TRADING AND PROFIT AND LOSS ACCOUNT

Final Accounts of sole Traders: show the calculation of profit earned or the loss incurred during the period and the financial position of the business at the end of the period.  Final accounts usually prepared from a trial balance.

1.  Trading Account:  deals with trading (buying and selling). The account shows the calculation of profit earned on goods sold.

Gross Profit  =  Sales – Cost of Goods Sold Cost of goods sold  =  opening stock + purchases + carriage inwards - closing stock

Drawings of goods for personal use is deducted from purchases Carriage inwards is added to the purchases

2.  Profit and Loss Account:  shows the calculation of final or true profit.  This is the profit after all running expenses and any other items of income.

Net Profit  =  Gross profit + other incomes - Expenses

                                                   Specimen of Profit and Loss Account

		Amount
Sales – Sales Returns Less: Cost of goods sold:                Opening stock of goods        Add: Purchases        Add: Carriage inwards/Carriage on purchases        Less: Closing stock                            Gross Profit        Add:  Rent received        Add:  Discount received        Add:  Commission received       Add :  Decrease in provision for bad debts       Less:  Expenses:                  Rent paid + Accrued/unpaid                  Salary paid + Accrued/ unpaid                  Bad debt                  General expenses                  Office expenses                  Insurance – prepaid/ paid in advance                  Increase in provision for bad debts                  Depreciation of fixed assets                  Bank charges                  Loan interest paid                  Repairs to building                  Delivery van expenses Net profit for the year transferred to capital a/c in the balance sheet	X X X X X X X X X X X X X X X x	X (-) Xx                    Xx Xx     Xx Xx xxx (-) xxx xxx

3.  Balance Sheet:  is a statement of the financial position of the business on a certain date.  It shows what the business          owns, and amounts owing to the business- the assets and what the business owes, the liabilities and the capital.

                                                       Specimen of Balance Sheet

		Amount
FIXED ASSETS:  Freehold Premises / Land and Buildings  Equipment less depreciation  Furniture – (depreciation of current year+ previous years)  Motor van / Motor vehicle – depreciation  Goodwill CURRENT ASSETS:   Cash in hand/ cash at bank   Debtors less provision for bad debts   Closing stock   Prepaid rent/insurance etc. LESS: CURRENT LIABILITIES   Creditors for goods                                                                                    xx   Creditors for expenses such as accrued rent, delivery van expenses           x   Bank overdraft                                                                                             x                  WORKING CAPITAL FINANCED BY:     Capital Add:  Net profit from P&L account Less: (Drawings of cash + goods) LONG TERM LIABILITIES         Bank Loan	X X X X xx Xx X X X	X X X X X   (+) Xx Xxx Xx (+) x xxx

                Adjustment of items in Final accounts

Items	Trading, Profit and Loss a/c	Balance Sheet
1.  unpaid expenses 2.  Prepaid expenses 3.  Drawings of goods 4.  Bank charges 5.  Provision for bad debts 6.  Provision for depreciation on fixed assets 7.  Accrued income 8.  Purchases, purchase returns, sales,      sales  returns 9.  Discount/commission/rent received 10. Discount allowed, commission paid, rent,       bad debt, wages, salaries, bank charges,       general expenses, office expenses,       repairs to building 11. Machinery, equipment, furniture,       premises, land and buildings 12. Cash in hand, debtors, cash at bank 13. Creditors, bank overdraft      Club Accounts 1.  subscription received in advance at start 2.  subscription received in advance at end 3.  subscription in arrear in the beginning 4.  subscription in arrear at the end	+ to the expenses - from the expenses - from purchases in trading a/c Expenses in profit and loss a/c Expenses Expenses Add to the g/p Trading a/c Added to gross profit Expenses in p&l a/c ……….. ………. ……….. Added to subscriptions in I&E a/c Deducted from subscription Deducted from subscriptions Added to subscriptions	Current liability Current assets Added to drawings Deducted from cash at bank Deducted from debtors Deducted from fixed assets Current asset …………….. ……………… …………….. Fixed asset Current asset Current liability Current liability in the opening b/s Current liability in the closing b/s Current asset in the opening b/s Current asset in the closing b/s

