The Trading and Profit and Loss Account and

The Trading and Profit and Loss Account and the Balance Sheet

What’s Inside ? Learning Objectives hink Corner Net purchases and net sales Trading and profit and loss account Capital account 1 2 Departmental accounts uiz Corner Trading account Trading and profit and loss account

Learning Objectives After reading this chapter, you will be able to: Describe the flow of preparing final accounts. Prepare the trading account and calculate the cost of goods sold and gross profit or gross loss. Prepare the trading account with appropriate adjustments for sales and for items affecting the cost of goods sold. Prepare the profit and loss account and calculate the net profit or net loss. Prepare the trading and profit and loss account.

Learning Objectives After reading this chapter, you will be able to: Balance off the capital account at the year end. Draw up the balance sheet and put relevant account balances under appropriate headings. Prepare the final accounts in vertical format. Prepare departmental accounts for companies having several departments. Prepare a profit and loss account for a business in the service sector that is not trading in goods.

Flow of preparing final accounts When business transactions occur, we need to enter these transactions into accounts _______. At the end of each month, the accounts need to be closed to have an overview of the business. _____ At the end of the financial year, the accounts need to final accounts be closed to prepare the ______. A trial _____ balance needs to be drawn up before the final accounts are prepared. A _______ trading account and a __________ profit and loss account are prepared to calculate the profit or loss made by the firm. The ______ capital account needs to be closed by transferring the net profit / loss and the drawings against it. A balance ______ sheet can then be drawn up. Learning Objectives

Trading account and cost of goods sold A trading account is an account in which _____ gross profit or ____ gross loss is calculated. Gross profit is the excess of ____ sales over the _______ cost of _____ goods sold for the period. Gross loss is the excess of ________ cost of goods sold over ____ for the period. sales Gross profit = Sales – Cost of goods sold Gross loss = Cost of goods sold – Sales Trading account is a double entry account where the leftdebit side and the right-hand side is the _____ credit side _____.

Trading account and cost of goods sold At the end of a financial year, businesses usually closing stock An have unsold goods; we call this _____. annual stocktaking _____ is usually held at the end of a financial year to ascertain the value of closing stock. Closing stock is carried forward to the next opening stock financial year; we call this the ______. A ____ stock account is opened to record closing stock and opening stock. Cost of = Opening stock + Purchases – Closing stock goods sold Total stock available Stock remained unsold

Trading account and cost of goods sold Example 1: Flora Company’s financial year ended on 31 December 20 X 8. Here is the information extracted from her books: $ Sales Purchases Opening stock Closing stock 100, 000 60, 000 8, 000 10, 000 The steps for preparing the trading account are as follows:

Trading account and cost of goods sold tep Close the sales account and transfer the credit balance to the trading account. Sales 20 X 8 Dec 31 Trading $ $ 20 X 8 100, 000 Dec 31 Total for the year 100, 000 Trading $ Sales $ 100, 000

Trading account and cost of goods sold tep Close the purchases account and transfer the debit balance to the trading account. Purchases 20 X 8 $ 20 X 8 Dec 31 Total for the year 60, 000 Dec 31 Trading $ 60, 000 Trading Purchases $ 60, 000 Sales $ 100, 000

Trading account and cost of goods sold tep Calculate the cost of goods sold by transferring the opening and closing stock from the stock account to the trading account. Stock 20 X 8 Jan 1 Balance b/f Dec 31 Trading $ 20 X 8 8, 000 Dec 31 Trading “ 31 Balance c/f 10, 000 18, 000 $ 8, 000 10, 000 18, 000 Trading Purchases Opening stock $ 60, 000 Sales 8, 000 Closing stock $ 100, 000 10, 000

Trading account and cost of goods sold tep Balance off the trading account and transfer the balance to the profit and loss account. Trading Purchases Opening stock Gross profit Transferred to the profit and loss account $ 60, 000 Sales 8, 000 Closing stock 42, 000 110, 000 $ 100, 000 110, 000

Trading account and cost of goods sold Example 2: On 31 December 20 X 7, Panda Company had the following account balances: $ Sales Purchases Opening stock Closing stock 70, 000 80, 000 4, 000 5, 000 The accounts would be closed as follows:

Trading account and cost of goods sold Sales 20 X 7 Dec 31 Trading $ $ 20 X 7 70, 000 Dec 31 Total for the year 70, 000 Purchases 20 X 7 $ 20 X 7 Dec 31 Total for the year 80, 000 Dec 31 Trading $ 80, 000 Trading Purchases $ 80, 000 Sales $ 70, 000

