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Trading, profit and loss account

The trading account calculates the amount of profit earned from buying and selling goods in a particular time period (usually one year).

The Trading account for Big Books Ltd appears below.

Trading account for Big Books Ltd for year ended 31/12/01

 
Sales   250,000
LESS COST OF SALES    
Opening stock 20,000  
Purchases 150,000  
Goods available 170,000  
Less closing stock 30,000  
Cost of sales   140,000
Gross profit   110,000

An explanation of each of the terms in the Trading Account follows.

Trading account for Big Books Ltd for year ended 31/12/01:this is the title of the account. It informs the user of the name of the business and the time period which has been used to measure gross profit.

Sales: The amount of money earned by the business selling books in the past year. Money earned by the business is known as Income or Revenue. Sales returns/returns in may have to be subtracted.

LESS COST OF SALES: this is a heading, which indicates that a calculation is going to be completed. This calculation will work out the cost of all the books that were sold in the year. It is calculated as follows

Cost of sales = opening stock + purchases - closing stock.

Opening stock: This is the value of stock left over from the previous year. This stock will be the first to be sold in the new year.

Purchases: This is the cost of all the new games bought during the year. (Two additional costs may be added to purchases, carriage in and import duty). Purchase returns/returns out may have to be subtracted.

Goods available: This represents the total cost of all the books that were available to be sold during the year. It is calculated by adding the opening stock and purchases.

Closing stock: This is the value of all the books left in the shop and the storeroom at the end of the year. It is subtracted from opening stock and purchases, as it does not form part of the goods sold during the year.

Cost of sales: This is the answer to the calculation of the cost of sales.

Gross profit: This measures the profit the business makes by buying and selling books. It is calculated as follows:

Gross profit = Sales – Cost of Sales


The Profit and Loss Account

The profit and loss account calculates the profit the business has earned after allowing for all the expenses incurred in running the business.

The profit and loss account for Big Books Ltd appears below.

Profit and loss account for Big Books Ltd for year ended 31/12/01

 
Gross Profit   110,000
LESS EXPENSES    
Administration expenses 40,000  
Distribution expenses 20,000  
Financial expenses 10,000 70,000
Net Profit   40,000

Profit and loss account for Big Books Ltd for year ended 31/12/01: This is the title of the account. It informs the user of the name of the business and the time period that has been used to measure net profit.

Gross Profit: the profit the business made buying and selling books. If the business earned additional income by means other than trading it could be added to gross profit. For example, if the business was able to rent space in the building the rent received could be added to gross profit. Interest received and commission received are common entries.

LESS EXPENSES: This is a heading, indicating the total of all business expenses are to be calculated.

Administration expenses: These are the costs associated with running the business such as wages, insurance, light and heat and depreciation.

Distribution expenses: These are the costs associated with selling the goods and delivering them. They include advertising, delivery van repairs and petrol.

Financial expenses: These are the costs associated with borrowing money such as interest on the overdraft and the mortgage.

Net profit: This is the profit that is owed to the owner(s). In the case of a company the shareholders may be paid a dividend from available profits. The profit that remains is reinvested in the business and is added to the capital in the balance sheet.


Club Accounts

A club is an organisation set up to further the interests of its members.

Unlike a business, clubs do not intend to make a profit. Therefore to measure their financial performance each year they prepare an INCOME and EXPENDITURE Account. In this account the clubs expenditure on the day-to-day running costs (do not include the cost of assets) is subtracted from its income (subscriptions, raffle income, collections, canteen profit). It may be necessary to prepare a canteen trading account to calculate the canteen profit.

If INCOME exceeds EXPENDITURE it is called surplus income and if EXPENDITURE exceeds INCOME it is called excess expenditure.

The club will produce a balance sheet in the same way as a private limited company with one exception. In the ‘Financed By’ section there is no Ordinary Share Capital — instead there is an Accumulated Fund, which represents the finance supplied by the members over the years.

Glossary of terms

All the terms used in relation to trading accounts are set out below:

Balance sheet: a statement of a business’s wealth on a particular date.

Assets: the resources owned by the business.

Liabilities: the amount of money owed by the business to the suppliers of finance.

Capital: the money invested in the business by the owner. It is a liability, as money is owed by the business to a supplier of finance.

Fixed assets: resources owned by the business. They are used to help run the business and are not intended for resale. Usually they are kept for a number of years and depreciation is recorded in the books to reflect their decline in value

Current assets: resources owned by the business, which will change their form within one year.

Current liabilities: amounts of money owed by the business, which must be repaid within one year.

Working capital: the name given to the difference between the current assets and the current liabilities. A positive working capital means the business has enough current assets to pay off its current liabilities.

Long-term liabilities: amounts of money owed by the business, which will be repaid over a long period of time.

Capital: the money owed to the owners as a result of their original investment.

Reserves: profits which have been retained in the business in order to provide finance.

Capital employed: the total of long-term liabilities plus capital and reserves. This represents the total amount the business owes to the suppliers of long-term capital.

The trading account: calculates the amount of profit earned from buying and selling goods in a particular time period.

Gross profit: measures the profit the business makes by buying and selling goods. It is calculated as follows: Gross profit = Sales – Cost of Sales.

Profit and loss account: calculates the profit the business has earned after allowing for all the expenses incurred in running the business.

Net profit: the profit that the business has earned after allowing for all the expenses incurred in running the business.

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