SOLE TRADER’S FINAL ACCOUNTS

Probably the main objective of the accounting function is the calculation of the profits earned by a
business or the losses suffered by it. The earning of profit is after all usually the main reason why the
business was set up in the first place, and the proprietor will want to know for various reasons how
much profit has earned or loss he has suffered. First he will want to know how the actual profits
compare with the profits he had hoped to make. He may also want to know his profits for such diverse
reasons as: to assist him to plan ahead, to help him to obtain a loan from a bank or from a private
individual, to show to a prospective partner or to a person to whom he hopes to sell the business, or
maybe he will need to know his profits for income tax purposes.

In the case of a trader, i.e. one man business, who is mainly concerned with buying and selling, the
profits are calculated by drawing up a special account called a Trading, Profit and Loss Account. For a
manufacturer it is also useful to prepare Manufacturing Accounts as well, but this will not be dealt with
in this topic. Undoubtedly one of the most important uses of the trading, profit and loss account is
comparing the results obtained with the results expected. Many businesses attach a great deal of
importance to their gross profit percentage. This is the amount of Profit made, before deducting
expenses for every N1 of sales. In order that this may easily be deduced from the profit calculations, the
account in which profit is computed is split into two sections- one in which the Gross Profit is calculated,
and the next section in which the Net profit is calculated. Where the cost of goods sold is greater than
the sales the result would be a Gross Loss, but this is a relatively rare occurrence. Where the expenses
incurred exceed the gross profit plus other revenue then the result is said to be a Net Loss. By taking the
figure of sales less the cost of goods sold, it can be seen that the accounting custom is to calculate a
trader’s profits only when the goods have been disposed of and not before. Gross Profit is defined as the
excess of sales over costs of goods sold in the Trading Account) period. While, Net Profit is what remains
after all other overhead expenses incurred in the period have been deducted. While the Trading Account
is used for the determination of Gross Profit (or Gross Loss), the Profit and Loss Account section is used
for determination of Net Profit (or Net Loss). While net profit increases the capital of the proprietor, net
loss, on the other hand decreases his capital.

After the trading, profit and loss accounts have been completed a statement is drawn up in which the
remaining balances in the books are arranged according to whether they are asset balances or liability or
capital balances. This statement is called a balance sheet. The assets are shown on the right-hand side
and the capital and liabilities on the left-hand side. It is very important to know that the balance sheet is
not part of the double-entry system, and therefore it is not an account. This contrasts with the Trading
and Profit and Loss Account which is part of double-entry. The use of the word ‘account’ indicates that it
is part of double-entry.

It is important to note that when preparing the final accounts (i.e. Trading, Profit and Loss Account and
Balance sheet) a Trial Balance is required, with some additional information (at least the value of closing
stock). This is because the value of closing stock is not obtain directly from an account, but through a
process known as stock taking, i.e. counting the left over of items in the shop and using calculator or
computer to value them. However, while all items appearing on the trial balance are to treated once,
either in the Trading Account, Profit and Loss Account or the Balance sheet, all other items appearing in
the additional information is to be treated twice, either in the Trading Account and the Balance Sheet or
in the Profit and Loss Account and the Balance sheet.

Note:
1) The trading profit and loss account is an account whereas the balance sheet is not. Also the
trading profit and loss account consist of two parts, the Trading Account where the Gross
Profit/Loss is found which is the excess/shortage of sales over the cost of goods sold; the
Profit and Loss Account where the Net Profit/Loss is found which contains the gross profit
plus any other revenue other than sales such as discount received, commission earned etc.
Less total cost used up during the period.
2) Carriage inwards refers to the cost of transporting purchases made by the business to its
place of storage. Hence this expense increases the cost of purchases. On the other hand,
carriage outward is the expenses of transporting the goods sold to the buyer’s premises. It is
an expenses which is debited to the profit and loss account.

