Calculating Profits for a Retailing Business Pt.

One of the main aims of operating a business is to make profit. Profit/Loss is the difference
between a business’s income (sales) and expenditure (purchases and operating expenses). A
profit occurs when a business makes a net gain in its value over a period of time due to
successful trading. This simply means that the business’s income was greater than its
expenditure. A situation where a business’s expenditure exceeds its incomes suggests that it
incurred a Loss.
Profit is calculated in a Trading and Profit and Loss Account/ Income Statement.
The Trading and Profit and Loss A/c is divided in a Trading Account which calculates the
Gross Profit for the period, and a Profit and Loss Account which calculates Net profit for the
period.

The Trading Account

This account calculates the profit made strictly from trading activities, also known as GROSS
PROFIT. Trading involves buying and selling of goods. Gross Profit is the excess of sales over
the cost of goods sold, that is the amount a business has made in excess of the original amount
spent on goods sold before deducting expenses.
In the trading account the Cost of Goods Sold is subtracted from Net Sales for the period to
calculate Gross Profit,

We can therefore use a simple equation for Gross Profit as:

Gross Profit = Sales – Cost of Goods Sold.

Example: Jim sells new tyres, his sales for the year amounted to $350,000, of which had a cost
of $90,000. His Gross Profit will therefore be equal to;
Gross Profit = Sales- Cost of Goods Sold
= 350,000 – 90,000= $260,000
Key Terms found in the Trading A/c:

Net Sales ─ the actual sales made after all adjustments have been made for goods returned to the
business by its customers. Net Sales is calculated by Sales MINUS Return Inwards. Return
Inward represents the amount of goods sold to customers that were returned to the business for
various reasons, therefore, it reduces the actual sales figure, hence it is subtracted from sales.

Net Purchases- the actual purchases made after all adjustments have been made for goods
returned by the business to its suppliers. Net Purchase is calculated by Purchases MINUS
Return Outwards. Return Outwards represents the amount of goods purchased by the business
that were to returned to its suppliers for various reasons, therefore, it reduces the actual purchase
figure, hence it is subtracted from purchases.

Carriage Inwards- This refers to transportation costs incurred by the business in order to obtain
goods purchased by the business. Carriage Inward is ADDED to the Net Purchase in order to
calculate the cost of goods purchased.

Opening Stock- This refers to the amount and value of goods that a business has available for
sale at the beginning of an accounting period from the previous accounting period. The
closing stock of the previous accounting period becomes the opening Stock of the current
accounting period.

Closing Stock- This refers to unsold goods at the end of an accounting period.

Cost of Goods Available- This refers to the total value of goods available for sale to the business
for the accounting period. The cost of goods available for sale equals the Opening Stock PLUS
the cost of goods purchased

Cost of Goods Sold ─ the value of the goods sold at its cost. This is calculated SUBTRACTING
closing/ unsold stock at the end of the period from the cost of goods available.
Trading Account format:

Name of Business
Trading A/c for the period ended …………………………………

Sales xxxx
Less Return Inward (xxx)
Net Sales xxxx
Less Cost of Goods Sold:
Opening Stock xxxx
Purchase xxxx
Less Return Outward (xxx) +
Net Purchases xxxx
+ Carriage Inwards xxx xxxx
Cost of Goods Available for Sale xxxx
Less Closing Stock (xxxx)
Cost of Goods Sold (xxxx)
Gross Profit xxxx

NB: The brackets means/ show subtraction

Example 1:
The following balances were taken from the books of UG Enterprise on September 30, 2019.
Sales 15,000
Purchases 7,000
Stock as at October 1 2018 (Opening Stock) 1,000
Return Outwards 50
Return Inwards 300
Stock as at September 20, 2019 (Closing Stock) 1,200

Required: Prepare the Trading A/c for UG Enterprise to disclose the Gross Profit made for the
year ended September 30, 2019.

Solution:
UG Enterprises
Trading A/c for the year ended September 30, 2019
$ $ $
Sales 15,000
Less Return Inward (300)
Net Sales 14,700
Less Cost of Goods Sold:
Opening Stock 1,000
Purchases 7,000
Less Return Outward (50)
Net Purchases 6,950
+ Carriage Inwards 100 7,050
Cost of Goods Available for Sale 8,050
Less Closing Stock (1,200)
Cost of Goods Sold (6,850)
Gross Profit 7,850