The Trading and Profit and Loss Account and the Balance Sheet

1
The Trading and Profit and Loss Account and the
Balance Sheet
2
Whats Inside ?
Learning Objectives
Net purchases and net sales
Trading and profit and loss account
Capital account
1
2
Departmental accounts
Trading account
Trading and profit and loss account
3
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.
4
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.
5
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
_____ to have an overview of the business.
closed
At the end of the financial year, the accounts
need to be closed to prepare the ___________.
final accounts
A __________ needs to be drawn up before the
final accounts are prepared.
trial balance
A _____________ and a ___________________ are
prepared to calculate the profit or loss made by
the firm.
trading account
profit and loss account
The ______ account needs to be closed by
transferring the net profit / loss and the
drawings against it.
capital
A ___________ can then be drawn up.
balance sheet
Learning Objectives
6
Trading account and cost of goods sold
A trading account is an account in which
__________ or ________ is calculated.
gross profit
gross loss
Gross profit is the excess of ____ over the
_______ _________ for the period.
sales
cost of
goods sold
Gross loss is the excess of _______________ over
____ for the period.
cost of goods sold
sales
Gross profit Sales Cost of goods sold Gross
loss Cost of goods sold Sales
Trading account is a double entry account where
the left-hand side is the _________ and the
right-hand side is the _________.
debit side
credit side
7
Trading account and cost of goods sold
At the end of a financial year, businesses
usually have unsold goods we call this
__________. An annual _________ is usually held
at the end of a financial year to ascertain the
value of closing stock.
closing stock
stocktaking
Closing stock is carried forward to the next
financial year we call this the ___________.
opening stock
A ____ account is opened to record closing stock
and opening stock.
stock
Cost of Opening stock Purchases
Closing stock goods sold
Total stock available
Stock remained unsold
8
Trading account and cost of goods sold
Example 1 Flora Companys financial year ended
on 31 December 20X8. Here is the information
extracted from her books
Sales 100,000 Purchases 60,000 Opening
stock 8,000 Closing stock 10,000
The steps for preparing the trading account are
as follows
9
Trading account and cost of goods sold
Close the sales account and transfer the credit
balance to the trading account.
Dec 31 Trading 100,000
Sales 100,000
10
Trading account and cost of goods sold
Close the purchases account and transfer the
debit balance to the trading account.
Dec 31 Trading 60,000
Purchases 60,000
11
Trading account and cost of goods sold
Calculate the cost of goods sold by transferring
the opening and closing stock from the stock
account to the trading account.
Dec 31 Trading 8,000
Dec 31 Trading 10,000
31 Balance c/f 10,000
Opening stock 8,000
Closing stock 10,000
12
Trading account and cost of goods sold
Balance off the trading account and transfer the
balance to the profit and loss account.
Gross profit 42,000
Transferred to the profit and loss account
13
Trading account and cost of goods sold
Example 2 On 31 December 20X7, Panda Company had
the following account balances
Sales 70,000 Purchases 80,000 Opening
stock 4,000 Closing stock 5,000
The accounts would be closed as follows
14
Trading account and cost of goods sold
Dec 31 Trading 70,000
Dec 31 Trading 80,000
Purchases 80,000
Sales 70,000
15
Trading account and cost of goods sold
Dec 31 Trading 4,000
Dec 31 Trading 5,000
31 Balance c/f 5,000
Opening stock 4,000
Closing stock 5,000
Gross loss 9,000
Transferred to the profit and loss account
Learning Objectives
16
You have learned that goods may be returned to
suppliers or returned from customers. How do
these two items affect purchases and sales?
Goods returned from customers reduce
sales, 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.
17
You have learned that goods may be returned to
suppliers or returned from customers. How do
these two items affect purchases and sales?
Goods returned from customers reduce
sales, 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.
18
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.
Dec 31 Trading 3,000
Returns inwards 3,000
19
Trading account and adjustments
Dec 31 Trading 5,000
Returns outwards 5,000
Gross profit 44,000
Since returns outwards reduce the amount of
purchases, the cost of goods sold Opening stock
Purchases Returns outwards Closing
stock
Net purchases
20
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 include all _______ that
increase the cost of goods.
expenses
1. Carriage inwards This is the cost of
delivering goods purchased from suppliers.
This cost of delivery _______ the cost of buying
goods thus, it should be included in the cost of
goods sold by transferring the balance in the
carriage inwards account to the ____________.
increases
trading account
21
Trading account and adjustments
Items affecting the cost of goods sold