Format

Trading Profit and loss Account for the year ended xxxxx (vertical format)

Sales / Turnover……………………………………………………………………………………xxx

Less sales return/ return inwards…………………………………………………………xxx

Net Sales………………………………………………………………………………………………xxx

Less Cost of Sales:

Opening Stock………………………………………………………..xxx

Add purchases…………………………….xxx

Carriage inward…………………….xxx

xxx

Less return outwards ………………..xxx

xxx

Cost of goods available………………………………………….xxx

Less closing stock………………………………………………….xxx

Cost of goods sold………………………………………………………………………………………xxx

Gross profit…………………………………………………………………………………………………xxx

Less Expenses:

Salaries & wages……………………………………………….xxx

Rent………………………………………………………………….xxx

Discount allowed……………………………………………..xxx

Advertisement………………………………………………….xxx

Depreciation…………………………………………………..xxx

Total expenses……………………………………………………………………………………….xxx

NET PROFIT / LOSS………………………………………………………………………………….xxx

Trading Profit and loss Account for the year ended xxxxx ( T format)

Opening Stock…………….…………………..…..xxx sales…………………………………………………..xxx

Add purchases……………….xxx less return inwards…………………………..xxx

Carriage inward………..xxx net sales…………………………………………….xxx

xxx

Less return outwards……..xxx

xxx

Cost of goods available…… ………………….xxx

Less closing stock…………………………………….xxx

Cost of goods sold.…………………………………xxx

Gross profit cld………………………………………xxx

Xxxx xxxx

Gross profit b/d……………………………………..xxx

Salaries & wages…………………………………….xxx

Rent…………………………………….…………….….xxx

Discount allowed………………………..………..xxx
Advertisement……………………………………….xxx

Depreciation…………………………………………..xxx

NET PROFIT…………………………………………….xxx

Xxxx xxxx

Balance Sheet as at xx.xx.xx (vertical format)

Fixed Asset Cost Dep NBV

Land………………………………………………………………………………………..xxx…………..xxx……………xxx

Motor………………………………………………………………………………………xxx…………..xxx…………..xxx

Total fixed asset………………………………………………………………………………………………………….xxx

Current assets:

Stock……………………………………………………………………………………….xxx

Debtors……………………………………………………………………………..……xxx

Banks………………………………………………………………………………………xxx

Cash……………………………………………………………………………………….xxx

Total current asset…………………………………………………………………………………….xxx

Less current liabilities:

Creditors……………………………………………………………………………….xxx

Bank overdraft..…………………………………………………………………….xxx

Total current liabilities…………………………………………………………………………………xxx

Working capital…………………………………………………………………………………………………………….xxx

Xxxx

Financed by:

Capital……………………………………………………………………………………………………………xxx

Add net profit…………………………………………………………………………………………………xxx

 Xxx

Less drawings………………………………………………………………………………………………….xxx

xxxx

Add long term liabilities:

Loan………………………………………………………………………………………………………………xxxx

Xxxx

Balance Sheet as at xx.xx.xx (T format)

Capital…………………………………………xxx Fixed Asset

Add net profit…………………..…………xxx Land………………………xxx

Xxx motor……………………...xxx

Less drawings…………………………….xxx current asset:

Xxxx stock……………………….…xxx

long term liabilities: debtors………………………...xxx

Loan………………………………………xxxx banks…………………………….xxx

current liabilities: cash………………………………..xxx

Creditors………………………………….xxx

Bank overdraft..……………………….xxx

Xxxx xxxx

Exercise without Adjustment

1) The following trial balance was extracted from the books of Fatou Jallow on 30 th September 2010
Dr Cr
Sales……………………………………………………………………………………………….37200
Purchases…………………………………………………………………23112
Stock 1 October 2009………………………………………………4776
Carriage outwards…………………………………………………….752
Carriage inwards………………………………………………………468
Salaries & wages………………………………………………………4894
 Motor expenses………………………………………………………1326
Return inwards……………………………………………………….880
Return outwards…………………………………………………………………………….710
Rent………………………………………………………………………580
Motor vehicle at cost………………………………………….4400
Fixtures & fittings at cost…………………………………….600
Sundry expenses…………………………………………………2404
Creditors ………………………………………………………………………………………6095
Debtors……………………………………………………………….8977
Cash at bank………………………………………………………..12124
Cash at hand……………………………………………………….200
Drawings……………………………………………………………4200
Capital……………………………………………………………………………………………25688
Total 69693 69693
Stock at 30 september 2010 was values at D5950