Trading account and cost of goods sold Stock 20 X 7 Jan 1 Balance b/f Dec 31 Trading $ 20 X 7 4, 000 Dec 31 Trading 5, 000 “ 31 Balance c/f 9, 000 $ 4, 000 5, 000 9, 000 Trading Purchases Opening stock $ 80, 000 Sales 4, 000 Closing stock Gross loss 84, 000 Transferred to the profit and loss account $ 70, 000 5, 000 9, 000 84, 000 Learning Objectives

hink Corner You have learned that goods may be returned to suppliers or returned from customers. How do these two items affect purchases and sales? nswer sales, Goods returned from customers reduce therefore, the actual sales would be: Net sales = Sales – Returns inwards Goods returned to suppliers reduce purchases, therefore the actual purchases would be: Net purchases = Purchases – Returns outwards Therefore, both returns inwards and returns outwards should be entered in the trading account.

Trading account and adjustments At the end of the financial year, returns accounts are closed and their balances are transferred to the _______. trading account Example 3: Assume that the total returns inwards and total returns outwards for Flora Company for the year were $3, 000 and $5, 000, respectively. Returns Inwards 20 X 8 Dec 31 Total for the year $ 20 X 8 3, 000 Dec 31 Trading $ 3, 000 Trading Purchases Opening stock Returns inwards $ 60, 000 Sales 8, 000 Closing stock 3, 000 $ 100, 000 10, 000

Trading account and adjustments Returns Outwards 20 X 8 Dec 31 Trading $ 20 X 8 5, 000 Dec 31 Total for the year $ 5, 000 Trading Purchases Opening stock Returns inwards Gross profit $ 60, 000 Sales 8, 000 Closing stock 3, 000 Returns outwards 44, 000 115, 000 $ 100, 000 10, 000 5, 000 115, 000 Since returns outwards reduce the amount of purchases, the cost of goods sold = Opening stock + Purchases – Returns outwards Net purchases – Closing stock

Trading account and adjustments Items affecting the cost of goods sold: To calculate the actual cost of goods sold, besides deducting returns outwards from purchases, we should expenses that increase the cost of goods. include all _______ 1. Carriage inwards: This is the cost of delivering goods purchased from suppliers. This cost of delivery _______ increases the cost of buying goods; thus, it should be included in the cost of goods sold by transferring the balance in the account carriage inwards account to the trading ______.

Trading account and adjustments Items affecting the cost of goods sold: 2. Cost of making goods ready for resale: Some goods may need to be processed before they are sold to customers. This cost of making goods ready for increases the cost of goods sold and should resale ____ account be shown in the trading ______. Opening stock + Net purchases + Carriage inwards + Cost of making goods ready for resale - Closing stock Cost of goods sold

Trading account and adjustments Items affecting the cost of goods sold: Example 4: Assume that Flora Company paid $5, 000 for carriage inwards and $4, 000 for goods packaging during the year. Carriage Inwards 20 X 8 Dec 31 Total for the year $ 20 X 8 5, 000 Dec 31 Trading $ 5, 000 Trading Purchases Opening stock Returns inwards Carriage inwards $ 60, 000 Sales 8, 000 Closing stock 3, 000 Returns outwards 5, 000 $ 100, 000 10, 000 5, 000

Trading account and adjustments Packing Goods 20 X 8 Dec 31 Total for the year $ 20 X 8 4, 000 Dec 31 Trading $ 4, 000 Trading Purchases Opening stock Returns inwards Carriage inwards Goods packaging Gross profit $ 60, 000 Sales 8, 000 Closing stock 3, 000 Returns outwards 5, 000 4, 000 35, 000 115, 000 Learning Objectives $ 100, 000 10, 000 5, 000 115, 000 uiz Corner

uiz Corner Using the following information, prepare a trading account for the year ended 31 December 20 X 8. Sales Purchases Stock as at 1 January 20 X 8 Stock as at 31 December 20 X 8 Returns inwards Returns outwards Carriage inwards Goods packaging $ 55, 000 41, 250 11, 500 10, 750 1, 500 1, 200 2, 100 2, 500

Profit and loss account net profit A profit and loss account is an account in which ____ or ______ net loss is calculated. All day-to-day running expenses and revenues are entered in this account. Net profit is the excess of __________ gross profit plus other _______ for the period. revenues over expenses Net loss is the excess of ____ expenses over the total of gross profit and ______ other revenues for the period. _____ Net profit = Gross profit + Other revenues – Expenses Net loss = Expenses – Gross profit – Other revenues Profit and loss account is also a _________ double entry account with a debit side and a credit side.