1. 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 resale ________ the cost of goods sold and
   should be shown in the ____________.

increases
trading account
22
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.
Dec 31 Trading 5,000
Carriage inwards 5,000
23
Trading account and adjustments
Dec 31 Trading 4,000
Goods packaging 4,000
Gross profit 35,000
uiz Corner
Learning Objectives
24
Using the following information, prepare a
trading account for the year ended 31 December
20X8.
Sales 55,000 Purchases 41,250 Stock as at 1
January 20X8 11,500 Stock as at 31 December
20X8 10,750 Returns inwards 1,500 Returns
outwards 1,200 Carriage inwards 2,100 Goods
packaging 2,500
25
Purchases 41,250
Sales 55,000
Opening stock 11,500
Closing stock 10,750
Returns inwards 1,500
Returns outwards 1,200
Carriage inwards 2,100
26
Purchases 41,250
Sales 55,000
Opening stock 11,500
Closing stock 10,750
Returns inwards 1,500
Returns outwards 1,200
Carriage inwards 2,100
Goods packaging 2,500
Gross profit 8,100
27
Using the following information, prepare a
trading account for the year ended 31 December
20X8.
Sales 55,000 Purchases 41,250 Stock as at 1
January 20X8 11,500 Stock as at 31 December
20X8 10,750 Returns inwards 1,500 Returns
outwards 1,200 Carriage inwards 2,100 Goods
packaging 2,500
28
Purchases 41,250
Sales 55,000
Opening stock 11,500
Closing stock 10,750
Returns inwards 1,500
Returns outwards 1,200
Carriage inwards 2,100
29
Purchases 41,250
Sales 55,000
Opening stock 11,500
Closing stock 10,750
Returns inwards 1,500
Returns outwards 1,200
Carriage inwards 2,100
Goods packaging 2,500
Gross profit 8,100
30
Profit and loss account
net profit
A profit and loss account is an account in which
________ or ______ is calculated. All day-to-day
running expenses and revenues are entered in this
account.
net loss
Net profit is the excess of ___________________
_______ over _______ for the period.
gross profit plus other
expenses
revenues
Net loss is the excess of ________ over the total
of __________ and ____________ for the period.
expenses
gross profit
other revenues
Net profit Gross profit Other revenues
Expenses Net loss Expenses Gross profit
Other revenues
Profit and loss account is also a
_________________ with a debit side and a credit
side.
double entry account
31
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
Close the other revenues accounts and transfer
the credit balances to the profit and loss
account.
Dec 31 Profit and loss 2,000
Commission receivable 2,000
32
Profit and loss account
Close the expenses accounts and transfer the
debit balances to the profit and loss account.
Dec 31 Profit and loss 10,000
Dec 31 Profit and loss 5,000
Salaries 10,000
Electricity 5,000
33
Profit and loss account
Dec 31 Profit and loss 10,000
Rent 10,000
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.
34
Profit and loss account
Net profit 12,000
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.
35
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
Dec 31 Profit and loss 20,000
Electricity 20,000
Net loss 3,000
Transferred to the capital account
Learning Objectives
36
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
into one, called the ____________________________.

trading and profit and loss account
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 account more
_________ and easier to _________.
informative
understand
When the two accounts are combined, it is
described as a ________________. The ____ of the
company and the ______________ are shown.
name
financial statement
period concerned
Example 7 Using the information in Examples 4
and 5, the trading and profit and loss account
for Flora Company would appear as
37
Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year
ended 31 December 20X8


Sales 100,000
Opening stock 8,000
Purchases 60,000
Less Returns inwards 3,000
Less Returns outwards 5,000
97,000
Name of the company
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
Salaries 10,000
Gross profit b/d 35,000
Electricity 5,000
Commission receivable 2,000
Rent 10,000
Net profit 12,000
38
Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year
ended 31 December 20X8


Sales 100,000
Opening stock 8,000
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
Salaries 10,000
Gross profit b/d 35,000
Electricity 5,000
Commission receivable 2,000
Rent 10,000
Net profit 12,000
39
Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year
ended 31 December 20X8