You are required to prepare a trading profit and loss account and a balance sheet for Fatou
Jallow as at 30 september 2010.

Final Accounts with Adjustments

We have looked at a trading profit and loss account where sales is taken for a period and all expenses for
that period is deducted from it, thus the result being a net profit or loss. In this case, we assume that the
expenses belonged exactly to the period of the trading profit and loss account. But you should be
cognizant of the fact that the accountant is concern with revenue earned and expenses incurred during
the period and not the receipts and payments actually made. Therefore adjustments are required for the
following:

1) Revenues other than sales: most of the time we consider sales as the only revenue for the
business. There are other revenue such as sales commission received, rent sub lease, discount
received, decrease in provision etc. such revenues are added to the gross profit in order not to
understate the profit for the period.
2) Accruals/Owings: these refer to services incurred during the period but not yet paid for as at the
time of extracting the final accounts. Such owings are added back to the expenses in the trading
profit and loss account and also under the current liability in the balance sheet.
3) Prepayments: refers to services paid for but not yet enjoyed. Such items are subtracted from the
expenses in the trading profit and loss account and added to the current assets in the balance
sheet.
4) Bad debts: refers to the debts that the business cannot recover. Bad debts are subtracted from
the expenses in the trading profit and loss account.
5) Provision for doubtful debts: this is money set aside against profit for doubtful debts. Increase in
provision is recorded under expenses in the trading profit and loss account and deducted from
 the debtors in the balance sheet. While a decrease in provision is revenue, it’s added to the
gross profit in the trading profit and loss account.
6) Depreciation: is the measure of the wearing out, consumption or loss of valued of a fixed asset
and they are added to the expenses in the trading profit and loss account.

When we make such adjustments, we are applying one of the accounting principles known as matching
concept. This principle states that all revenues and expenses should be match in the year in which they
are incurred.

SAMPLE QUESTION

QUESTION ONE
The following trial balance was extracted from the books of Muhammad at the close of
business on 3I July, 2017

Trial Balance As At 31st July, 2017

Particulars Dr Cr
22,86
Purchases and Sales 0 41,970
Stock 1st August 2016 5,160  
Capital 1st August 2016   7,200
Bank Overdraft   4,350
Cash 90  
Discounts 1,440 930
Returns inwards 810  
Returns outwards   570
Carriage outwards 2,160  
Rent and insurance 1,740  
Provision for Bad and Doubtful debts   660
Fixtures and Fittings 1,200  
Delivery Van 2,100  
Debtors and Creditors 11,910 6,060
Drawings 2,880  
Wages and salaries 8,940  
Office expenses 450  
61,74
0 61,740
You are required to prepare a Trading, Profit and Loss Account for the year ended 31
July 2017, and a Balance Sheet as at that date. Give effect to the following adjustments:
(i) Stock 31 July 2010 D4, 290.
(ii) Wages and salaries accrued at 31 July 2017 D 2l0, Office expenses owing D810.
(iii) Rent prepaid at 31 July 2017 D180
(iv) Increase provision for Bad and Doubtful Debts by DI50 to D810.
(v) Provide for depreciation as follows: Fixtures and fittings D120, Delivery van D500.
(15 Marks)
 Muhammad
Trading, Profit and Loss Account for the Year Ended 31 July, 2017  
D D D D
Opening stock 5,160 Sales 41,970
Add: Purchases 22,860 Less returns inwards 810
28,020 Net sales 41,160
Less Returns outward 570
COGAS 27,450
Less: Closing stock 4,290
Cost of Goods Sold 23,160
Gross Profit c/d 18,000
41,160 41,160

