BOOK KEEPING O LEVEL(FORM ONE) NOTES – FINAL ACCOUNT

Final Account

Trading Account & Profit and Loss Account

The primary purpose of a business is to earn profit. A trader needs to know how well the business has performed during a trading period. It is uncommon for a business to end up with a loss. The trader determines the profitability of the business by preparing financial accounts, including the Profit and Loss Account.

Trading Account

The purpose of this account is to determine the gross profit or loss. Gross profit is the excess of sales over the cost of goods sold, including expenses directly attributable to putting goods in a saleable condition.

The cost of goods is represented by the value of goods purchased during the period, including carriage costs incurred to bring the goods to the trading premises.

Gross profit (GP) = Sales – Purchases.

Gross loss (GL) = Purchases – Sales.

Stock: Unsold goods, which are of two kinds: opening stock and closing stock.

Opening stock: Unsold goods available at the beginning of the trading period, e.g., goods available before starting business.

Closing stock: Unsold goods available at the end of the trading period, i.e., goods remaining unsold at the end of the trading period.

Trading Period

The trading period is the time frame a proprietor uses to evaluate the business to check if a profit or loss was earned. Usually, this period is one year.

Trading Account Format

DR TRADING ACCOUNT CR

Example 1:

Prepare the Trading Account for the year ended 2008.

• Purchases: 18,000
• Sales: 27,000
• Stock at 1.1.2008: 3,000
• Stock at 31.12.2008: 1,500

Solution

DR TRADING ACCOUNT FOR THE YEAR ENDED 31.12.2008 CR

Exercise 1

Prepare the Trading Account for the year ended 2008.

• Purchases: 12,000
• Sales: 30,000
• Stock at 1.1.2008: 5,000
• Stock at 31.12.2008: 2,000

Exercise 2

Prepare the Trading Account for the year ended 2008.

• Purchases: 70,000
• Sales: 120,000
• Stock at 1.1.2008: 30,000
• Stock at 31.12.2008: 25,000

Exercise 3

Prepare the Trading Account for the following:

• Purchases: 170,000
• Sales: 180,000
• Stock at 1.7.2006: 60,000
• Stock at 30.6.2007: 40,000

Solution QN1

DR TRADING ACCOUNT FOR THE YEAR ENDED 31.12.2008 CR

Profit and Loss Account

This account is used to determine net profit or net loss.

Net profit means the actual profit obtained in the business, which is credited to the Profit and Loss Account.

DR PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 2008 CR

Carriage Inwards

Carriage inwards refers to the transport cost of goods purchased. This occurs when a buyer pays the cost of transporting goods to the business premises.

Carriage Outwards

Carriage outwards refers to the transport charge of goods paid by the seller to transport goods to the customer. This occurs when the seller pays the cost of transporting goods to the buyer.

Returns

Return Inwards

This occurs when the seller receives goods returned from the customer.

Return Outwards

This occurs when the buyer returns goods to the supplier.

Example

Prepare the Profit and Loss Account from the example given for the year ended 2004.

• Gross profit: 45,000
• Stationery: 9,000
• Water bill: 7,500
• Electricity: 5,000
• Wages: 2,800
• General expenses: 5,500

Solution

DR PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 3 DEC 2004 CR

Exercise 1

Prepare the Profit and Loss Account from the example given for the year ended 2007.

• Gross profit: 120,000
• Stationery: 22,000
• Water bill: 15,000
• Electricity: 58,000
• Wages: 7,500
• General expenses: 42,300

Exercise 2

Prepare the Profit and Loss Account from the example given for the year ended 2002.

• Gross profit: 150,000
• Stationery: 33,000
• Water bills: 10,000
• Electricity: 28,000
• Wages: 15,000
• General expenses: 3,000

Exercise 3

Prepare Trading, Profit and Loss Account for the year ended 30 June 2003.

• Purchases: 140,000
• Sales: 220,000
• Stock at 1 July 2003: 25,000
• Stock at 30 June 2003: 5,000
• Traveling expenses: 1,050
• Electricity: 1,200
• Wages: 3,000
• General expenses: 5,000
• Rent: 2,500

Exercise 4

Given the following information, prepare Trading, Profit and Loss Account for the year ended 2006.

• Stock on July 2005: 35,000
• Stock on June: 20,000
• Purchases during the year: 97,000
• Sales during the year: 180,000
• Carriage inwards: 7,000
• Carriage outwards: 5,000
• Return inward: 3,000
• Return outward: 1,200
• Water bill: 2,000
• Stationery: 2,500
• Wages: 2,500
• Insurance: 2,000
• Stationery: 1,000

Exercise 5

Prepare Trading, Profit and Loss Account for the year ended 2006.

• Stock at July 2005: 15,000
• Stock at June 2006: 32,000
• Purchases during the year: 85,000
• Sales during the year: 225,000
• Carriage inward: 5,200
• Carriage outwards: 2,000
• Return inward: 5,000
• Return outwards: 15,000
• Stationery: 7,000
• Insurance: 3,500
• Electricity: 2,500
• Rent: 4,000
• Fumigation: 3,500
• Water bills: 2,500

Exercise 6

June 1: Balance of cash in hand 500
Balance at bank 10,000

2: Received cash from Mbigili 250
3: Paid Chacha by cheque 1,200
4: Received cheque from Minza and banked it 300
6: Received cash from Tatiro 120
10: Paid rent by cheque 500
15: Paid wages by cash 200
18: Paid cash to bank 100
20: Drew cash from bank for office use 200

Enter the above transactions in the cash book and carry down the balance as at 25th June.

Solutions

Solution QN1

DR PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 2007 CR

Solution QN2

DR PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 2007 CR

Solution QN4

DR TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.12.2008 CR