Profit and loss account Example 5: Flora Company received a commission of $2, 000 and paid salaries amounting to $10, 000, electricity amounting to $5, 000 and $10, 000 in rent during the year. Steps for preparing a profit and loss account are: tep Close the other revenues accounts and transfer the credit balances to the profit and loss account. Commission Receivable 20 X 8 Dec 31 Profit and loss $ 20 X 8 2, 000 Dec 31 Total for the year $ 2, 000 Profit and Loss $ Gross profit b/f Commission receivable $ 35, 000 2, 000

Profit and loss account tep Close the expenses accounts and transfer the debit balances to the profit and loss account. Salaries 20 X 8 $ 20 X 8 Dec 31 Total for the year 10, 000 Dec 31 Profit and loss $ 10, 000 Electricity 20 X 8 Dec 31 Total for the year $ 20 X 8 5, 000 Dec 31 Profit and loss $ 5, 000 Profit and Loss Salaries Electricity $ 10, 000 Gross profit b/f 5, 000 Commission receivable $ 35, 000 2, 000

Profit and loss account Rent 20 X 8 $ 20 X 8 Dec 31 Total for the year 10, 000 Dec 31 Profit and loss $ 10, 000 Profit and Loss Salaries Electricity Rent tep $ 10, 000 Gross profit b/f 5, 000 Commission receivable 10, 000 $ 35, 000 2, 000 Balance off the profit and loss account. A credit balance represents a net profit and a debit balance represents a net loss. Then, transfer the debit or credit balance to the capital account.

Profit and loss account Profit and Loss Salaries Electricity Rent Net profit 12, 000 $ 10, 000 Gross profit b/f 5, 000 Commission receivable 10, 000 $ 35, 000 2, 000 37, 000 Transferred to the capital account Note: After the profit and loss account is prepared, the other revenues and expenses accounts are closed and their balances will not be carried forward to the next year.

Profit and loss account Example 6: Assume that the electricity paid by Flora Company was $20, 000, the profit and loss account would appear as: Electricity 20 X 8 $ 20 X 8 Dec 31 Total for the year 20, 000 Dec 31 Profit and loss $ 20, 000 Profit and Loss Salaries Electricity Rent $ 10, 000 Gross profit b/f 20, 000 Commission receivable 10, 000 Net loss 40, 000 Transferred to the capital account $ 35, 000 2, 000 3, 000 40, 000 Learning Objectives

Trading and profit and loss account If the final accounts are to be presented to outsiders like banks, investors and the Inland Revenue Department, we need to combine the trading account and the profit and loss account trading and profit and loss account into one, called the ______________. The format of the trading and profit and loss account is similar to that of the trading account and the profit and loss account; only a few changes are made to make the informative and easier to _____. understand account more _____ When the two accounts are combined, it is described as a name of the company and the ________. financial statement The _________ period concerned are shown. Example 7: Using the information in Examples 4 and 5, the trading and profit and loss account for Flora Company would appear as:

