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

• 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.

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.

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.

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.

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
2. Exercise 6.1, 6.2, 6.3A, 6.4A
3. 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.