Trading Profit And Loss Account JSS3 Business Studies Lesson Note

Trading Account

A trading account is prepared to determine the profit or gross loss in a particular business period. The gross profit or loss is the difference between sales and cost of goods sold.

Business prepares trading, profit, and loss accounts to ascertain the financial position of a business at the end of the year.

Contents of trading account :

•     Opening stock – is usually the stock at the beginning of the period.
•     Closing stock – is the stock hot used up at the end of the business period.
•   Returned outward – goods bought but returned to the owner due to one reason or the other e.g. defective or substandard.
• Return inward – goods sold to the customers but returned due to one reason to another.
•   Carriage inward – is the cost of carrying goods bought into an organisation.
• Cost of goods available for sales – is the summation of opening stock, purchases, carriage inward and deduct goods returned.
•  Gross profit – is the excess of sales over the cost of goods sold.
•  Net sales – is the sales less return inward.

Profit and Loss Account (P & L Account)

Purpose of Profit and Loss Account

Profit & Loss Account: This is an account prepared after the preparation of the Trading Account. It is debited with all operational expenses and credited with the gross profit and all other revenue accruing to a business.

Purpose of Preparing the Profit & Loss Account

The P&L account is prepared either to ascertain net profit or net loss.

Worked Example:

Question: From the trial balance of Diligent Stores Ltd above, you are required to prepare the Profit and Loss Account of the company for the year ended 31st December 2009.

Solution

DILIGENT STORES LTD

st December 2009.border=”1″ style=”height: 150px;” width=”431″>

EVALUATION

Write a short note on the profit and loss account.

State the purpose of preparing a profit and loss account.

READING ASSIGNMENT

Business Studies by O.A. Lawal. Pages 77 to 80

GENERAL REVISION QUESTIONS

1. What is a petty cash book?
2. Mention three items that can appear in the petty cash book.
3. Who keeps the petty cash book?
4. Define the imprest system.
5. What is the amount of money given to the petty cashier at the beginning of the period called?

WEEKEND ASSIGNMENT

Which of the following is an item in the profit and loss account? A. sales B. purchases C. carriage inward D. carriage outward.

All of the following are expenses in the profit and loss account except__ A. discount received B. electricity C. discount allowed D. rent and rates.

____ is an item credited to the profit and loss account. A. insurance B. drawings C. rent received D. salaries and wages.

The purpose of preparing a profit and loss account is to ascertain the ______of the business A. net profit /gross loss B. net income C. gross profit /gross loss D. net profit/ /net loss.

In the profit and loss account all expenses are___ A. debited B. credited C. closed down D. added to the gross profit.

THEORY

1. Write short notes on the Profit and Loss account.
2. Prepare a format of a Profit and Loss Account with four items on the credit side and twelve items or entries on the debit side.