Sales 100,000
Opening stock 8,000
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
Salaries 10,000
Gross profit b/d 35,000
Electricity 5,000
Commission receivable 2,000
Rent 10,000
Net profit 12,000
40
Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year
ended 31 December 20X8


Sales 100,000
Opening stock 8,000
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
Salaries 10,000
Gross profit b/d 35,000
Electricity 5,000
Commission receivable 2,000
Rent 10,000
Net profit 12,000
41
Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year
ended 31 December 20X8


Sales 100,000
Opening stock 8,000
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 purchased for the year
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
Salaries 10,000
Gross profit b/d 35,000
Electricity 5,000
Commission receivable 2,000
Rent 10,000
Net profit 12,000
42
Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year
ended 31 December 20X8


Sales 100,000
Opening stock 8,000
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 for sale for the year
72,000
Less Closing stock 10,000
Cost of goods sold 62,000
Gross profit c/d 35,000
Salaries 10,000
Gross profit b/d 35,000
Electricity 5,000
Commission receivable 2,000
Rent 10,000
Net profit 12,000
43
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?
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.
44
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?
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.
45
From the following information, prepare a trading
and profit and loss account for Gowell Company
for the year ended 31 March 20X7.
Stock as at 1 April 20X6 16,000 Purchases 66,70
0 Sales 93,800 Returns inwards 2,500 Returns
outwards 2,000
46
Carriage inwards 5,000 Packaging goods for
resale 5,000 Stock as at 31 March
20X7 12,000 Rent received 20,000 Wages and
salaries 10,000 Insurance 5,000
47
Gowell Company
Trading and Profit and Loss Account for the year
ended 31 March 20X7


Sales 93,800
Opening stock 16,000
Purchases 66,700
Less Returns inwards 2,500
91,300
Less Returns outwards 2,000
64,700
Add Carriage inwards 5,000
Packaging 5,000
74,700
Less Closing stock 12,000 62,700
Cost of goods sold 78,700
Gross profit c/d 12,600
Wages and salaries 10,000
Gross profit b/d 12,600
Rent receivable 20,000
48
Gowell Company
Trading and Profit and Loss Account for the year
ended 31 March 20X7


Sales 93,800
Opening stock 16,000
Purchases 66,700
Less Returns inwards 2,500
91,300
Less Returns outwards 2,000
64,700
Add Carriage inwards 5,000
Packaging 5,000
74,700
Less Closing stock 12,000 62,700
Cost of goods sold 78,700
Gross profit c/d 12,600
Wages and salaries 10,000
Gross profit b/d 12,600
Rent receivable 20,000
49
Gowell Company
Trading and Profit and Loss Account for the year
ended 31 March 20X7


Sales 93,800
Opening stock 16,000
Purchases 66,700
Less Returns inwards 2,500
91,300
Less Returns outwards 2,000
64,700
Add Carriage inwards 5,000
Packaging 5,000
74,700
Less Closing stock 12,000 62,700
Cost of goods sold 78,700
Gross profit c/d 12,600
Wages and salaries 10,000
Gross profit b/d 12,600
Insurance 5,000
Rent receivable 20,000
Net profit 17,600
50
Below are the balances extracted from the trial
balance of Gowell Company as at 31 March 20X7.
Prepare a trading and profit and loss account for
Gowell Company for the year ended 31 March 20X7.
Stock as at 1 April 20X6 16,000 Purchases 66,70
0 Sales 93,800 Returns inwards 2,500 Returns
outwards 2,000
51
Carriage inwards 5,000 Packaging goods for
resale 5,000 Stock as at 31 March
20X7 12,000 Rent received 20,000 Wages and
salaries 10,000 Insurance 5,000
Learning Objectives
52
Gowell Company
Trading and Profit and Loss Account for the year
ended 31 March 20X7


Sales 93,800
Opening stock 16,000
Purchases 66,700
Less Returns inwards 2,500
91,300
Less Returns outwards 2,000
64,700
Add Carriage inwards 5,000
Packaging 5,000
74,700
Less Closing stock 12,000 62,700
Cost of goods sold 78,700
Gross profit c/d 12,600
Wages and salaries 10,000
Gross profit b/d 12,600
Rent receivable 20,000
53
Gowell Company
Trading and Profit and Loss Account for the year
ended 31 March 20X7


