This is the account constructed for the purpose of finding the gross profit or loss of a business at a particular period. It is a revenue account and form part of the double entry system.
SALES: This represents the total cash and credit sales during the period .It is credited to trading account.
RETURNS INWARDS: This is the total value of goods returned to the seller by the customers out of goods previously sold to them .This is also known as sales return and must be deducted from the total sales
TURNOVER ;This is the total net sales during a period of time .This means sales less return inwards .
PURCHASES: This represents the total of the cash and credit purchases of goods for resale .It is debited to the trading account.
RETURNS OUTWARDS: This is the total value of goods returned to supplier out of the goods bought .It is also known as purchases returns
CARRIAGE INWARDS: Carriage inwards is the cost of transportation charged on goods purchased .Carriage inwards is the cost incurred in order to bring the goods purchased to the present location
CARRIAGE OUTWARDS; This is the cost of transportation charged on goods sold to customers .It is a selling expense and is debited to profit and loss account
COST OF GOODS SOLD: This is the total cost of goods actually sold by the organization
COST OF GOODS AVAILABLE FOR SALE: This is the addition of opening stock and purchases
STOCK OF GOODS:
1. Opening stock: This represents goods available in a business at the beginning of the trading period
2. Closing stock: This is the stock of goods unsold at the end of the trading period
PROFIT AND LOSS ACCOUNT:
This is the account constructed by a business organization to show the net profit or net loss. Expenses incurred by the organization are debited while gross profit from trading and other gains are credited.
Note: the profit is carried to the capital account
The main purpose is to arrive at the net profit after charging all the expenses from the gross profit .
ADJUSTMENT IN THE PROFIT AND LOSS ACCOUNT
ACCRUALS AND PREPAYMENTS
1. ACCRUALS: Accruals concepts states that revenue and expenditure are recognized as they are earned or incurred and dealt with in the profit and loss account for the period to which they relate and not period they are paid and received.It can be divided into :Accrued income and Accrued expenses.
a.Accrued income: These are income which are due in respect of the current trading period but such income have not been received at the close of final account preparation.
2. PREPAYMENTS: Prepayments represents amount paid in the current period for a subsequent period. Expenses can be paid in advance and income can be received in advance. It can be referred to as prepaid or paid in advance.
a. Expenses in advance: These are expenses like rent , insurance etc.which are paid in advance for subsequent period .Only the expenses for the must be charged to the profit and loss account
Treatment in final accounts
Reduction in expenses debited to profit and loss account
Current assets in the balance sheet
b. Income in advance: These are income received by the organization during the current period which relates to the next trading period e.g. rent received in advance.
Show the journal entries and the appropriate accounts to make the following adjustments that were brought to your attention on 31st march this year after you have completed the trial balance for Sunshine Bakeries .Show how items will appear on the balance sheet this date
a. Motor vehicle ,#11000000 have been revalued at #8600000
b. commission owed to sales representative stands at #400000.The balance on this account is currently #1800000
State five differences between trading account and profit and loss account