What is Accounting
The provision of information of an
economic or financial nature.
Enable to make better decision.
What is Bookkeeping
Book-keeping is the process of
recording the monetary worth of
business transactions in the books of
accounts. It is the record-making
phase of accounting.
The Major Users of
Accounting Information
Owners
Management
Lenders
Suppliers of Goods and Creditors
Customers
Competitors
Government
Employees
The Public
Accounting Equation
Assets
(Resources in the
business)
=
Capital
+
(Resources Supplied
by the owner)
Liabilities
(Resources Supplied
by outsiders)
The Balance Sheet
The expression of the accounting
equation
Example
The introduction of capital
1 July 1997
Peter opened a bank account for this new
business and paid in a cheque of $40,000 as
his investment in the business.
Peter
Effect
Balance Sheet as at 1 July 1997
Bank (assets)
Capital
increases
increases
$
$
Assets
Bank
40,000 Capital
40,000
40,000
40,000
Example
The purchase of stock by cheque
4 July 1997
The business bought goods for resale of
$5,000 by cheque.
Peter
Effect
Balance Sheet as at 4 July 1997
Stock (assets)
$
increases
Assets
Bank (assets)
Stock
decreases
Bank
5,000 Capital
$
40,000
35,000
40,000
40,000
Example
The purchase of stock by incurring
a liability (i.e. deferring payment)
10 July 1997
The business bought goods $10,000 on credit
from P.Tang.
Peter
Effect
Stock
Creditor
(assets)
(liability)
increases
increases
Balance Sheet as at 10 July 1997
$
Assets
$
Capital
40,000
Stock
15,000 Liabilities
Bank
35,000 Creditor
10,000
50,000
50,000
Example
Sale of stock for cash
20 July 1997
Sold goods for cash $4,000.
Peter
Effect
Balance Sheet as at 20 July 1997
Stock (assets)
$
$
decreases
Assets
Cash (assets)
Stock
11,000 Liabilities
increases
Bank
35,000 Creditor
Cash
Capital
40,000
10,000
4,000
50,000
50,000
Example
Sale of stock on credit
22 July 1997
Sold goods on credit to ABC Ltd. $1,000.
Peter
Effect
Balance Sheet as at 22 July 1997
Stock (assets)
$
$
decreases
Assets
Capital
Debtor (assets)
Stock
10,000 Liabilities
increases
Debtor
1,000 Creditors
Bank
35,000
Cash
4,000
50,000
40,000
10,000
50,000
Example
The settlement of a liability
25 July 1997
Paid money owing to P.Tang by cash $4,000.
Peter
Effect
Cash
Creditor
(assets)
(liability)
decreases decreases
Balance Sheet as at 25 July 1997
$
Assets
$
Capital
Stock
10,000 Liabilities
Debtor
1,000 Creditor
Bank
40,000
6,000
35,000
46,000
46,000
Double-Entry System
Every transaction affects two items in
the balance sheet.
The Format of an Account
(i) Traditional Format “T form”
•
•
The left-hand side is called the debit side.
The right-hand side is called the credit
side.
Title of the Account
Debit side
Credit side
(ii) Computerized Format
Date
Particulars
Name of Account
Foilio
Debit
Credit
Balance
Assets
They are economic resources which
provide benefits to the business.
Assets
Fixed Assets
Current Assets
Fixed Assets
Intangible Fixed Assets
Tangible Fixed Assets
Intangible Fixed Assets
E.g.
Goodwill
Patents
Franchises
Royalties
Development
Expenditures
Tangible Fixed Assets
E.g.
Land and Buildings
Premises
Furniture & Fittings
Office Equipment
Machinery
Motor Vehicles
Long-term Investments
Current Assets
E.g.
Stock
Debtors
Current Investments
Prepaid Expenses
Bills Receivable
Accrued Income
Bank/Cash
Liabilities
They are debts or obligations owed by
the business to outside parties.
Liabilities
Long-term Liabilities
(Repayable beyond the next accounting
year)
Current Liabilities
(Repayable within the next 12 months)
Long-term Liabilities
E.g.
Debentures
Bank Loans
Loans from Others
Current Liabilities
E.g.
Creditors
Accrued Expenses
Prepaid Income
Bank Overdrafts
Capital
Capital is what the company owed to
the owners.
It is a liability of the business to its
owners.
Accounts
To record
Entry in the account
Assets
an increase
a decrease
Debit
Credit
Liabilities
an increase
a decrease
Credit
Debit
Capital
an increase
a decrease
Credit
Debit
Any asset account
Increase
Decrease
+
Any liability account
Decrease
Increase
-
+
Capital account
Decrease
Increase
-
+
Example (A)
1 May 2004

Transaction
 Started an engineering business putting $1,000 into a
bank account.

