TRADING, PROFIT AND LOSS ACCOUNT
The main objective of any business enterprise is to make profit. One must be able to determine whether a business is making a profit or loss. There are two kinds of profit. The first kind of profit is the GROSS PROFIT. The gross profit is not the actual profit of a business because the business must have incurred some expenses in the course of running the business. The second kind of profit is the NET PROFIT. This is obtained by deducting all expenses from the gross profit.
The final account refers to those account which show the owner of the business at the end of each accounting period how much he/she has gained or lost. The final account is divided into 3, namely;
Profit and Loss Account
TRADING ACCOUNT: The purpose of trading account is to show the gross profit or loss of the business.
PROFIT AND LOSS ACCOUNT: The purpose of the profit and loss account is to show the net profit or loss after all expenses have been considered. Overhead expenses like salaries, rates, rent, insurance etc.
OPENING STOCK: This is the worth of goods at the beginning of a trading period
CLOSING STOCK: This is the amount of goods a trader has at the end of the trading period
PURCHASES: This is the total of all goods bought during the trading period
RETURN OUTWARD/PURCHASES RETURNS: This is the total of goods returned to suppliers during the trading period as a result of defect
SALES: This is made up of all cash and credit goods sold during the trading period
RETURN INWARDS/SALES RETURN: This is the total of goods returned by the customers for one reason or the other.
CARRIAGE INWARDS: This is the cost of goods incurred from the transportation of goods.
GOODS AVAILABLE FOR SALES: This is calculated by adding opening stock to the purchases made during the trading period
COST OF GOODS SOLD: This is also called COST OF SALES. It is the total monetary value of goods that are sold. It is arrived at by deducting closing stock of goods from cost of goods available for sales.
FORMAT OF TRADING ACCOUNT
OLOGUNDUDU TRADING ACCOUNT FOR THE YEAR ENDED 31ST OF DECEMBER 2014
Opening Stock XX Sales XXX
Prepare the trading account from the extract obtained from the trial balance of Ogunnaike & Co.
Stock as at 1st Jan 6,550
Return inwards 1,000
Return Outwards 500
Stock as at 31st Dec. 1999 3000
Ogunnaike & Co. Trading Account for the year ended 31st Dec. 1999
Opening Stock 6,550 Sales 30,000
NOTE: To get your gross profit, you deduct your cost of goods sold from the Net Sales i.e N29,000- N23,550 = N5,450
Prepare the trading account of Ayegbajeje for the year ended 31st Dec. 1997 from the details below
Opening Stock 1900
Carriage Inwards 100
Closing Stock 1400
Return Outwards 250
Ayegbajeje Trading Account for the year ended 31st Dec. 1997
Opening Stock 1900 Sales 19,000
PROFIT AND LOSS ACCOUNT
This is an aspect of income statement used to determine the net profit or loss or the period. It is presented immediately after the trading account. The total running expenses is deducted from the gross profit to arrive at the net profit or loss or the year. If the gross profit is greater than the total expenses, it is called NET PROFIT but if the total expenses are greater than the gross profit, it is called NET LOSS.
The profit and loss account is prepared to determine the net profit or loss for the period, to determine the total expenses for the year, to determine the total income for the year.
Dr Profit and loss account for 31/12/1997 Cr
Discount Allowed XX Gross profit b/d XXX
Rent and Rates XX Discount Received XX
Wages and Salaries XX Decrease in provision for bad debt XX
Insurance XX Commission Received XX
Electricity Bill XX XXX
Carriage Outward XX
Bank Charges XX
Motor Van Expenses XX
Net Profit XXX
From example 1, using Ogunnaike trading account, the following expenses were further incurred from running the business.
Discount Received 150
Discount Allowed 100
Prepare: Ogunnaike profit and loss account
Dr. Ogunnaike Profit & loss account for the year ended 31st Dec. 1999 Cr.
Electricity 500 Gross profit b/d 5,450
Rent 750 Discount Received 150
Discount Allowed 100 Total Income 5,600
Total Expenses 1450
Net Profit 4,150
NOTE: The gross profit b/d is from the trading account. The net profit is arrived at by deducting the total expenses from the total income i.e N5,600-N1,450 =N4,150
Below is the format that combines the trading, profit and loss account together:
Dr. Olowookere Trading, Profit and Loss Account for the year ended 31st Dec. 2014 Cr
Opening Stock XX Sales XXX
EXPENSES Gross profit b/d XXX
Cleaning of premises XX +Discount Received XX
Rent XX +Commission Received XX
Petrol XX XXX
Commission Allowed XX
Discount Allowed XX
Motor Van XX
Net Profit XXX
See: Basic Concepts for Business Studies for Upper levels 7-9 (JSS 1-3) by Adekunle K.O for more insight.
Prepare a trading, profit and loss account for Ajanlekoko Nig. Ltd. Using the details below:
Stock as at 1st Jan. 2002 18,000
Return Inwards 450
Commission Received 240
Commission Allowed 300
Return Outwards 3,000
Electricity bills 450
Discount Allowed 1,200
Discount Received 2,250
Closing Stock as at 31/12/2002 7,500.