the heading should be Trading, profit and loss account for the year ended......
The trading account observes the difference between the sales and the cost of goods sold. It is a revenue account which follows the principle of double entry. The left side is the debit side while the right side is the credit side. On debit side,we record stock at the beginning. This is added to purchases less returns outwards and then deduct closing stock of goods. The cost of goods sold will be arrived at. On the credit side, we record the sales less returns inwards. Gross profit is the difference between the cost of goods and net sales.
Format Of A Trading Account
Dr. Trading account for the year ended 31st December 20-- Cr.
$ $
|
$
|
Opening stock XX
Add purchases XX
Add carriage inwards XX
XX
Less return outwards (XX)
XX
Goods withdrawn for own use (xx) XX
Cost of goods available for sale XX
Less closing stock (XX)
Cost of goods sold XX
Gross profit XX
XX
|
Sales
XX
Less returns inwards XX
XX
___
XX
|
The method used above for presenting the trading account is called T-method. There is another method called "vertical method" which can also be used. The format can be seen below:
Trading account for the year ended 31st December 20--
$ $
Sales xx
less return inwards xx xx
Cost of goods sold
opening stock xx
Add purchases xx
xx
Add carriage inwards xx
xx
less return outwards xx
xx
less closing stock xx xx
Gross profit xx
TERMINOLOGIES
Purchases
It can be defined as the goods bought for resale. It is the total of credit and cash purchases. It does not include purchase of fixed assets. It must be debited to the trading account. If a company that deals with buying and selling of cars buys wood, the wood cannot be regarded as purchases because it is not bought for the purpose of reselling.
Sales
It is the total of cash and credit sales during the trading period. It is credited to the trading account and it does not include sales of fixed assets. If a company selling cars sells one of its fixed assets assets furniture, it cannot be regarded as sales.
Opening stock
It is the stock of goods that is available for sale at the beginning of the trading period.
Closing stock
It is the stock of goods that is available at the end of the trading period.
Purchases return or Return outwards
These include goods returned to the suppliers. It is deducted from the purchases for the period.
Sales return or Returns inwards
These include goods returned to the company by the customers. It should be deducted from the sales for the period.
Carriage outwards
It is the cost of transportation of goods to the customers. It is called carriage on sales and must be recorded as expenses.
Carriage inwards
It is the cost of transporting goods to the company. It should be added to purchases.
Cost of goods available for sale
It is the amount arrived at, after adding the purchases to the opening stock.
Cost of goods sold
This the cost of goods actually sold. When the closing stock subtracted from the cost of goods available for sale, the remainder is called the cost of goods sold.
Gross profit
It is the excess of the sales over the cost of goods sold. It is the profit arrived at before deducting the expenses.
Net profit
It is the profit arrived at after deducting all the expenses incurred in the period.
Goods withdrawn for own use
These include the goods withdrawn by the owner of the business. It is deducted from the purchases in the trading account and added to drawings in the balance sheet.
Goods destroyed or stolen
It is deducted from the purchases and is posted to the debit side of the profit and loss.
Profit Snd Loss account
It is the account that shows the net profit or loss of an organization. Income or gains are credited, while expenses are debited. The profit or loss will be taken to the capital account.
Format of Trading, profit and loss account
$ $
|
$
|
Opening stock xx
Add purchases xx
Add carriage inwards xx
xx
Less return outwards (xx)
xx
xx
Less goods withdrawn(own) xx xx
Cost of goods avail. For sale xx
Less closing stock (xx)
Cost of goods sold xx
Gross profit xx
xx
Carriage outward xx
Salaries and wages xx
Rent xx
Insurance xx
Sundry expenses xx
Advertising xx
General expenses xx
All other expenses xx
Net profit xx
xx
|
Sales xx
Less returns inwards xx
xx
__
xx
Gross profit xx
Discount received xx
All other incomes xx
___
xx
|
BALANCE SHEET
It is defined as the statement that shows the presentation of the summary of assets and liabilities in a form that is well arranged, so that the financial position may be clearly ascertained. Balance sheet is not an account, it is a statement that shows the balance remaining in the books. It must be headed as "The balance sheet as at ......."
The assets are recorded in order of liquidity. Here are some terminologies in balance sheet:
Fixed assets
These included assets which are of permanent nature and it creates revenue for the business. They are assets that have long life span, i.e, they can last for a long period of time. e.g Land and building, premises, plant and machinery etc.
Current assets
These are assets that have short life span, i.e, that can last for a short period of time such as: cash in hand, prepaid expenses, cash at bank etc. They are assets that are easily realizable.
Liquid assets
These include assets that are capable of being converted easily into cash such as: debtors, investments etc.
Liabilities
Liabilities can be defined as the indebtedness of a business to outsiders. It is the claim on the assets of the company.
Capital
It is owner`s interest in the assets of the business. It can be referred to as the owner`s equity.
Overtrading
It is a situation whereby a firm has no working capital. It cannot meet its current liabilities and may become bankrupt.
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