Lesson Notes By Weeks and Term v3 - Senior Secondary 1
Trading Account
Download the Lessonotes Mobile Nigeria 2025 app for faster lesson access on Android and iPhone.
Trading Account
Download the Lessonotes Mobile Nigeria 2025 app for faster lesson access on Android and iPhone.
Subject: Financial Accounting
Class: Senior Secondary 1
Term: 3rd Term
Week: 4
Theme: Classes Of Accounts And Final Account Of A Sole Trader (Proprietor)
This page supports the lesson note with a companion video and a short classroom-ready summary.
For class groups and homework, share this lesson page so learners also get the summary, objectives, and full lesson context.
Identify Trading Account items. Prepare the Trading Account.
Determine: - Cost of goods available. - Cost of goods sold. - Sales
The Trading Account is the first part of the Income Statement (or Profit and Loss Account). Its primary function is to calculate the Gross Profit or Gross Loss made by a business during an accounting period from its main trading activities (buying and selling goods). It records all direct costs associated with bringing goods to a saleable condition and the revenue generated from their sale.
Key Terms and Components:
1. Sales Revenue (Sales): The total income generated from selling goods to customers.
Sales Returns (Returns Inwards): Goods returned by customers to the business. These are deducted from gross sales to arrive at Net Sales. Net Sales = Gross Sales - Sales Returns
2. Opening Stock (Beginning Inventory): The value of unsold goods at the beginning of the accounting period. This stock was carried over from the previous period.
3. Purchases: The total cost of goods bought by the business for resale during the accounting period.
Purchases Returns (Returns Outwards): Goods returned by the business to its suppliers. These are deducted from gross purchases to arrive at Net Purchases.
Carriage Inwards (Freight In): The cost incurred in transporting goods purchased from the supplier's location to the business's premises. This is added to purchases as it is a direct cost of bringing goods into a saleable condition. Net Purchases = Gross Purchases - Purchases Returns + Carriage Inwards
4. Closing Stock (Ending Inventory): The value of unsold goods remaining at the end of the accounting period. This is an asset and will become the opening stock for the next period. It is usually determined by a physical count (stocktaking) and valued at the lower of cost or net realisable value.
5. Cost of Goods Available for Sale: The total cost of all goods the business had on hand or acquired during the period that were available for sale. Cost of Goods Available for Sale = Opening Stock + Net Purchases
6. Cost of Goods Sold (COGS): The direct costs attributable to the production of the goods sold by a company. This is the expense directly associated with sales. Cost of Goods Sold = Opening Stock + Net Purchases - Closing Stock Alternatively: Cost of Goods Sold = Cost of Goods Available for Sale - Closing Stock
7. Gross Profit: The profit a business makes from selling goods, before deducting operating expenses (like salaries, rent, etc.). It is the excess of Net Sales over Cost of Goods Sold. Gross Profit = Net Sales - Cost of Goods Sold
8. Gross Loss: Occurs when the Cost of Goods Sold exceeds the Net Sales. Gross Loss = Cost of Goods Sold - Net Sales Format of a Trading Account (T-Form): A Trading Account is typically presented in a T-format, with debits on the left side and credits on the right side. | Debit Side (Expenses/Costs) | Credit Side (Revenue) | | :------------------------------- | :----------------------- | | Opening Stock | Sales (less Returns Inwards) | | Purchases (less Returns Outwards, plus Carriage Inwards) | Closing Stock | | Carriage Inwards | | | Gross Profit (if Sales > COGS) | | | TOTAL | TOTAL | | | Gross Loss (if COGS > Sales) | | TOTAL | TOTAL | Worked
Example: Adesanya Traders, a dealer in electronics in Alaba International Market, provides the following balances for the year ended 31st December 2023: | Account Name | Amount (₦) | | :------------------- | :--------- | | Stock (1st Jan 2023) | 150,000 | | Purchases | 800,000 | | Sales | 1,200,000 | | Returns Inwards | 50,000 | | Returns Outwards | 30,000 | | Carriage Inwards | 20,000 | | Stock (31st Dec 2023)| 200,000 | Task: Prepare Adesanya Traders' Trading Account for the year ended 31st December 2023 and determine: a. Cost of Goods Available b. Cost of Goods Sold c. Net Sales d.
Gross Profit Solution: Step 1: Calculate Net Sales Gross Sales = ₦1,200,000 Less: Returns Inwards = ₦50,000 Net Sales = ₦1,200,000 - ₦50,000 = ₦1,150,000 Step 2: Calculate Net Purchases Gross Purchases = ₦800,000 Less: Returns Outwards = ₦30,000 Add: Carriage | 50,000 | | Returns Outwards | 30,000 | | Carriage Inwards | 20,000 | | Stock (31st Dec 2023)| 200,000 | Task: Prepare Adesanya Traders' Trading Account for the year ended 31st December 2023 and determine: a. Cost of Goods Available b. Cost of Goods Sold c. Net Sales d.
