C hapter 8: An introduction to the trading

account and profit and loss

account
Contents of chapter
This chapter shows students how to calculate gross and net profits by drawing up trading and profit and loss
accounts.

From Chapter 8 onwards, especially in Chapters 9 and 10, final accounts will be shown both horizontally and
vertically. After these chapters, vertical style final accounts will be used except where it is easier to explain a
double entry item by using horizontal style accounts.

Notes for teachers

A trading and profit and loss account is prepared once a year for:
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(i) Business owners.
(ii) Tax inspectors.
(iii) The bank, especially if there is a bank overdraft.
(iv) Companies registrar — if it is a company.
(v) Other parties, e.g. creditors.

2 Often they will be produced monthly or quarterly for use by management. Management will not want to
wait for twelve months to find how the business is progressing.

3 The steps for preparing a trading account, a profit and loss account, and balancing off the capital account
are shown in pp. 71–72, p. 73 and p. 75, respectively.

In the USA, Australia and some other countries, it is usually called an Income Account.
4

Both gross and net profits are calculated to enable better comparison of the accounts with those of
5
previous years.

All costs necessary to get the product ready for sale go in the trading account part. These are direct costs.
6
The administration costs and selling and distribution costs go in the profit and loss account part.

A stock account has to be opened for stock, as otherwise there would be no record of this asset in the
7
books at the balance sheet date.

Students should know that the trading and profit and loss account is part of double entry, but the balance
8
sheet is simply a list of balances.

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 Answers to MCQs and exercises
8.1 D 8.2 C 8.3 B 8.4 D 8.5 D 8.6 D

8.7
K Chow
Trading Account for the year ended 31 December 20X7
$ $
Purchases 28,470 Sales 39,420
Less Closing stock 3,790
Cost of goods sold 24,680
Gross profit 14,740
39,420 39,420

8.8
L Sing
Trading and Profit and Loss Account for the year ended 31 December 20X8
$ $
Purchases 24,190 Sales 38,220
Less Closing stock 4,310
Cost of goods sold 19,880
Gross profit c/d 18,340
38,220 38,220
Rent and rates 4,170 Gross profit b/d 18,340
Wages and salaries 5,390
Postage and stationery 840
Electricity expenses 710
General expenses 370
Net profit 6,860
18,340 18,340

8.9X (Horizontal)

C Ng
Trading and Profit and Loss Account for the year ended 31 December 20X9
$ $
Purchases 42,910 Sales 57,090
Less Closing stock 8,220
Cost of goods sold 34,690
Gross profit c/d 22,400
57,090 57,090
Rent and rates 4,990 Gross profit b/d 22,400
Motor expenses 2,370
Sundry expenses 410
Travel expenses 600
Office expenses 720
Net profit 13,310
22,400 22,400

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8.10
(a) (Horizontal) W Wong
Trading and Profit and Loss Account for the year ended 30 June 20X4
$ $
Purchases 38,500 Sales 76,900
Less Closing stock 4,150
Cost of goods sold 34,350
Gross profit c/d 42,550
76,900 76,900
Rent and rates 14,700 Gross profit b/d 42,550
Lighting expenses 2,820 Interest received 3,500
Salaries and wages 16,000
Insurance 3,050
Trade expenses 506
Motor expenses 2,133
Net profit 6,841
46,050 46,050

(Vertical) W Wong
Trading and Profit and Loss Account for the year ended 30 June 20X4
$ $
Sales 76,900
Less Cost of goods sold:
Purchases 38,500
Less Closing stock 4,150 34,350
Gross profit 42,550
Add Other revenues:
Interest received 3,500
46,050
Less Expenses:
Rent and rates 14,700
Lighting expenses 2,820
Salaries and wages 16,000
Insurance 3,050
Trade expenses 506
Motor expenses 2,133 39,209
Net profit 6,841

(b) Drawings
20X4 $ 20X4 $
Jun 30 Total for the year 2,400 Jun 30 Capital 2,400

Capital
$ 20X3 $
Jul 1 Bank 65,000
20X4 20X4
Jun 30 Drawings 2,400 Jun 30 Net profit for the year 6,841
" 30 Balance c/f 69,441
71,841 71,841

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 8.11X
(a) (Horizontal) T Chuen
Trading and Profit and Loss Account for the year ended 31 December 20X6
$ $
Purchases 18,385 Sales 32,815
Less Closing stock 4,960
Cost of goods sold 13,425
Gross profit c/d 19,390
32,815 32,815
Postal expenses 210 Gross profit b/d 19,390
Rent and rates 10,600
Management fees 2,255
Salaries 3,560
Insurance 700
Net profit 2,065
19,390 19,390

(Vertical) T Chuen
Trading and Profit and Loss Account for the year ended 31 December 20X6
$ $
Sales 32,815
Less Cost of goods sold:
Purchases 18,385
Less Closing stock 4,960 13,425
Gross profit 19,390
Less Expenses:
Postal expenses 210
Rent and rates 10,600
Management fees 2,255
Salaries 3,560
Insurance 700 17,325
Net profit 2,065

(b) Drawings
20X6 $ 20X6 $
Dec 31 Total for the year 4,350 Dec 31 Capital 4,350

Capital
20X6 $ 20X6 $
Dec 31 Drawings 4,350 Jan 1 Balance 21,000
" 31 Balance c/f 18,715 Dec 31 Net profit from profit and loss 2,065
23,065 23,065

8.12
Drawings
20X6 $ 20X6 $
Apr 13 Purchases 3,500 Dec 31 Capital 4,150
Jul 17 Cash 650
4,150 4,150

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 Capital
20X6 $ 20X6 $
Dec 31 Drawings 4,150 Jan 1 Balance b/f 74,000
" 31 Balance c/f 113,850 Feb 2 Bank 20,000
Nov 26 Creditor 8,200
Dec 31 Net profit for the year 15,800
118,000 118,000

8.13X
(Horizontal)
W Yeung
Trading and Profit and Loss Account for the year ended 31 December 20X9
$ $
Purchases 216,000 Sales 469,800
Less Closing stock 9,600
Cost of goods sold 206,400
Gross profit c/d 263,400
469,800 469,800
Rent and rates 100,000 Gross profit b/d 263,400
Salaries 128,200 Interest received 28,600
Utilities charges 2,300
Commissions 4,500
Net profit 57,000
292,000 292,000

(Vertical)
W Yeung
Trading and Profit and Loss Account for the year ended 31 December 20X9
$ $
Sales 469,800
Less Cost of goods sold:
Purchases 216,000
Less Closing stock 9,600 206,400
Gross profit 263,400
Add Other revenues:
Interest received 28,600
292,000
Less Expenses:
Rent and rates 100,000
Salaries 128,200
Utilities charges 2,300
Commissions 4,500 235,000
Net profit 57,000

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