Trading profit and loss

Trading Profit and Loss

Gross Profit/Loss using Trading Account

The trading and profit and loss A/C is an account that is composed of two accounts, the trading A/C, and the profit and loss A/C.

The trading A/C is used to determine the gross profit of the goods sold:

Gross profit = sales – cost of goods sold

The profit and loss account (A/C) is the part of the account that determines the net profit loss:

Net profit = gross profit – expenses

Net loss = expenses – gross profit

• In the profit and loss A/C, the gross profit and other revenues are credited to the account while the operating expenses are debited.

• We have net profit if the credit is greater than the debit and net loss if the debit is greater than the credit.

Example 1

The following is the trial balance of FMHN Trading Co. as at 31 December 2004. Prepare the trading and profit and loss accounts for the year 2004.

FMHN TRADING CO.

TRIAL BALANCE as at 31 December 2004

Account	DR	CR
Capital		41,500
Machines	4,550	-
Motor vehicle	5,520	-
Stock	24,970	-
Debtors	20,960	-
Creditors	-	16,275
Cash	755	-
Purchases	71,630	-
Sales	-	90,370
Salaries	8,417	-
Office expenses	1,370	-
Discount allowed	563	-
Drawings	9,500	-
Total	148,235	148,235

The following information was available at 31 December 2004:

1. Stock at 31 December 2004: 27,340/-
2. Office expenses owing: 110/-
3. Depreciation to be charged as motor vehicle 20%, machines 10%.

Solution

Net Profit/Loss Account

When net loss is recorded, the profit and loss A/C appears as shown in the following example.

PROFIT AND LOSS A/C

For the year ending 31 December 2004

First, adjust the trial balance to include the three items above.

1. Add the stock and the purchases, to obtain 96,600. Subtract the stock at the end of the period to obtain 69,260. This gives the cost of the stock sold.
2. Add 110 to the office expenses account, increasing it to 1,480.
3. Motor: 20% of 5,520 is 1104. Machines: 10% of 4,550 is 455. Include these under depreciation.

Set out the account as shown below. The gross profit of 21,110 is found to be subtracting the cost of the stock (69,260) from the sales (90,370). The net profit of 9,991 is found by subtracting the costs of the firm (salaries, office expenses, discount, and depreciation from the gross profit).

FMHN TRADING CO.

TRADING AND PROFIT AND LOSS A/C For the year ending 31st December 2004

Opening stock	24,970		Sales	90,370
Purchases	71,630		Less: Closing stock	27,340
Goods available for sale	96,600		Gross profit c/d	21,110
Cost of goods sold	69,260
	90,370			90,370

Salaries	8,417	Gross profit b/d	21,110
Add: Owing	110
Office expense	1,370
Add: Owing
Discount allowed	563
Depreciation: Motor vehicle	1,104
Machines	455
Net profit	10,091		21,110

Income Statement		Expenses
Salaries	1,500	Gross profit b/d	12,500
Electricity	3,400	Discount received	1,500
Rent	800
Advertising	2,700
Discount allowed	4,000
Office expenses	5,600
Net loss	4,000