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20 X 8 $ $ $ Opening stock 8, 000 Sales 100, 000 Purchases 60, 000 Less Returns inwards 3, 000 Less Returns outwards 5, 000 97, 000 55, 000 Name of Add Carriage inwards 5, 000 the company Goods packaging 4, 000 64, 000 72, 000 Less Closing stock 10, 000 Cost of goods sold 62, 000 Gross profit c/d 35, 000 97, 000 Salaries 10, 000 Gross profit b/d 35, 000 Electricity 5, 000 Commission receivable 2, 000 Rent 10, 000 Net profit 12, 000 37, 000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20 X 8 $ $ $ Opening stock 8, 000 Sales 100, 000 Purchases 60, 000 Less Returns inwards 3, 000 Less Returns outwards 5, 000 97, 000 55, 000 Add Carriage inwards 5, 000 Period concerned Goods packaging 4, 000 64, 000 72, 000 Less Closing stock 10, 000 Cost of goods sold 62, 000 Gross profit c/d 35, 000 97, 000 Salaries 10, 000 Gross profit b/d 35, 000 Electricity 5, 000 Commission receivable 2, 000 Rent 10, 000 Net profit 12, 000 37, 000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20 X 8 $ $ $ Opening stock 8, 000 Sales 100, 000 Purchases 60, 000 Less Returns inwards 3, 000 Less Returns outwards 5, 000 97, 000 55, 000 Add Carriage inwards 5, 000 Net sales Goods packaging 4, 000 64, 000 72, 000 Less Closing stock 10, 000 Cost of goods sold 62, 000 Gross profit c/d 35, 000 97, 000 Salaries 10, 000 Gross profit b/d 35, 000 Electricity 5, 000 Commission receivable 2, 000 Rent 10, 000 Net profit 12, 000 37, 000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20 X 8 $ $ $ Opening stock 8, 000 Sales 100, 000 Purchases 60, 000 Less Returns inwards 3, 000 Less Returns outwards 5, 000 97, 000 Net purchases 55, 000 Add Carriage inwards 5, 000 Goods packaging 4, 000 64, 000 72, 000 Less Closing stock 10, 000 Cost of goods sold 62, 000 Gross profit c/d 35, 000 97, 000 Salaries 10, 000 Gross profit b/d 35, 000 Electricity 5, 000 Commission receivable 2, 000 Rent 10, 000 Net profit 12, 000 37, 000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20 X 8 $ $ $ Opening stock 8, 000 Sales 100, 000 Purchases 60, 000 Less Returns inwards 3, 000 Less Returns outwards 5, 000 97, 000 55, 000 Add Carriage inwards 5, 000 Total cost of goods Goods packaging 4, 000 64, 000 purchased for the year 72, 000 Less Closing stock 10, 000 Cost of goods sold 62, 000 Gross profit c/d 35, 000 97, 000 Salaries 10, 000 Gross profit b/d 35, 000 Electricity 5, 000 Commission receivable 2, 000 Rent 10, 000 Net profit 12, 000 37, 000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20 X 8 $ $ $ Opening stock 8, 000 Sales 100, 000 Purchases 60, 000 Less Returns inwards 3, 000 Less Returns outwards 5, 000 97, 000 55, 000 Add Carriage inwards 5, 000 Goods packaging 4, 000 64, 000 Total goods available 72, 000 for sale for the year Less Closing stock 10, 000 Cost of goods sold 62, 000 Gross profit c/d 35, 000 97, 000 Salaries 10, 000 Gross profit b/d 35, 000 Electricity 5, 000 Commission receivable 2, 000 Rent 10, 000 Net profit 12, 000 37, 000

hink Corner What are the differences between the format of the trading and profit and loss account and that of the trading account and the profit and loss account? nswer 1. Returns inwards are put on the credit side and are deducted from sales to get the net sales figure. 2. Returns outwards are put on the debit side as a contra item and are deducted from purchases to get the net purchases figure. 3. Closing stock is deducted from the figure of total cost of goods purchased to get the figure of the cost of goods sold.

uiz Corner Below are the balances extracted from the trial balance of Gowell Company as at 31 March 20 X 7. Prepare a trading and profit and loss account for Gowell Company for the year ended 31 March 20 X 7. Stock as at 1 April 20 X 6 Purchases Sales Returns inwards Returns outwards $ 16, 000 66, 700 93, 800 2, 500 2, 000

uiz Corner Carriage inwards Packaging goods for resale Stock as at 31 March 20 X 7 Rent received Wages and salaries Insurance $ 5, 000 12, 000 20, 000 10, 000 5, 000 Learning Objectives

hink Corner After getting the net profit from the profit and loss acount, what should we do? nswer You have learned that profit increases capital and loss decreases capital. After calculating the net profit/loss, we should transfer the net profit or net loss to the capital account to obtain the updated amount of capital. Old capital + Net profit = New capital Old capital – Net loss = New capital

hink Corner Can you think of any other items which affect the amount of capital? nswer Drawings reduce capital and therefore we should transfer the balance of the drawings account to the capital account in order to calculate the amount of new capital at the end of a financial year. Old capital + Net profit – Drawings = New capital Old capital – Net loss – Drawings = New capital

Closing the capital account Remember, the balance of capital in the trial balance is the _______. opening balance At the end of the year, we need to close the capital account by transferring the net profit or net loss and the drawings to get the closing ______. balance Example 8: Assume that the opening capital balance as at 1 January 20 X 8 and the drawings for the year ended 31 December 20 X 8 for Flora Company were $50, 000 and $5, 000, respectively. The capital account would be closed as follows:

Closing the capital account The steps for closing the capital account are: tep Close the drawings account and transfer the balance to the capital account. Drawings 20 X 8 Dec 31 Total for the year $ 20 X 8 5, 000 Dec 31 Capital $ 5, 000 Capital 20 X 8 Dec 31 Drawings $ 20 X 8 5, 000 Jan 1 Balance b/f $ 50, 000

