Trading Account Chpt 5

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Gavin Gallagher
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1 Trading Account Chpt 5 Objectives 1. Explain the purpose of the Trading Account 2. Explain the accounting concept of Matching and Accrual concepts 3. Explain the meaning of -Total and Net Sales - Total and Net Purchases - Cost of goods sold/cost of sales - Gross Profit/Loss 4. Drawing up the Trading Account Compute the following: - total and net sales - Total and net purchases - Cost of purchases (carriage, freight, transportation, etc) 1

2 Objectives Continued.. Cost of goods available for sale Cost of goods sold/ cost of sales Gross profit/loss Show Transfer from related accounts to the trading account - Sales and purchases - Sales and Purchases return - Stock Prepare a Trading account with the proper format Valuing Closing Stock - Prudence concept - Define net realisable/market value - Draw up the stock Account, identify incorrect stock valuation on profit and/or assets 2

3 Objectives Continued.. Introduction of Ratios Compute profitability ratios - Gross profit margin - gross profit mark-up Identify way to improve profitability 3

4 Purpose of Trading Account According to the Going Concern concept, business is assumed to carry on for an indefinite period of time. Therefore it is important to measure the business performance periodically so as to provide financial reports to decision makers in due course. Such necessity is called accounting period concept The trading account is a financial statement prepared at the end of the accounting period to determine the gross profit or loss of the business 4

5 Accounting concepts Accrual concept - Revenue is recognised when it is earned and expenses is recognised when they are incurred. Matching Concept - Revenue earned during an accounting period has to be matched with the expense associated with earning that revenue Eg. Accrued revenue and expenses are included in the matching process while revenue received but not yet earned and expenses paid but not yet incurred should be left out of the matching process 5

6 Net sales= Total Sales Sales Return / Return Inwards Net Purchases= Total Purchase Purchase returns/ Return Outwards Cost of Goods sold (COGS) / Cost of Sales COGS= Opening stock + Total cost of goods purchased Closing Stock Opening Stock= Stock held at the beginning of Period Closing Stock= Stock held at the end of the period and are considered as assets Gross Profit/Loss Gross profit(loss) = Sales Cost of goods sold Positive= Profit, Negative = Loss 6

7 Mary decided to set up a drinks store on the school s sports day. Mary s uncle is a distributor of canned drinks to the supermarkets. Mary arranged with her uncle to supply her 200 canned drinks of Coke at a special price of 60 cents per can. On sports day, Mary had a roaring business. She sold the drinks at $1.00 per can. The canned drinks were all sold out within two hours. What is Mary s total sales? Total sales = 200 x $1 = $200 What is the total cost of the canned drinks? Cost of sales = 200 x $0.60 = $120 How much money did Mary make? Gross Profit = $200 - $120 = $80

8 Cost of purchases= Cost of item +carriage inwards+ Freight inwards+ insurance on purchases + other related cost Net Purchases= Cost of purchase Return Outwards Cost of goods available for sale= Opening + total cost of goods purchased Valuation of closing stock - Remember the prudence concept, the closing stock is value at cost price or net realisable value whichever is lower 8

9 The Chinese New Year is approaching and Mr J Tan decided to import 3,000 crates of oranges from his usual supplier in Fuchow, China. Mr Tan agreed to purchase the oranges at $10 per crate. He has to bear the freight charges of $500, 5% import duty and $200 carriage inwards. What is the cost of the oranges? Cost of oranges = 3,000 x $10 = $30,000 What are the additional costs on purchases that Mr Tan has to pay? Freight $500 + Import duty $1,500 + Carriage inwards $200 Total additional costs on purchases = $2,200 How much must Mr Tan pay altogether for the oranges to be delivered to him? Total cost of purchases = $30,000 + $2,200 = $32,200

10 5.3 Closing of Accounts to Trading Account General Journal Date Particulars Dr Cr 20X2 Dec 31 Sales Trading Account (Transfer of Sales to Trading) $ $ Trading Account Purchases (Transfer of Purchases to Trading)

11 Recording transactions in the ledger The following transactions took place during the month of May 2012: Cash purchases $1,000 Credit purchases $3,000 Cash sales $1,600 Credit sales $2,000 Required: 1. Record the transactions in the Sales and Purchases Accounts in the ledger 2. Transfer the balances to the Trading Account at the end of the month Dr Purchases Account Cr Cash 1,000 S. Creditors 3,000 Dr Sales Account Cr Cash 1,600 S. Debtors 2,000

12 Preparing Trading Account Dr Purchases Account Cr Cash 1,000 Trading Account 4,000 S. Creditors 3,000 4,000 4,000 Close the accounts and transfer balances to Trading Account to calculate Gross Profit. To determine the Gross Profit for month of May 2007, we must first value the closing stock. Dr Sales Account Cr $ Trading Account 3,600 3,600 $ Cash 1,600 S. Debtors 2,000 3,600 Dr Trading Account for the month ended 31 May 2007 Cr $ $ Purchases 4,000 Sales 3,600 Less Closing Stock 1,500 Dr Stock Account Cr $ Trading Account 1,500 Cost of goods sold 2,500 Gross Profit 1,100 3,600 3,600

13 Name of Firm Trading Account for the year ended date. $ $ $ $ Opening Stock Sales Purchases Less: Sales Returns Less: Purchases Returns Net Purchases Add: Carriage Inwards Wages on purhases Custom Duty Insurance on purchases Cost of goods available for sale Less: closing stock Cost of goods sold Gross Profit 13

14 Introductions of Ratios Gross profit Mark-up - Gross Profit/Cost of goods sold X 100% Eg. Gross profit= 2k COGS= 3.6k Applying formula, (2k/3.6k X 100%)= 55.5% Gross Profit Margin - Gross Profit/ Net Sales X 100% 14

15 The End Questions and answers? 15

Sole Trader Final Accounts

All questions copyright of Cambridge International Examinations 1 Sole Trader Final Accounts All questions copyright of Cambridge International Examinations 2 2 1 Amah Retto's ledger accounts for the year