List of some common Expenses, Income, Assets and Liabilities

EXPENSES. Carriage inwards,  carriage outwards Purchases, wages and salaries, Rent and insurance, electricity charges, advertising charges, bank charges, Discount allowed, bad debts, Depreciation of fixed assets, Provision for bad debts, office expenses, Provision for discount on debtors General expenses, motor expenses, Motor vehicle expenses Repairs to building or machinery Interest on loan	FIXED ASSETS Plant and Machinery Land and Buildings Premises Equipment Furniture and Fittings Fixtures and Fittings Lawn Mover Computers Motor van/Motor vehicle Motor car	CURRENT LIABILITY Creditors for goods Creditors for expenses:    Eg. Rent owing,           Salary accrued           Wages unpaid           General expenses unpaid           Commission outstanding Bank overdraft [ all unpaid amounts]
INCOMES: Sales, discount received, Commission received Interest received,  rent received, profit on sale of old fixed assets	CURRENT ASSETS Cash in hand Cash at bank Debtors Closing stock Prepaid rent, insurance, rates	LONG TERM LIABILITIES Loan from bank Mortgage loans Debenture

The trading and profit & loss account and balance sheet prepared at the end of a year is known as Final accounts. While preparing the final accounts, there may be some items so far not adjusted. These items are to be adjusted in the final accounts for calculating the correct profit or loss of the business. The usual adjustments in the final accounts are:

a. Expenses owing:  These are the expenses incurred during the year but not paid in cash. This amount will be paid in the near future (next year). The owing expense is to be added with the amount of same expense already paid given in the trial balance and it should be shown in the balance sheet as a current liability.

The double entry for recording the expenses owing is

                                Debit       Expenses account

                                Credit     Expenses owing account

This expense is also known as outstanding expenses, expenses payable or expense payable.

b. Prepaid expense. : This is the expense paid during the year for the benefit of the next year. The portion of the expense which is prepaid is to be deducted from the total expenses already paid during the year (given in the trial balance) and shown as current asset in the balance sheet.

The double entry for recording the prepaid expense is

                                Debit       Prepaid expense account and

                                Credit     Expense account                               

This expense is also known as expense paid in advance or unexpired expense

c. Accrued income: The income earned during the year but not received in cash is known as accrued income. The amount of accrued income is to be considered as current year’s income and added with the concerned income received during the year (given in the trial balance) and shown as a current asset in the balance sheet.

The double entry for recording the accrued income is:

                                Debit      Accrued income account and

                                Credit     Income account

The accrued income is also known as outstanding income.

d. Income received in advance: This is the income received during the year for the services to be rendered during the next year.  Since this income is not related to the current year, it should be deducted from the concerned income (given in the trial balance) and shown as a current liability in the balance sheet.

The double entry for recording the income received in advance is:

                                Debit      Income account and

                                Credit     Income received in advance

This is also known as unexpired income.

 e. Depreciation: The part of the cost of a fixed asset that is consumed by a business during the period of its use is known as depreciation. It is considered as an expense in the business therefore shown as an expense in the profit & loss account and deducted from the cost price of the concerned fixed asset in the balance sheet.

The double entry for recording depreciation is:

                                Debit      Profit & loss account and

                                Credit     Depreciation account                   

f. Bad debt: The part of the amount of debtors which cannot be recovered is known as bad debt. It is an expense to be shown in the profit & loss account. If the bad debt appears in the trial balance, it is known as bad debt written off and shown in the profit & loss account only. If bad debt information appears among the adjustment points below the trial balance, then it should be shown as an expense in the profit & loss account and shown as a deduction from the debtors in the balance sheet under the heading “current assets”.

The double entry for recording the bad debt is:

                                Debit      Bad debt account and

                                Credit     Debtors account

g. Goods drawings by the owner for his personal use:-

The amount of goods withdrawn by the owner for his personal use is to be considered as drawing.

The double entry for recording the goods drawings is:

                                Debit      Drawings account and

                                Credit     Purchase account or sales account

The amount of goods drawings should be deducted form purchases and capital in the balance sheet.