Trading and profit and loss accounts and balance sheets: Other items

• The Trading and Profit and Loss Account and Balance Sheet are almost always more complex in the real world when compared to the simple statements in these notes
• There are several more factors to be taken into consideration when preparing these final accounts
• These include:
• Sales and Purchases Returns
• Carriage inwards and Carriage outwards
• Opening stock from the previous trading period

Sales and Purchases Returns

• Both these items are dealt with in the Trading Account
• Sales Returns are deducted from the Sales figure
• The result is known as Net Sales or Net Turnover
• It is important to understand that typically Sales Returns only affect Credit Sales and Not Cash Sales
• Purchases Returns are deducted from the Purchases figure in the Trading Account

(Sales-Sales Returns)-(Opening Stock+(Purchases-Purchases Returns)-Closing Stock)=Gross Profit

Carriage Inwards

• Includes all the costs incurred in bringing purchases into the businesses
• For example: courier costs
• transport costs
• Freight charges
• postage costs etc
• Carriage inwards must be added to the cost of purchases in the Trading Account

Carriage Outwards

• These are the costs incurred when goods are delivered to customers
• For example the business might offer customers “free” delivery
• Carriage outwards in not part of the Sales figure
• Carriage Outwards are an expense item in the Profit and Loss Account

Closing and Opening  Stock

• In the second and subsequent years of business most businesses have stock remaining at the end of the year
• This stock is known as closing stock.
• It is deducted from the Total Goods available in the Trading Account
• The closing stock in the preceding year is treated as Opening stock in the subsequent period
• Opening Stock is added to Purchases so as to obtain the Cost of Goods Available in the Trading Account

Other expenses that appear in the Trading Account

• In addition to the items listed above
• The Trading Account must also include items such as import duty (this is added to purchases)
• Transport insurance
• Courier’s handling fees
• Any costs incurred in bringing goods into a salable condition including repairs

To access more topics go to the Principles of Accounts Notes.