Effect
 Increases asset of bank
 Increases capital of owner

Action
 Dr. Bank account
 Cr. Capital account
Bank
2004
May 1 Capital
$
1000
Capital
2004
May 1 Bank
$
1000
Example (B)
3 May 2004

Transaction
 Bought machinery on credit from Unique Machines $275.

Effect
 Increases asset of machinery
 Increases liability to Unique Machines

Action
 Dr. Machinery account
 Cr. Unique Machines account
Machinery
2004
$
May 3 Unique
275
Unique Machines (Creditor)
2004
$
May 3 Machinery 275
Example (C)
4 May 2004

Transaction
 Withdrew $200 cash from the bank and placed it in the
cash box.

Effect
 Increases asset of cash
 Decreases asset of bank

Action
 Dr. Cash account
 Cr. Bank account
Cash
2004
May 4 Bank
$
200
Bank
2004
$
May 1 Capital 1000
2004
May 4 Cash
$
200
Example (D)
7 May 2004

Transaction
 Bought a motor van paying in cash $180

Effect
 Increases asset of motor van
 Decreases asset of cash

Action
 Dr. Motor Van account
 Cr. Cash account
2004
May 7 Cash
2004
May 4 Bank
Motor van
$
180
Cash
$
2004
May 7
200
$
Motor van 180
Example (E)
10 May 2004

Transaction
 Sold some of the machinery for $15 on credit to S. Au.

Effect
 Increases asset of money owing by S. Au
 Decreases asset of machinery

Action
 Dr. S. Au’s account
 Cr. Machinery account
S Au (Debtor)
$
2004
May 10 Machinery 15
Machinery
2004
May 3 Unique
$
275
2004
May 10 S Au
$
15
Example (F)
21 May 2004

Transaction
 Returned some of the machinery, value $27, to Unique
Machines.

Effect
 Decreases liability to Unique Machines
 Decreases asset of machinery

Action
 Dr. Unique Machines
 Cr. Machinery account
Machinery
2004
$ 2004
May 3 Unique Machines (B) 275 May 10 S. Au (E)
$
15
May 21 Unique Machines (F)
Unique Machines (Creditor)
2004
May 21 Machinery
$
27
2004
May 3 Machinery
$
275
27
Example (G)
28 May 2004

Transaction
 S. Au paid the firm the amount owing, $15, by cheque.

Effect
 Increases asset of bank
 Decreases asset of money owing by S. Au.

Action
 Dr. Bank account
 Cr. S. Au’s account
S. Au (Debtor)
2004
May 10 Machinery (E)
$ 2004
15 May 28 Bank (G)
$
15
Bank
2004
May 1 Capital
May 28 S Au
$
1000
15
2004
May 4 Cash
$
200
Example (H)
30 May 2004

Transaction
 Bought another motor van paying by cheque $420.

Effect
 Increases asset of motor vans
 Decreases asset of bank

Action
 Dr. Motor van account
 Cr. Bank account
2004
May 7 Cash
May 30 Bank
Motor van
$
180
420
Bank
2004
May 1 Capital
May 28 S Au
$
1000
15
2004
May 4 Cash
May 30 Motor van
$
200
420
Example (I)
31 May 2004
Transaction

