• Usually, these will be the goods which the
  business will sell first in the second year,
  before buying anymore goods (purchases) to
  resell.

18
OPENING STOCK

• In order to find how much stock B. Swift has at
  the end of the second year, i.e. 31 December
  2006, B. Swift will again have to list the goods
  he has not sold during the year (i.e. undertake a
  stocktake). In other words, identify the goods he
  still has in the store room (stock).
• Again this closing stock of goods, will usually
  be valued at cost, i.e. what the business paid
  for them.
• B. Swift values his stock at 31 December 2006 at
  550.
• Let us look at the stock account for the two
  years.

19
STOCK ACCOUNT FOR TWO YEARS

• STOCK A/C
• 2005 2005
• Dec 31 Trading A/c 300
• Dec 31 Balance c/d 300
• 300 300
• 2006 2006
• Jan 1 Balance b/d 300
• Dec 31 Trading A/c 300
• Dec 31Trading A/c 550
• Dec 31 Balance c/d 550
• 850 850
• 2007
• Jan 1 Balance b/d 550

20
OPENING AND CLOSING STOCK

• The closing stock for one period is always
  brought forward as the opening stock for the next
  period.
• The Trading, Profit and Loss account for the year
  ended 31 December 2006, and Balance Sheet as at
  31 December 2006 will appear as follows

21
B. SwiftTrading, Profit and Loss AccountYear
Ended 31 December 2006

• Sales 6,700
• COST OF SALES
• Opening stock 300
• Purchases 4,260
• 4,560
• Closing stock ( 550)
• (4,010)
• GROSS PROFIT 2,690
• EXPENSES
• Carriage outwards 110
• Wages 520
• Rent 240
• Lighting and heating expenses 190
• General expenses 70
• (1,130)
• NET PROFIT 1,560

22
B. SwiftBalance Sheet as at 31 December 2006

• FIXED ASSETS
• Buildings 2,000
• Fixtures and Fittings 750
• 2,750
• CURRENT ASSETS
• Stock 550
• Debtors 1,200
• Bank 120
• Cash 40
• 1,910
• CURRENT LIABILITIES
• Creditors ( 900)
• NET CURRENT ASSETS 1,010
• 3,760
• CAPITAL
• Balance at 1 January 2006 2,100

23
What has happened during the year in the Capital
Account?

• NOTE The balance brought forward in the Trial
  Balance is 3,100, NOT 2,100. This means that
  during the year the owner has introduced an extra
  1,000.

24
Financial Statements

• Financial statements is the term given to all the
  summary statements that accountants produce at
  the end of an accounting period (in the example
  provided, one year).
• They used to be called the FINAL ACCOUNTS, but
  this is misleading, as the Balance Sheet, for
  example, is not an account.
• You should note, however, that many people still
  refer to them as the final accounts, or more
  simply, the accounts.

25
Other expenses in the Trading account.

• ANY COSTS incurred in converting purchases into
  goods for resale, should be included in the
  Trading account, i.e. in the calculation of gross
  profit,
• For goods imported, it is usual to find that the
  costs of import duty and insurance, are treated
  as part of the cost of the goods, along with any
  costs incurred in repackaging the goods for
  resale.

26
EXAMPLE

• L. Stokes drew up the following trial balance as
  at 30 September 2008. You are to draft the
  trading, profit and loss account for the year
  ended 30 September 2008 and a balance sheet as at
  that date.
• Note that stock at 30 September 2008 was valued
  at 27,475.

27
L. StokesTrial Balance as at 30 September 2008

• Dr Cr
• Capital 30,955
• Drawings 8,420
• Cash at bank 3,115
• Cash in hand 295
• Debtors 12,300
• Creditors 9,370
• Stock 23,910
• Van 4,100
• Office equipment 6,250
• Sales 130,900
• Purchases 92,100
• Returns inwards 550
• Carriage inwards 215
• Returns outwards 307
• Carriage outwards 309
• Motor expenses 1,630
• Rent 2,970

28
L. StokesTrading, Profit and Loss AccountYear
Ended 30 September 2008

• Sales (130,900 550) 130,350
• COST OF SALES
• Opening stock 23,910
• Purchases Carriage (92,100215-307) 92,008
• 115,918
• Closing stock
  (27,475)
• (88,443)
• GROSS PROFIT 41,907
• EXPENSES
• Carriage outwards 309
• Motor expenses 1,630
• Rent 2,970
• Telephone 405
• Wages Salaries 12,810
• Insurance 492
• Office expenses 1,377
• Sundry expenses 284

29
L. StokesBalance Sheet as at 30 September 2008

• FIXED ASSETS
• Van 4,100
• Office Equipment 6,250
• 10,350
• CURRENT ASSETS
• Stock 27,475
• Debtors 12,300
• Cash at Bank 3,115
• Cash in hand 295
• 43,185
• CURRENT LIABILITIES
• Creditors (9,370)
• NET CURRENT ASSETS 33,815
• 44,165
• CAPITAL
• Balance at 1 October 2007
  30,955