Identify the treatment of stocks in the books of the business with particular reference to the final accounts

Final account

Trading account and profit and loss account

Purpose of business is to earn profit. Trader is in position to know how well he has fared during a trading period. Uncommon for a business end up into a loss. The trader determines the profitability of the business by preparing financial Account, Profit and Loss Account.

Trading account

The purpose of this account determines gross profit or loss. Gross profit is the excess of the sales over cost of goods sold, including the expenses directly attributable to put goods in a saleable condition.

The cost of the goods is represented by the value of the goods purchased during the period, including carriage in bringing the goods to the trade premises.

Gross profit (GP) = Sales - Purchases.

Gross loss (GL) = Purchases - Sales.

Stock

Unsold goods and are of two kinds, opening stock and closing stock.

Opening stock: is unsold goods which available at the beginning of trading period e.g. Available before starting business.

Closing stock: unsold goods available at the end of trading period i.e. goods remained unsold at the end of trading period.

Trading period

Is the period which a proprietor uses to evaluate his / her business to check of earn/ profit or losses from a business. Usually will be one year.

Trading account format

DR TRADING ACCOUNT CR

Details/Particular	Amount	Details/Particular	Amount
Opening Stock	XXX	Sales	XXX
Add: Purchases	XXX
Goods available for sale	XXX
Less: Closing stock	XXX
Cost of goods sold	XXX
Gross profit c/d	XXX
	XXX		XXX
		Gross Profit b/d	XXX

Example 1

Prepare trading Account for the year ended 2008.

Purchases 18,000

Sales 27,000

Stock at 1.1.2008 3,000

Stock at 31.12.2008 1,500

Solution

DR TRADING ACCOUNT FOR THE YEAR ENDED 31.12.2008 CR

Details/Particular	Amount	Details/Particular	Amount
Opening Stock	3,000	Sales	27,000
Add: Purchases	18,000
Goods available for sale	21,000
Less: Closing stock	1,500
Cost of goods sold	19,500
Gross profit c/d	7,500
	27,000		27,000
		Gross Profit b/d	7,500

Example 2

PREPARE TRADING Account for the year ended 2008.

Purchases 12,000

Sales 30,000

Stock at 1.1.2008 5,000

Stock at 31.12.2008 2,000

Example 3

Prepare trading Account for the year ended 2008

Purchase 70,000

Sales 120,000

Stock at 1.1.2008 30,000

Stock at 31.12.2008 25,000

Example 4

Prepare trading Account for the given the following.

Purchases 170,000

Sales 180,000

Stock at 1.7.2006 60,000

Stock at 30.6.2007 40,000

Solution 1

DR TRADING ACCOUNT FOR THE YEAR ENDED 31.12.2008 CR

Details/Particular		Amount	Details/Particular	Amount
Opening Stock		5,000	Sales	30,000
Add: Purchases		12,000
Goods available for sale		17,000
Less: Closing stock		2,000
Cost of goods sold		15,000
Gross profit	c/d	15,000
		30,000		30,000
			Gross Profit b/d	15,000

Solution 2

DR TRADING ACCOUNT FOR THE YEAR ENDED 31.12.2008 CR

Details/Particular		Amount	Details/Particular	Amount
Opening Stock		30,000	Sales	120,000
Add: Purchases		70,000
Goods available for sale		100,000
Less: Closing stock		25,000
Cost of goods sold		75,000
Gross profit	c/d	45,000
		120,000		120,000
			Gross Profit b/d	45,000

Solution 3

DR TRADING ACCOUNT FOR THE YEAR ENDED 31.12.2008 CR

Details/Particular	Amount	Details/Particular	Amount
Opening Stock Add: Purchases Goods available for sale Less: Closing stock Cost of goods sold Gross loss c/d	60,000 170,000 230,000 40,000 190,000 190,000 10,000	Sales Gross loss c/d	180,000 10,000 190,000