TERM: 2ND TERM
SUBJECT: BUSINESS STUDIES
CLASS: JSS 3
TOPIC: TRADING ACCOUNT
- Definition of Trading Account
- Purpose of Trading Account
- Terminologies Involved in the Preparation of Trading Account
- Working Exercise (Trading Account)
Definition of Trading Account: The Trading Account can simply be defined as an account prepared after the preparation of the trial balance in order to ascertain either the gross profit or gross loss of a trading concern.
Purpose of Trading Account: The purpose of preparing the trading account is to ascertain the profitability or otherwise of the business i.e. to arrive at the gross profit or gross loss of a business.
Terminologies Involved in The Preparation of The Trading Account
- Opening Stock: This is the value of the goods in stock at the beginning of a trading period.
- Purchases: This is the value of both cash and credit purchases (ie total purchases) during a given trading period.
- Purchases Returns or Returns Outwards: This is the value of goods which a business returned to its supplies for one reason or the other.
- Net Purchases: This is equal to total purchases less returns outwards or purchases less purchases returns for a given trading period.
- Cost Of Goods Available for Sale: This is arrived at by adding purchases to opening stock and deducting purchases returns (if any) from the above addition.
- Closing Stock: This is the value of goods left unsold at the end of a given trading period.
- Cost of Goods Sold: This is arrived at as follows:-
Opening stock + Purchases – Returns
Outwards – Closing stock or (cost of goods available for sales less closing stock).
- Gross Profit: This is the excess of the net sales over cost of goods sold.
- Gross Loss: This is the excess of cost of goods sold over the net sales.
- Net Sales: This is equal to sales or sales revenue ie (cash and credit sales) less sales return or return inwards.
- Returns Inwards or Sales Returns: This is the value of all goods returned by the customers of a business as not acceptable to them due to one reason or the other.
- Sales: This is the total value of all cash and credit sales of a business in a given trading period.
- Carriage Inwards: This is the carriage on purchases
Working Exercise of a Trading Account
Question: From the following trial balance of Diligent Stores Ltd, Draw up a trading for the year ended 31st December 2009:-
|Carriage outwards||200|| |
|Carriage Inwards||310|| |
|Returns inward||205|| |
|Purchases||11, 874|| |
|Return outwards|| ||200|
|Salaries and wages||3,862|| |
|Sundry expenses||664|| |
|General Expenses||480|| |
|Bank||10, 482|| |
|Motor Van|| ||350|
|Furniture and fittings||1,800|| |
|Land and buildings||5,000|| |
| ||43, 289||43, 289|
Stock at 31st December 2009 was N3, 000
DILIGENT STORES LTD
Trading, Profit & Loss Account For The Year Ended 31st December 2009
| ||N||N|| ||N||N|
|Openingstock|| ||2, 368||Sales||18, 600|| |
|Add purchases||11, 874|| ||Less Sales Return||205|| |
|Add carriage Inwards||310|| ||NET SALES|| ||18, 395|
| ||12, 184|| || || || |
|Less Purchase Returns||322|| || || || |
|NET PURCHASES|| ||11, 862|| || || |
|COST OF GOODS AVAILABLE FOR SALE|| ||14, 230|| || || |
|Less Closing Stock|| ||3,000|| || || |
|COST OF GOODS SOLD|| ||11, 230|| || || |
|Gross Profit c/d || ||7, 165|| || || |
| || ||18, 395|| || ||18, 395|
NOTE: The above trading account is prepared using the conventional or “T” method. The vertical method will be used later.
- Write a short note on trading account
- State the purposes of preparing a profit and loss account.
Business Studies by O.A. Lawal. Pages 72 to 76.
GENERAL REVISION QUESTIONS
- What is a petty cash book?
- Mention three items that can appear in the petty cash book.
- Who keeps the petty cash book?
- Define imprest system.
- What is the amount of money given to the petty cashier at the beginning of the period called?
- A return outward is __________ Purchases A. added to B. deducted from C. Similar to
- not related to.
- Purchases returns is the same as A. purchases journal B. Returns outwards C. net sale D. Returns outwards journal.
- Which of the following statements is correct? A. Net sales = sale + sale returns B. Cost of goods sold = opening stock + closing stock C. Gross profit = Net sales – cost of goods sold D. None of the above.
- Which of the following is posted to trading account? A. Carriage outwards B. Carriage inward
- Rent D. Discount received.
- Which of the following equations is correct? A. Net profit = Gross profit + other incomes – total expenses B. Net sales + closing stock = gross profit C. opening stock + closing stock = cost of sales D. Sales – purchases = Net profit.
- Write short notes on Trading Account
- Prepare a format of a Trading Account showing its items