Sales 93,800
Opening stock 16,000
Purchases 66,700
Less Returns inwards 2,500
91,300
Less Returns outwards 2,000
64,700
Add Carriage inwards 5,000
Packaging 5,000
74,700
Less Closing stock 12,000 62,700
Cost of goods sold 78,700
Gross profit c/d 12,600
Wages and salaries 10,000
Gross profit b/d 12,600
Rent receivable 20,000
54
Gowell Company
Trading and Profit and Loss Account for the year
ended 31 March 20X7


Sales 93,800
Opening stock 16,000
Purchases 66,700
Less Returns inwards 2,500
91,300
Less Returns outwards 2,000
64,700
Add Carriage inwards 5,000
Packaging 5,000
74,700
Less Closing stock 12,000 62,700
Cost of goods sold 78,700
Gross profit c/d 12,600
Wages and salaries 10,000
Gross profit b/d 12,600
Insurance 5,000
Rent receivable 20,000
Net profit 17,600
55
After getting the net profit from the profit and
loss account, what should we do?
You have learned that profit increases capital
and loss decreases capital. After calculating the
net profit / net loss, we should transfer the net
profit / 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
56
After getting the net profit from the profit and
loss acount, what should we do?
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
57
Can you think of any other items which affect the
amount of capital?
Drawings. 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
58
Can you think of any other items which affect the
amount of capital?
Drawings. 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
59
Closing the capital account
Remember, the balance of capital in the trial
balance is the _____________. 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 ____________.
opening balance
closing balance
Example 8 Assume that the opening capital
balance as at 1 January 20X8 and the drawings for
the year ended 31 December 20X8 for Flora Company
were 50,000 and 5,000, respectively. The
capital account would be closed as follows
60
Closing the capital account
The steps for closing the capital account are
Close the drawings account and transfer the
balance to the capital account.
Dec 31 Capital 5,000
Dec 31 Drawings 5,000
61
Closing the capital account
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.
31 Balance c/f 57,000
Dec 31 Net profit for the year 12,000
62
Closing the capital account
Example 9 Assume that Flora Company had a net
loss of 3,000 in 20X8 and the opening capital
balance and the drawings for the year ended 31
December 20X8 were 50,000 and 5,000,
respectively. The capital account would be closed
as follows
Dec 31 Capital 5,000
Dec 31 Drawings 5,000
31 Net loss for the year 3,000
31 Balance c/f 42,000
Learning Objectives
63
Balance sheet
financial
A balance sheet is a statement showing the
_______ ______ of a business at a ____________.
After the ____________________________ is
prepared, all the accounts should be closed
except the _____, _______ and _____ accounts.
These accounts are then listed on the
___________.
position
particular date
trading and profit and loss account
assets
liabilities
capital
balance sheet
Balance sheet is not part of the
________________ it is only a ___ 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
_________________.
double entry system
list
next accounting year
Balance sheet is a presentation of the _________
_______ in a statement form.
accounting
equation
64
Balance sheet
Layout of a balance sheet
Balance Sheet as at (date)
Capital
Fixed Assets
Details of fixed assets XXX
Details of capital XXX
Current Assets
Long-term Liabilities
Details of current assets XXX
Details of long-term liabilities XXX
Current Liabilities
Details of current liabilities XXX
Assets
Capital Liabilities
65
Balance sheet
Fixed assets are assets which have a long life
and are to be used in the business.
Examples are
Land and buildings
Fixtures and fittings
Machinery
Motor vehicles
66
Balance sheet
Current assets are assets that are likely to be
converted into cash in the short term or are
items with a short life.
Examples are
Stock
Debtors
Bank
Cash
67
Balance sheet
Long-term liabilities are liabilities that do not
have to be repaid in the near future.
An example is a three-year loan from a bank.
Current liabilities are liabilities that are to
be repaid for in the near future.
An example is creditors.
68
Balance sheet
Example 10 Based on the information in Examples
7 and 8, and the following balances extracted on
31 December 20X8 (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 20X8.
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
69
Balance sheet
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
Fixed asset
Fixed asset
Motor vehicles 20,000
Current asset
Debtors 20,000
Current asset
Bank 10,000
Current asset
Cash 5,000
Long-term liability
Long-term loan from Kowloon Bank 30,000
Current liability
Creditors 8,000
70
Balance sheet
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.
Fixed Assets
Furniture and fittings 30,000
Motor vehicles 20,000
Current Assets
Stock 10,000
Debtors 20,000
Bank 10,000
Cash 5,000 45,000
71
Balance sheet
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.
Capital
Balance as at 1 Jan 20X8 50,000
Add Net profit for the year 12,000
Less Drawings 5,000
Long-term Liabilities
Loan from Kowloon Bank 30,000
Current Liabilities
Creditors 8,000
72
Balance sheet
Enter the totals of the two sides that should be
level with each other.
Learning Objectives
73
Final accounts in vertical format
Final accounts (trading and profit and loss
accounts and balance sheets) are sometimes
prepared in ____________ instead of horizontal
format. The results are the ____ using either
presentation method.
vertical format
same
Example 7 is now shown in vertical format
74
Final accounts in vertical format
Flora Company
Trading and Profit and Loss Account for the year
ended 31 December 20X8