Closing the capital account tep Transfer the net profit or net loss from the profit and loss account to the capital account. Balance off the capital account. The balance is carried forward to the next financial year. Capital 20 X 8 Dec 31 Drawings “ 31 Balance c/f $ 20 X 8 5, 000 Jan 1 Balance b/f 57, 000 Dec 31 Net profit for the year 62, 000 $ 50, 000 12, 000 62, 000

Closing the capital account Example 9: Assume that Flora Company had a net loss of $3, 000 in 20 X 8 and the opening capital balance and the drawings for the year ended 31 December 20 X 8 were $50, 000 and $5, 000, respectively. The capital account would be closed as follows: Drawings 20 X 8 Dec 31 Total for the year $ 20 X 8 5, 000 Dec 31 Capital $ 5, 000 Capital 20 X 8 $ 20 X 8 Dec 31 Drawings 5, 000 Jan 1 Balance b/f “ 31 Net loss for the year 3, 000 “ 31 Balance c/f 42, 000 50, 000 $ 50, 000 Learning Objectives

Balance sheet financial A balance sheet is a statement showing the _______ position ______ of a business at a ______. particular date After trading and profit and loss account is prepared, the ______________ assets all the accounts should be closed except the _____, _______ and capital _____ accounts. These accounts are liabilities sheet then listed on the balance ______. Balance sheet is not part of the double ________; entry system it is only a ___ list of assets, liabilities and capital balances. These accounts are not closed at the year end, and the balances in these accounts are carried forward to the _________. next accounting year Balance sheet is a presentation of the _____ accounting _______ equation in a statement form.

Balance sheet Layout of a balance sheet: Balance Sheet as at (date) $ $ Fixed Assets Details of fixed assets Current Assets Details of current assets Assets Capital XXX Details of capital XXX Long-term Liabilities XXX Details of long-term liabilities XXX Current Liabilities Details of current liabilities XXX XXX Capital + Liabilities

Balance sheet Example 10: Based on the information in Examples 7 and 8, and the following balances extracted on 31 December 20 X 8 (after the trading and profit and loss account was prepared and the capital account was closed), prepare a balance sheet for Flora Company as at 31 December 20 X 8. $ Furniture and fittings 30, 000 Motor vehicles 20, 000 Debtors 20, 000 Bank 10, 000 Cash 5, 000 Long-term loan from Kowloon Bank 30, 000 Creditors 8, 000 Steps for preparing a balance sheet:

Balance sheet tep Classify the balances remaining in our books (after preparing the trading and profit and loss account) into fixed assets, current assets, capital, long-term liabilities and current liabilities. $ Furniture and fittings 30, 000 Motor vehicles 20, 000 Debtors 20, 000 Bank 10, 000 Cash 5, 000 Long-term loan from Kowloon Bank 30, 000 Creditors 8, 000 Fixed asset Current asset Long-term liability Current liability

Balance sheet tep List the balances of fixed assets and current assets on the left-hand side of the balance sheet. Get their subtotals and add them up to arrive at total assets. Flora Company Balance Sheet as at 31 December 20 X 8 Fixed Assets Furniture and fittings Motor vehicles Current Assets Stock Debtors Bank Cash $ 10, 000 20, 000 10, 000 5, 000 $ 30, 000 20, 000 50, 000 45, 000 95, 000

Balance sheet tep List the balances of capital, long-term liabilities and current liabilities on the right-hand side of the balance. Get their subtotals and add them up to arrive at the total of capital and liabilities. Flora Company Balance Sheet as at 31 December 20 X 8 Fixed Assets Furniture and fittings Motor vehicles Current Assets Stock Debtors Bank Cash 10, 000 20, 000 10, 000 5, 000 $ $ Capital 30, 000 Balance as at 1 Jan 20 X 8 50, 000 20, 000 Add Net profit for the year 12, 000 50, 000 62, 000 Less Drawings 5, 000 57, 000 Long-term Liabilities Loan from Kowloon Bank 30, 000 45, 000 Current Liabilities Creditors 8, 000 95, 000

