Lesson Notes By Weeks and Term - Senior Secondary School 1

SUBJECT: FINANCIAL ACCOUNTING

CLASS:  SS 1

DATE:

TERM: 3rd TERM

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

1. 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

1. 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

1. The gross profit is………. (a) N47,200   (b) N42,200   (c) N37,200 (d) N19,800
2. The net profit is…………(a) N42,200   (b) N37,200   (c)  N19,800  (d) N47,200
3. The cost of goods sold is ………..(a) N185,100  (b) N139,200  (c) N136,200  (d) N131,200
4. 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 

1. List ten items of expenses that are charged (or debited ) to the Profit and Loss Account of a sole trader.