Final Accounts Presentation

Peter Green and Kevin Murphy

TRADING, PROFIT & LOSS ACCOUNTS AND BALANCE

SHEETSFurther Considerations


Returns Inwards and Returns Outwards.

• The Sales account and the Returns Inwards account, deal with goods sold and goods returned by customers, respectively.

• The Purchases account and the Returns Outwards account deal with goods purchased and goods returned to the supplier, respectively.


Returns Inwards and Returns Outwards.

• When gross profit is calculated, returns also have to be taken into account.

• Remember B. Swifts trial balance.


B. SwiftTrial Balance as at 31 December 2005

Dr Cr£ £

Sales 3,850Purchases 2,900Rent 240Lighting expenses 150General expenses 60Fixtures and Fittings 500Debtors 680Creditors 910Bank 1,510Cash 20Drawings 700Capital 2,000

6,760 6,760


Returns Inwards & Outwards

• Suppose that in the trial balance of B. Swift, rather than simply containing a sales account balance of £3,850 and a purchases account balance of £2,900, the balances showing stock movements were as follows:



Dr CrRS RS

Sales 4,000Purchases 3,120Returns inwards 150Returns outwards 220Rent 240Lighting expenses 150General expenses 60Fixtures and Fittings 500Debtors 680Creditors 910Bank 1,510Cash 20Drawings 700Capital 2,000

7,130 7,130



• Both, in fact, amount to the same thing, as far as gross profit is concerned.

• In the original version, sales wereRS3,850.• In the amended version, returns inwards

should be deducted to obtain the correct figure for goods sold to customers and KEPT by them, i.e. £4,000 - £150 = £3,850.



• Similarly, purchases were originally shown as being £2,900.

• In the amended version, returns outwards should be deducted to obtain the correct figure for the actual goods purchased and KEPT, by B. Swift for resale.

• Remember the previous financial statement, i. e. the Trading, Profit and Loss Account.


B. SwiftTrading, Profit and Loss AccountYear Ended 31 December 2005

£ £Sales 3,850Less Cost of Sales

Purchases 2,900Closing stock ( 300)

(2,600)GROSS PROFIT 1,250Less EXPENSES

Rent 240Lighting 150General 60

( 450)NET PROFIT 800

======



• The revised Trading, Profit and Loss account, will provide the same information, but will look slightly different, as shown next.



£ £Sales 4,000Less Returns inwards ( 150)

3,850Less Cost of Sales

Purchases 3,120Less Returns outwards ( 220)Closing stock ( 300)

(2,600)

GROSS PROFIT 1,250Less EXPENSES

Rent 240Lighting 150General 60

( 450)

NET PROFIT 800======


Carriage

• When goods are delivered by suppliers or sent to customers, the cost of delivering the goods is often an additional cost of the goods purchased, or an additional cost to the business for delivering the goods to the customer (free of charge), respectively.

• In accounting, this is referred to as the COST of carriage.


Carriage

• When a COST is incurred for delivery of goods purchased, it is called carriage inwards.

• When a COST is incurred for the delivery of goods to customers, it is called carriage outwards.

• In order to ensure that the correct cost of buying goods for resale, is always included in the calculation of GROSS PROFIT (Remember, gross profit is the difference between the total cost of the goods acquired for resale, and the selling price of the goods to the customer), carriage inwards is always added to the cost of purchases in the trading account (it is part of the cost of buying the goods for resale).


Carriage

• If the business decides to deliver goods to customers, free of charge (when a business does not add an amount on to the standard selling price to cover the cost of delivering the goods to the customer), this COST (carriage outwards) should be included in the calculation of net profit, as carriage outwards is effectively an expense, and therefore included in the Profit and Loss account.


Stock and the second year of a business.

At the end of his second year of trading, on 31 December 2006, B. Swift draws up another trial balance, which is shown below:



Dr Cr£ £

Sales 6,700Purchases 4,260Rent 240Lighting & Heating expenses 190Wages: shop assistant 520General expenses 70Carriage outwards 110Buildings 2,000Fixtures and Fittings 750Debtors 1,200Creditors 900Bank 120Cash 40Drawings 900Capital 3,100Stock 300

10,700 10,700


OPENING STOCK

• The closing stock, as of 31 December 2005, has become the opening stock for the year ended 31 December 2006 and appears in the trial balance at this date.

• Remember what stock is. Goods the business owns for resale (A CURRENT ASSET).

• Usually, these will be the goods which the business will sell first in the second year, before buying anymore goods (purchases) to resell.