Balance sheet tep Enter the totals of the two sides that should be level with each other. Flora Company Balance Sheet as at 31 December 20 X 8 Fixed Assets Furniture and fittings Motor vehicles Current Assets Stock Debtors Bank Cash 10, 000 20, 000 10, 000 5, 000 $ $ Capital 30, 000 Balance as at 1 Jan 20 X 8 50, 000 20, 000 Add Net profit for the year 12, 000 50, 000 62, 000 Less Drawings 5, 000 57, 000 Long-term Liabilities Loan from Kowloon Bank 30, 000 45, 000 Current Liabilities Creditors 8, 000 95, 000 Learning Objectives

Final accounts in vertical format Final accounts (trading and profit and loss accounts and balance sheets) are sometimes prepared in vertical format instead of horizontal format. The ______ same using either presentation results are the ____ method. Example 7 is now shown in vertical format:

Final accounts in vertical format Flora Company Trading and Profit and Loss Account for the year ended 31 December 20 X 8 Sales Less $ Returns inwards Cost of goods sold: Opening stock Add Purchases Less Returns outwards Add Carriage inwards Goods packaging Less Closing stock Gross profit Add Other revenues: Commission receivable Less $ Expenses: Salaries Electricity Rent Net profit 60, 000 5, 000 $ 100, 000 3, 000 97, 000 8, 000 55, 000 4, 000 72, 000 10, 000 62, 000 35, 000 2, 000 37, 000 10, 000 5, 000 10, 000 25, 000 12, 000

Final accounts in vertical format We have mentioned that the balance sheet is a presentation of the accounting ________ equation in statement form. In a vertical style balance sheet, it shows Fixed assets + Net current assets – Long-term liabilities = Capital. Net current assets occur when current assets exceed ______ current liabilities. When current liabilities exceed current assets, their difference is called net current liabilities _________. Example 10 is shown in vertical format:

Final accounts in vertical format Flora Company Balance Sheet as at 31 December 20 X 8 Fixed Assets Furniture and fittings Motor vehicles Current Assets Stock Debtors Bank Cash Less Current Liabilities Creditors Net current assets Less Long-term Liabilities Loan from Kowloon Bank Financed by: Capital as at 1 January 20 X 8 Add Net profit for the year Less Drawings $ $ 30, 000 20, 000 50, 000 10, 000 20, 000 10, 000 5, 000 45, 000 8, 000 37, 000 87, 000 30, 000 57, 000 50, 000 12, 000 62, 000 57, 000

Final accounts in vertical format Sometimes, long-term liabilities are shown under capital in a vertical style balance sheet. Below is an example: Flora Company Balance Sheet as at 31 December 20 X 8 (extract) Capital Balance as at 1 January 20 X 8 Add Net profit for the year Less Drawings Long-term Liabilities Loan from Kowloon Bank $ 50, 000 12, 000 62, 000 57, 000 30, 000 87, 000 Learning Objectives

hink Corner Sometimes, businesses may have several departments. Are the final accounts for these companies prepared in the same way as mentioned before? nswer No. There will be extra columns in the trading and profit and loss account for companies with several departments. Sales revenue and expenses are split among various departments and are recorded in these extra columns.

Departmental accounts Example 11: The following balances were extracted from the books of Longway Company as at 31 March 20 X 7. $ Sales: Audio department 50, 000 Digital camera department 70, 000 Stock (1 Apr 20 X 6): Audio department 10, 000 Digital camera department 20, 000 Purchases: Audio department 20, 000 Digital camera department 40, 000 Stock (31 Mar 20 X 7): Audio department 15, 000 Digital camera department 10, 000

Departmental accounts Longway Company Trading Account for the year ended 31 March 20 X 7 Sales Less Cost of goods sold: Opening stock Purchases Audio $ $ 50, 000 10, 000 20, 000 30, 000 Digital Camera $ $ 70, 000 20, 000 40, 000 60, 000

Departmental accounts Longway Company Trading Account for the year ended 31 March 20 X 7 Sales Less Cost of goods sold: Opening stock Purchases Less Closing stock Gross profit Audio $ $ 50, 000 10, 000 20, 000 30, 000 15, 000 35, 000 Digital Camera $ $ 70, 000 20, 000 40, 000 60, 000 10, 000 50, 000 20, 000 Learning Objectives

Final accounts for the service sector In a trading account, we calculate the gross profit by subtracting the costs of goods sold from the sales. What if a business does not trade in goods? For businesses not trading in goods, there is no need to and loss account is prepare a trading account. A profit _________ enough. The final accounts for these businesses are a profit and loss account and a balance sheet. Examples of businesses not trading in goods are those service sector such as dentists, accountants in the ______, and lawyers. Revenue earned by service providers is usually called fees earned, commission earned or services charged.