Gross Profit Solution: Step 1: Calculate Net Sales Gross Sales = ₦1,200,000 Less: Returns Inwards = ₦50,000 Net Sales = ₦1,200,000 - ₦50,000 = ₦1,150,000 Step 2: Calculate Net Purchases Gross Purchases = ₦800,000 Less: Returns Outwards = ₦30,000 Add: Carriage Inwards = ₦20,000 Net Purchases = ₦800,000 - ₦30,000 + ₦20,000 = ₦790,000 Step 3: Calculate Cost of Goods Available for Sale Opening Stock = ₦150,000 Add: Net Purchases = ₦790,000 Cost of Goods Available for Sale = ₦150,000 + ₦790,000 = ₦940,000 Step 4: Calculate Cost of Goods Sold Cost of Goods Available for Sale = ₦940,000 Less: Closing Stock = ₦200,000 Cost of Goods Sold = ₦940,000 - ₦200,000 = ₦740,000 Step 5: Prepare Trading Account Adesanya Traders Trading Account for the Year Ended 31st December 2023 | Details | Amount (₦) | Details | Amount (₦) | | :------------------ | :--------- | :------------------------ | :--------- | | Opening Stock | 150,000 | Sales | 1,200,000 | | Purchases | 800,000 | Less: Returns Inwards | (50,000) | | Less: Returns Outwards | (30,000) | | | | | 770,000 | Net Sales | 1,150,000 | | Add: Carriage Inwards | 20,000 | Closing Stock | 200,000 | | Net Purchases | 790,000 | | | | | | | | | Cost of Goods Sold | 740,000 | | | | Gross Profit c/d | 410,000 | | | | Total | 1,350,000| Total | 1,350,000| Step 6: Determine Gross Profit Gross Profit = Net Sales - Cost of Goods Sold Gross Profit = ₦1,150,000 - ₦740,000 = ₦410,000 Summary of Answers: a. Cost of Goods Available = ₦940,000 b. Cost of Goods Sold = ₦740,000 c. Net Sales = ₦1,150,000 d. Gross Profit = ₦410,000 Teacher Activities: Introduction and Review: Begin by reviewing the concept of final accounts and the need for businesses to determine profitability. Link to previous lessons on ledgers and trial balance.
Concept Explanation: Clearly explain what a Trading Account is, its purpose, and its importance using relatable Nigerian business examples (e.g., a provision store, a textile shop).
Item Identification: Guide students through identifying typical items that appear in a Trading Account (Opening Stock, Purchases, Sales, Returns, Carriage Inwards, Closing Stock). Use charts or project a list of items.
Format Demonstration: On the board, demonstrate the T-format of the Trading Account, explaining where each item is placed (Debit vs. Credit side) and why.
Step-by-Step Preparation: Work through a detailed example (like the Adesanya Traders example above) on the board, showing step-by-step calculations for Net Sales, Net Purchases, Cost of Goods Available, Cost of Goods Sold, and Gross Profit/Loss. Emphasize the logic behind each entry.
Interactive Q&A: Encourage students to ask questions and answer their queries to clarify understanding.
Group Work Facilitation: Divide students into small groups and provide them with practice questions to prepare a Trading Account. Circulate to offer guidance and support.
Review and Feedback: Review group solutions, highlight common errors, and provide constructive feedback.
Link to Real-life: Discuss how real Nigerian businesses use this account.
Student Activities: Active Listening and Note-taking: Students will actively listen to explanations and take comprehensive notes on key definitions, components, and the format of the Trading Account.
Participation in Discussions: Students will participate in class discussions, ask clarifying questions, and offer examples from their local environment.
Item Identification Exercise: Students will identify and classify items provided by the teacher as belonging to the Trading Account, and state whether they are debited or credited.
Group Problem Solving: In assigned groups, students will work collaboratively to solve practice problems involving the preparation of a Trading Account, calculating Net Sales, Net Purchases, Cost of Goods Available, and Cost of Goods Sold.
Presentation of Solutions: Groups will present their solutions to the class, explaining their steps and reasoning.
Individual Practice: Students will attempt independent practice questions to consolidate their understanding.
Question 1 (Identifying Items): Identify which of the following items are typically found in a Trading Account and state whether they are debited or credited: a. Rent Paid b. Opening Stock c. Sales d. Carriage Inwards e. Purchases Returns f. Salaries g. Closing Stock h.
