Introduction to the Trial Balance, Trading and Profit and Loss

Accounts, and the Balance Sheet

Week 5

In Your Textbook...

Roshayani Arshad, et al. (2007), Financial Accounting An Introduction, 2nd Edition, Malaysia, McGraw Hill.

• Chapter 4: Accounting Cycle

(pp. 54 – 65)

Flowchart of Accounting Records

Source Documents

Journals

Trading, Profit & Loss Acc

Balance Sheet

Ledgers

Trial Balance

You’ve learnt that under double entry bookkeeping– for each debit entry there is a credit entry

– for each credit entry there is a debit entry

Let’s see if you can remember the basics of double entry.What is the double entry for the following transaction:

(a) Purchase of a new van for RM9,000 which was paid in full by cheque.

Dr.

Cr.

(b) Goods which cost RM40 taken out by the owner for her own use.

Dr.

Cr.

Motor Vehicle - Van

RM9,000

Bank

RM9,000

Drawings

Purchases

RM40

RM40

Recap

• All the items recorded in all the accounts on the debit side should equal in total all the items recorded on the credit side of the accounts.

• In order to check that there is a matching credit entry for every debit entry, we prepare something called a Trial Balance.

Trial Balance

• A Trial Balance is a list of all ledger accounts with balances at a particular date.

• All accounts with debit balances will be listed in one column and those with credit balances will be listed in the second column.

Determining the Balance

Accounts with debit balances

Accounts with credit balances

Asset Liability

Expenses Capital

Drawings Revenue

• At the end of each month, quarter-year, half-year or one year, all the accounts are balanced to determine whether they have debit or credit balances.

Purpose of Trial Balance

1. A test of the equality of the debit and credit balances in the ledger, i.e. it checks the mathematical accuracy of the double-entry rules used.

2. Helps to facilitate the preparation of the financial statements.

Trial Balance: ExampleQuickpower Trading

Trial Balance as at 5th February 2006

Account Title Debit ($) Credit ($)

Cash in Hand 4,900

Cash at Bank 55,400

Debtors 4,000

Stock 18,000

Fixtures and Fittings 10,000

Creditors 9,000

Bank Loan 30,000

Capital 50,000

Drawings 100

Sales 3,500

Electricity Expense 100

93,000 93,000

Lecture Exercise• From the following list of balances extracted from the ledger of

Wen on 31 Dec 02, prepare a Trial Balance as at that date.

RM RM

Loan 30,000 Carriage 2,000

Cash in hand 400 Creditors 5,425

Cash at bank 10,800 Sales 12,400

Capital 18,000 Purchases 9,400

Drawings 300 Return outwards 275

Motor vehicle 28,500 Wages 5,000

Debtors 6,100 Rent & rates 3,600

Trading and Profit and Loss Accounts

Flowchart of Accounting Records

Source Documents

Journals

Trading, Profit & Loss Acc

Balance Sheet

Ledgers

Trial Balance

Gross Profit

• A trader buys goods at a certain price and resells them at a higher price to earn profit = gross profit.

• • Derived from the difference between the selling

price and the cost price of the good.• Expenses incurred in running the business have

not been taken into account yet.

Gross Profit = Sales – Cost of Goods Sold

Preparation of the Trading Account

• Revenue and expenses affect the profits of a business.

• Their accounts are closed and balances transferred to the Trading and Profit and Loss Accounts for the calculation of profits.

• Accounts affecting the calculation of gross profit are transferred to the Trading Account.

• Accounts affecting the calculation of net profit are transferred to the Profit and Loss Account.

Dr Sales Account Cr

2002 $ 2002 $

Jul 31 Transfer to Trading 5,680 Jul 31 Balance 5,680

Dr Purchases Account Cr

Jul 31 Balance $3,900 Jul 31 Transfer to Trading $3,900

Dr Returns Outwards Account Cr

Jul 31 Transfer to Trading $150 Jul 15 Lin & Co $150

Dr Returns Inwards Account Cr

Jul 22 A. Huang $450 Jul 31 Transfer to Trading $450

Closing Stock

• Goods that remain unsold at the end of the accounting period.

• Recorded in the books as an asset.• To record the closing stock, a Stock

Account is debited with amount of goods in hand.

Opening Stock

• The closing stock of one accounting period will become the opening stock of the next accounting period.

• This is done by balancing the Stock Account and bringing down its balance to the next period.

Additional Cost on Purchases

1. Carriage Inwards – cost of transport borne by the buyer.

2. Duty on Purchases – import duties levied on goods imported and excise duties imposed on locally manufactured goods.

3. Wages on Purchases – wages which form part of the cost of preparing the goods or getting them ready for resale.

4. Other purchase expenses: packing & grading expenses, insurance on purchases, inward freight.

Trading Account: Example

On 31 December 2002, the books of B. Wu show the following balances:

$Stock, 1 January 2002 980Purchases 12,950Sales 10,590Returns inwards 340Returns outwards 480Carriage inwards 120Duty on purchases 150The closing stock is valued at $680.

Dr Trading Account for the year ended 31 Dec 2002 (horizontal) Cr

$ $ $ $

Opening stock 980 Sales 10,590

Purchases 12,950 Less Return Inwards 340

Less Return Outwards 480 10,250

12,470 Gross loss 2,790

Add Carriage Inwards 120

Duty on purchase 150 12,740

Cost of goods available for sale 13,720

Less Closing stock 680

Cost of goods sold 13,040

13,040 13,040

Trading Account for the year ended 31 Dec 2002 (vertical)

RM RM RM

Sales 10,590

Less: Return inwards 340

10,250

Less: Cost of goods sold

Opening stock 980

Add: Purchases 12,950

Less: Return outwards 480

13,450

Add: Carriage inwards 120

Duty on purchases 150 270

Cost of goods available for sales 13,720

Less: Closing stock 680 13,040

Gross loss (2,790)

Lecture Exercise

1. Using the information given below, prepare the Trading Account for the year ended 31 December 2002.

Purchases 26,850Sales 39,640Returns: Sales 250

Purchases 400Closing stock 2,630

(Gross Profit $15,570)

Dr Trading Account for the year ended 31 Dec 2008 Cr

Purchases 26,850

RM RM

Less return o/wards 400

Less closing stock 2,630

Cost of Goods available for sale

26,450

Sales

Less Return inwards 250

39,640

39,390 39,390

Gross profit 15,570

Cost of Goods sold 23,820

RM

RM RM RMSales 39,640 Less: Return inwards 250 Net sales 39,390

Less: Cost of goods soldOpening stock -Purchases 26,850 Less: Return outwards (400) 26,450 Cost of goods available for sales 26,450 Less: Closing stock (2,630) 23,820

Gross profit 15,570

Trading Account for the year ended 31 Dec 2008

Lecture Exercise2. Using the information given below, prepare the

Trading Account for the year ended 31 December 2002.

Purchases 34,750Expenses on purchases:

Duty 1,460Freight 1,650

Sales 43,800Returns: Sales 145

Purchases 95Stock: Opening 4,215

Closing 8,370

(Gross Profit $10,045)