8,94
Wages and Salaries 0   Gross profit b/d 18,000
Add: Accrued 210 9,150 Discount received 930
Office expenses 450  
Add: Accrued 810 1,260
1,74
Rent & Insurance 0  
Less prepaid 180 1,560
Discount allowed 1,440
Increase in PBDD:  
New provision 810  
Less old provision 660 150
Depreciation:  
Furniture and Fittings 120  
Delivery van 500 620
Carriage outwards 2,160
Net profit c/d 2,590
18,930 18,930
 
   
 Balance Sheet as at 31 July, 2017
D D
7,20 A.Dep
Opening capital 0   Fixed Assets Cost . NBV
2,59
Add: Net profit 0   D D D
9,79
0   Fixtures & Fittings 1,200 120 1,080
2,88
Less drawings 0   Furt. & Equipt. 2,100 500 1,600
Closing capital 6,910 3,300 620 2,680
 
Current Liabilities   Current Assets
6,06
Creditors 0   Stock 4,290
Accrued wages &
salaries 210   Debtors 11,910
Accrued office
expenses 810   Less BD 810 11,100
4,35
Bank overdraft 0 11,430 Prepaid rent 180
  Cash 90
  15,660
18,340 18,340
 

Exercise 1

a) The following trial balance was extracted from the books of kumba manneh as at 28 february
2011
Dr Cr
D D
Purchases & Sales 11280 19740
Cash at bank 1140
Cash in hand 210
Capital 9900
Drawings 2850
Office furniture 1440
Rent 1020
Wages and salaries 2580
 Discount 690 360
Debtors & Creditors 4920 2490
st
Stock 1 march 2010 2970
st
Provision for bad & doubtful debt 1 march 2010 270
Delivery van 2400
Van running costs 450
Bad debts written off 810
Total 32760 32760
Notes:
a) Stock at 28th February 2011 D3510
b) Wages and salaries accrued at 28 February 2011, D90
c) Rent prepaid at 28 february 2011, D140
d) Van running cost owing at 28 february 2011, D60
e) Increase the provision for bad and doubtful debts by D60
f) Provide the depreciation as follows: office furniture D180 and delivery van D480.

You are required to prepare the final account for kumba manneh as at 28 february 2011.

Exercise 2.

The following represents the trial balance extracted from the books of Mr jones, a small business
based in Aboyne. The books are well-maintained and there is no reason to doubt the accuracy of
the entries

Dr Cr

£ £

Sales 430,000

Purchases 293,500

Carriage in 2100

Drawings 31,000

Rent 5,200

Business rates 2,600

Insurance 550

Postage 250
Stationery 986

Advertising 250

Wages 10,500

Bad debts 400

Provision for doubtful debts 400

Debtors 5,120

Creditors 3,600

Cash in hand 120

Cash at bank 3,257

Stock 6,520

Equipment at cost 150,000

Accumulated depreciation- equipment 35,000

Capital 43,353

512,353 512,353

Following a discussion with Mr Jones, the following points have come to light:

a) Accruals are necessary for rent (£150), business rate (£200), and stationery (£16).
b) Insurance has been prepaid by £150, advertising by £50.
c) Stock at the year-end is £7,000.
d) Depreciation is to be charged on the equipment at a rate of 10% on cost.
e) The doubtful debt provision is to be increased to 10% of the year-end balance.
f) Purchase invoices to the value of £12,000 were found in a desk drawer the day before the
meeting with Mr Jones. Half of them have been paid by cheque (but no record made in
the cash book) and the rest are outstanding

Required

a) Prepare a trading and profit and loss account for the year ending on the date of extraction
of the trail balance together with a balance sheet as at that date.