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

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

1. 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

1. 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.