Discounts Received Solution 1: a. Rent Paid - Not in Trading Account (Operating Expense in Profit & Loss Account) b. Opening Stock - Debit c. Sales - Credit d. Carriage Inwards - Debit e. Purchases Returns - Debit (reduces Purchases) f. Salaries - Not in Trading Account (Operating Expense in Profit & Loss Account) g. Closing Stock - Credit h. Discounts Received - Not in Trading Account (Other Income in Profit & Loss Account)
Commentary: This question checks the fundamental ability to recognise direct trading elements. Students must understand that the Trading Account focuses only on items directly related to buying and selling goods. Question 2 (Calculations for Malam Bala's Kiosk): Malam Bala, a provision store owner in Kaduna, provided the following information for October 2023: Stock on 1st October 2023: ₦85,000 Purchases during October: ₦320,000 Returns Outwards: ₦15,000 Carriage on goods purchased: ₦8,000 Sales during October: ₦450,000 Stock on 31st October 2023: ₦110,000 Calculate for Malam Bala: a. Net Purchases b. Cost of Goods Available for Sale c.
Cost of Goods Sold Solution 2: a.
Net Purchases: Gross Purchases = ₦320,000 Less: Returns Outwards = ₦15,000 Add: Carriage Inwards = ₦8,000 Net Purchases = ₦320,000 - ₦15,000 + ₦8,000 = ₦313,000 b.
Cost of Goods Available for Sale: Opening Stock = ₦85,000 Add: Net Purchases = ₦313,000 Cost of Goods Available for Sale = ₦85,000 + ₦313,000 = ₦398,000 c.
Cost of Goods Sold: Cost of Goods Available for Sale = ₦398,000 Less: Closing Stock = ₦110,000 Cost of Goods Sold = ₦398,000 - ₦110,000 = ₦288,000
Commentary: This question breaks down the calculation process, ensuring students can perform the intermediate steps correctly before attempting a full Trading Account. It reinforces the definitions of Net Purchases, Cost of Goods Available, and Cost of Goods Sold.
Question 3 (Preparing Trading Account): The following information was extracted from the books of Mama Nkechi's Boutique for the year ended 31st December 2022: Opening Stock: ₦220,000 Purchases: ₦980,000 Sales: ₦1,500,000 Returns Inwards: ₦60,000 Returns Outwards: ₦40,000 Carriage Inwards: ₦15,000 Closing Stock: ₦300,000 Prepare Mama Nkechi's Trading Account for the year ended 31st December
2
0
2
2. Solution 3: Mama Nkechi's Boutique Trading Account for the Year Ended 31st December 2022 | Details | Amount (₦) | Details | Amount (₦) | | :------------------ | :--------- | :------------------------ | :--------- | | Opening Stock | 220,000 | Sales | 1,500,000 | | Purchases | 980,000 | Less: Returns Inwards | (60,000) | | Less: Returns Outwards | (40,000) | | | | | 940,000 | Net Sales | 1,440,000 | | Add: Carriage Inwards | 15,000 | Closing Stock | 300,000 | | Net Purchases | 955,000 | | | | | | | | | Cost of Goods Sold | 875,000 | (Calculated as 220k + 955k - 300k) | | | Gross Profit c/d | 565,000 | (Calculated as 1,440k - 875k) | | | Total | 1,440,000| Total | 1,440,000|
Commentary: This question requires students to integrate all the previous steps into a complete Trading Account. It tests their ability to apply the format and make all necessary adjustments to arrive at the Gross Profit.
Adesanya Traders, a dealer in electronics in Alaba International Market, provides the following balances for the year ended 31st December 2023:
| Account Name | Amount (₦) |
| :------------------- | :--------- |
| Stock (1st Jan 2023) | 150,000 |
| Purchases | 800,000 |
| Sales | 1,200,000 |
| Returns Inwards | 50,000 |
| Returns Outwards | 30,000 |
| Carriage Inwards | 20,000 |
| Stock (31st Dec 2023)| 200,000 |
Task: Prepare Adesanya Traders' Trading Account for the year ended 31st December 2023 and determine:
a. Cost of Goods Available
b. Cost of Goods Sold
c. Net Sales
d. Gross Profit
Solution:
Market Traders and Small Business Owners: In Nigeria, many individuals operate small businesses (e.g., selling textiles in Balogun Market, provisions in a local kiosk, or agricultural produce). The Trading Account helps them understand the profitability of their core buying and selling activities. For instance, a yam seller can calculate if the revenue from selling yams covers the cost of purchasing and transporting them from the farm. This empowers them to make informed decisions about pricing and purchasing. Evaluating Supplier Performance and Cost Control: Businesses in Nigeria, from manufacturing plants in Ogun State to distributors in Onitsha, constantly monitor their "Cost of Goods Sold." By preparing the Trading Account, they can track changes in purchase prices, carriage costs, and stock levels. An unexpected increase in Cost of Goods Sold might prompt them to review their suppliers, negotiate better deals, or find more efficient transport methods, directly impacting their profitability. Investment Decisions and Economic Analysis: For individuals considering investing in Nigerian companies (e.g., shares of a manufacturing company listed on the NGX), the Trading Account section of the financial statements provides crucial insights into the company's operational efficiency. A consistent increase in gross profit indicates a healthy core business, which can influence investment decisions. Economic analysts also use aggregated trading data to assess the health of specific sectors within the Nigerian economy.