5/2/2025
UNIT 10
Learning objectives
• Introduction to Final Account
• Key elements of Trading Account
• Importance of Trading Account
• Key elements of Profit and Loss Account
• Importance Profit and Loss Account
• Prepare the Trading and Profit & Loss Accounts
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Introduction to Final Accounts
Every year, an organisation needs to answer two important
questions:
1. How much profit (or loss) did it make this year?
2. How much is the organisation worth?
To find the answers to these questions, a company will prepare
a set of accounts.
Textbook page reference: 320
Final Accounts
Final Accounts include:
(i)Trading account: It shows gross profit/loss of the
business for the accounting period.
(ii)Profit & loss account: It shows the net profit/loss
of the business for the accounting period.
(iii)Balance sheet: It shows the financial position of
the business at a specific date.
These are prepared at the close of the year hence
known as final accounts.
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final accounts
2 Accounting concepts for Final Account Preparation
ACCOUNTING CYCLE
TRANSACTIONS
Entry in the
Preparation
books of
of final
Original Entry
accounts
(ORIGINAL
(summary)
RECORD)
Preparation of Posting in the
Trial Balance concerned
(CHECKING THE Ledger account
ACCURACY) (CLASSIFICATION)
Balancing of
accounts
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PreParation of final accounts
• Balances of all the accounts in the ledgers are
transferred to trial balance.
• From trial balance, expenses and income
accounts are transferred to trading account and
profit and loss account.
• Assets, Liabilities and Capital (Accounts with
balances which are to be carried forward to the
next year) are shown in the balance sheet. The
balance sheet constitutes the final stage of
accounting.
Do exercise on pg 115- Transfer from ledgers to Trading A/c
features of trading account
1. It is the first stage In the preparation of final
accounts.
2. It include net sales, net purchases,
opening/closing stock and direct cost of goods
sold (eg. Carriage inwards, custom duty etc).
3. The balance of this account discloses the gross
profit or gross loss.
4.The balance of this account (Gross Profit/loss is
transferred to the profit and loss account.
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Format of the Trading Account
Glory Pte Ltd
Trading Account for the year ended 31st December 2023
Opening stock 100 Sales 1000
Less: Sales Returns 200
Purchases 200 Net Sales 800
Less: Purchases Returns 50
Net Purchases 150
Add Carriage Inwards 20
Custom duty 10
Wages on packaging 20
Freight & insurance 20
Total purchases 220
Cost of goods available for sale 320
Less: Closing stock 100
Cost of goods sold (COGS) 220
Gross profit c/d 580
800 800
Gross profit is b/d to the Profit and loss Account
Components in Trading Account
Opening stock is the cost of goods held in stock at the beginning of the financial
year.
Purchases (net) is the cost of goods bought during the year. These goods are
bought with the specific intention of reselling them.
-
Drawings of Goods taken by owner
+
Carriage/freight inwards is the cost of having purchases delivered to the business.
+
Wages for workers packing purchase goods for re-sale
+
Customs/Import duties is a tax paid on purchases from Import.
Closing stock is the value of goods held in stock at the end of the financial year.
(unsold goods)
Cost goods sold is the cost to the business of selling the goods that were actually
sold during the trading period.
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Components in Trading Account
Sales (net) is the value of the goods sold by the business.
Cost goods sold is the cost to the business of selling the goods
that were actually sold during the trading period.
Gross Profit/Loss
Textbook page reference: 321
Closing Stock in Trading Account
Chapter 27
• Closing stock is the value of goods unsold at the end of the
financial year.
• Closing stock this A/c’g period = opening stock of next A/c’g period.
• Value of stock = lower of cost price and net realizable value.
Difference (Cost-NRV) = loss in Profit and Loss A/c
Textbook page reference: 321
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Accounting concept for Closing Stock
Chapter 27
Textbook page reference: 321
Formula in Trading Account
Net Purchases
Net Sales= Sales- Sales returns
=Purchases-Purchases returns
Cost of goods available for sale
(COGAS)
Cost of goods sold (COGS)
=Opening stock + Net Purchases
= Opening stock + Net
Purchases– closing stock
Gross Profit=Net Sales-Cost of Or
Goods sold COGAS – closing stock
Do exercise on pg 112- 115
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remember… Chapter 27
Sales Some
Opening stock Old
Purchases People
Customs Duty Can Drive
Carriage In Cars In
Closing Stock Space!
Textbook page reference: 324
Profit and loss account
• The profit and loss account shows net
profit. Trading account shows Gross Profit.
Net Profit/Loss= Gross Profit + Income -
Expenses
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Profit and loss account
• The profit & loss statement or Income statement is
considered one of the most important documents
for keeping an eye on the financial health of a
business.
• It is now known as the ‘Statement of Financial
Performance’.
Importance of Profit and Loss Account
1. It provides information about net profit earned or net
loss suffered by the business.
2. It helps in determining whether the business is being
run efficiently or not by comparing the Profit and
Loss account of two accounting periods.
3. It helps in taking effective control steps by analysing
the various expenses listed in the Profit and Loss
account of two accounting periods years.
4. It allows in the estimation of profit for the coming
years by comparing the profit of previous years.
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Format of the Profit and Loss Account
Glory Pte Ltd
Profit and Loss Account for the year ended 31st December 2023
Expenses Gross Profit b/d 800
Advertising 150 Add: Other Incomes
Salaries 100 Rent received 100
Salesmen’s commission 220 Int rec from bank
Insurance expenses 280 deposit 200
Water & Electricity expenses 250 Commission rec 300
Delivery expenses 200 Discount rec 100 700
Rental expenses 300 Net Loss 400
Office expenses 400
1900 1900
Go through the illustration on pg 116-117: Trf from
ledgers to P/L A/c
Chapter 27
Recap and review
Can you?
› Explain the term ‘final accounts’
› Outline the reasons why businesses prepare final accounts
› Outline the purpose of the trading account and Profit & Loss
account?
› List and explain the key elements of a trading account and Profit &
Loss account?
› Prepare a trading account in order to calculate gross profit.
› Prepare a Profit and Loss account in order to calculate net profit.
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THE END
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