Sales 100,000
Less Returns inwards 3,000
97,000
Less Cost of goods sold
Opening stock 8,000
Add Purchases 60,000
Less Returns outwards 5,000 55,000
Add Carriage inwards 5,000
Goods packaging 4,000
72,000
Less Closing stock 10,000 62,000
Gross profit 35,000
Add Other revenues
Commission receivable 2,000
37,000
Less Expenses
Salaries 10,000
Electricity 5,000
Rent 10,000 25,000
Net profit 12,000
75
Final accounts in vertical format
We have mentioned that the balance sheet is a
presentation of the _______________ in statement
form. In a vertical style balance sheet, it shows
Fixed assets Net current assets Long-term
liabilities Capital.
accounting equation
Net current assets occur when current assets
______ current liabilities. When current
liabilities exceed current assets, their
difference is called _________________.
exceed
net current liabilities
Example 10 is shown in vertical format
76
Final accounts in vertical format
Flora Company
Balance Sheet as at 31 December 20X8
Fixed Assets
Furniture and fittings 30,000
Motor vehicles 20,000
50,000
Current Assets
Stock 10,000
Debtors 20,000
Bank 10,000
Cash 5,000
45,000
Less Current Liabilities
Creditors 8,000
Net current assets 37,000
87,000
Less Long-term Liabilities
Loan from Kowloon Bank 30,000
57,000
Financed by
Capital as at 1 January 20X8 50,000
Add Net profit for the year 12,000
62,000
Less Drawings 5,000
57,000
77
Final accounts in vertical format
Sometimes, long-term liabilities are shown under
capital in a vertical style balance sheet. Below
is an example
Long-term Liabilities
Loan from Kowloon Bank 30,000
87,000
Learning Objectives
78
Sometimes, businesses may have several
departments. Are the final accounts for these
companies prepared in the same way as mentioned
before?
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.
79
Sometimes, businesses may have several
departments. Are the final accounts for these
companies prepared in the same way as mentioned
before?
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.
80
Departmental accounts
Example 11 The following balances were extracted
from the books of Longway Company as at 31 March
20X7.
Sales Audio department 50,000 Digital
camera department 70,000 Stock (1 Apr
20X6) Audio department 10,000 Digital camera
department 20,000 Purchases Audio
department 20,000 Digital camera
department 40,000 Stock (31 Mar 20X7) Audio
department 15,000 Digital camera
department 10,000
81
Departmental accounts
Longway Company
Trading Account for the year ended 31 March 20X7
Audio Digital Camera

Sales 50,000 70,000
Less Cost of goods sold
Opening stock 10,000 20,000
Purchases 20,000 40,000
82
Departmental accounts
Longway Company
Trading Account for the year ended 31 March 20X7
Audio Digital Camera

Sales 50,000 70,000
Less Cost of goods sold
Opening stock 10,000 20,000
Purchases 20,000 40,000
30,000 60,000
Less Closing stock 15,000 15,000 10,000 50,000
Learning Objectives
83
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 prepare a trading account. A
__________________ is enough. The final accounts
for these businesses are a profit and loss
account and a balance sheet.
profit and loss account
Examples of businesses not trading in goods are
those in the ____________, such as dentists,
accountants and lawyers.
service sector
Revenue earned by service providers is usually
called fees earned, commission earned or services
charged.