OPENING STOCK

• In order to find how much stock B. Swift has at the end of the second year, i.e. 31 December 2006, B. Swift will again have to list the goods he has not sold during the year (i.e. undertake a stocktake). In other words, identify the goods he still has in the store room (stock).

• Again this closing stock of goods, will usually be valued at cost, i.e. what the business paid for them.

• B. Swift values his stock at 31 December 2006 at £550.

• Let us look at the stock account for the two years.


STOCK ACCOUNT FOR TWO YEARS

STOCK A/C2005 £ 2005 £Dec 31 Trading A/c 300

Dec 31 Balance c/d 300

300 300

2006 2006Jan 1 Balance b/d 300

Dec 31 Trading A/c 300Dec 31Trading A/c 550

Dec 31 Balance c/d 550850 850

2007Jan 1 Balance b/d 550


OPENING AND CLOSING STOCK

• The closing stock for one period is always brought forward as the opening stock for the next period.

• The Trading, Profit and Loss account for the year ended 31 December 2006, and Balance Sheet as at 31 December 2006 will appear as follows:



£ £Sales 6,700COST OF SALES

Opening stock 300Purchases 4,260

4,560Closing stock ( 550)

(4,010)

GROSS PROFIT 2,690EXPENSES

Carriage outwards 110Wages 520Rent 240Lighting and heating expenses 190General expenses 70

(1,130)

NET PROFIT 1,560======


B. SwiftBalance Sheet as at 31 December 2006

£ £FIXED ASSETS

Buildings 2,000Fixtures and Fittings 750

2,750CURRENT ASSETS

Stock 550Debtors 1,200Bank 120Cash 40

1,910CURRENT LIABILITIES

Creditors ( 900)

NET CURRENT ASSETS 1,0103,760=====

CAPITALBalance at 1 January 2006 2,100Capital introduced 1,000Net Profit 1,560

4,660Drawings ( 900)

3,760=====


What has happened during the year in the Capital Account?

NOTE: The balance brought forward in the Trial Balance is £3,100, NOT £2,100. This means that during the year the owner has introduced an extra £1,000.


Financial Statements

• Financial statements is the term given to all the summary statements that accountants produce at the end of an accounting period (in the example provided, one year).

• They used to be called the FINAL ACCOUNTS, but this is misleading, as the Balance Sheet, for example, is not an account.

• You should note, however, that many people still refer to them as the final accounts, or more simply, the accounts.


Other expenses in the Trading account.

• ANY COSTS incurred in converting purchases into goods for resale, should be included in the Trading account, i.e. in the calculation of gross profit,

• For goods imported, it is usual to find that the costs of import duty and insurance, are treated as part of the cost of the goods, along with any costs incurred in repackaging the goods for resale.


EXAMPLE

L. Stokes drew up the following trial balance as at 30 September 2008. You are to draft the trading, profit and loss account for the year ended 30 September 2008 and a balance sheet as at that date.

Note that stock at 30 September 2008 was valued at £27,475.


L. StokesTrial Balance as at 30 September 2008

Dr Cr

£ £Capital 30,955Drawings 8,420Cash at bank 3,115Cash in hand 295Debtors 12,300Creditors 9,370Stock 23,910Van 4,100Office equipment 6,250Sales 130,900Purchases 92,100Returns inwards 550Carriage inwards 215Returns outwards 307Carriage outwards 309Motor expenses 1,630Rent 2,970Telephone charges 405Wages & Salaries 12,810Insurance 492Office expenses 1,377Sundry expenses 284

171,532 171,532


L. StokesTrading, Profit and Loss AccountYear Ended 30 September 2008

£ £Sales (130,900 – 550) 130,350COST OF SALES

Opening stock 23,910Purchases & Carriage (92,100+215-307) 92,008

115,918Closing stock (27,475)

(88,443)

GROSS PROFIT 41,907EXPENSES

Carriage outwards 309Motor expenses 1,630Rent 2,970Telephone 405Wages & Salaries 12,810Insurance 492Office expenses 1,377Sundry expenses 284

(20,277)

NET PROFIT 21,630 ======


L. StokesBalance Sheet as at 30 September 2008

£ £FIXED ASSETS

Van 4,100Office Equipment 6,250

10,350CURRENT ASSETS

Stock 27,475Debtors 12,300Cash at Bank 3,115Cash in hand 295

43,185CURRENT LIABILITIES

Creditors (9,370)

NET CURRENT ASSETS 33,815 44,165 =====

CAPITALBalance at 1 October 2007 30,955Net Profit 21,630

52,585Drawings (8,420)

44,165 ======

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Final Accounts Presentation