Paid the amount of $248 to Unique Machines by
cheque.
Effect


Decrease liability to Unique Machines
Decrease asset of bank
Action


Dr. Unique Machines
Cr. Bank account
Bank
$
2004
1,000 May 4 Cash (C)
2004
May 1 Capital (A)
May 28 S.Au (G)
15
May 30 Motor Van(H)
$
200
420
May 31 Unique Machines (I) 248
Unique Machines (Creditor)
2004
$
May 21 Machinery
27
May 31 Bank
248
2004
May 3 Machinery
$
275
The double entry system:
The treatment of stock
The stock of goods in a business is
constantly changing because some
more of it is bought, some of it is sold,
some is returned to the suppliers and
some is returned by the customers.
The treatment of stock
In four accounts:
Purchases account
For the purchase of goods
Sales account
For the sales of goods
Returns inwards
account
For goods returned to the
firm by its customers
Returns Outwards
account
For goods returned
from the firm to its
suppliers
As stock is an asset,
these four accounts are all connected with this asset,
the double entry rules for these four accounts are
those used for assets.
Purchases of stock on
credit (Credit Purchases)
Dr. Purchases account
Cr. Creditor/Supplier account
Example:
1 August 2004
Goods costing $165 were bought on
credit from D. Hong.
 The asset of stock is increased.
 An increase in a liability
2004
Aug 1 D. Hong
Purchases
$
165
D. Hong (Creditors)
2004
Aug 1 Purchases
$
165
Purchases of stock for
cash (Cash Purchases)
Dr. Purchases account
Cr. Cash
Example
2 August 2004.
Goods costing $22 were bought, cash
being paid for them immediately.


The asset of stock was increased.
The asset of cash was decreased.
2004
Aug 4 Cash
Purchases
$
22
Cash
2004
Aug 4
Purchases
$
22
Sales of stock on credit
(Credit Sales)
Dr. Cash account
Cr. Sales account
Example
3 August 2004
Sold goods on credit for $250 to K. Lee.


K. Lee is a debtor for the goods. The
increase in the asset of debtors requires a
debit.
The asset of stock was decreased. For this
a credit entry to reduce and asset is
needed.
K. Lee (Debtors)
2004
Aug 3 Sales
$
250
Sales
2004
Aug 3
K. Lee
$
250
Sales of stock for cash
(Cash Sales)
Dr. Cash account
Cr. Sales account
Example
4 August 2004
Goods were sold for $55, the cash
being received at once upon sale.


The asset of cash was increased. A debit
in the Cash account is needed to show this.
The asset of stock was reduced. The
reduction of an asset requires a credit.
Cash
2004
Aug 4
Sales
$
55
Sales
2004
Aug 4
Cash
$
55
Return inwards
Return inwards represent goods sold
which have now been returned by
customer.


Dr. Return Inwards account
Cr. Debtors/Customers account
Example
5 August 2004
Goods which had previously been sold
to F. Lo for $29 were returned by him.


The asset of stock was increased by the
goods returned.
A decrease in an asset. The debt of F. Lo
to the firm is now reduced.
Return Inwards
2004
Aug 5
F. Lo
$
29
F. Lo (Debtors)
2004
Aug 5 Return inwards
$
29
Returns Outwards
Returns outwards represent goods
which were purchased, and are now
being returned to the supplier.


Dr. Creditors/Suppliers account
Cr. Return Outwards
Example
6 August 2004
Goods previously bought for $96 were
returned by the firm to K. Ho.


The liability of the firm to K. Ho was
decreased
The asset of stock is decreased by the
goods sent out
K. Ho (Creditor)
2004
Aug 6 Return outwards
$
96
Returns Outwards
2004
Aug 6 K. Ho
$
96
Special meaning of
“Purchases” and “Sales”
Purchases in accounting means the purchase
of those goods.
With the prime intention of selling.
If something else is bought, such as a motor
van, such an item cannot be called a
purchase
The prime intention of buying the motor van
is for use by the company and not for resale.
Comparison of cash and credit
purchases/sales
(1) Purchases of goods where they are
paid for immediately by cash (Cash
Purchases)
(2) Purchase of goods on credit (Credit
Purchases)
(1) Cash Purchases
Dr. Purchases account
Cr. Cash account
(2) Credit Purchases
The first part is:


Dr. Purchases account
Cr. Supplier’s/Creditor’s account
The second part is:


Dr. Supplier’s/Creditor’s account
Cr. Cash/Bank account
Cash Sales
Complete entry:
Credit Sales
First part:
Dr. Cash account
Dr. Customer’s account
Cr. Sales account
Cr. Sales account
Second part:
Dr. Cash/Bank account
Cr. Customer’s account
The double entry system:
Expenses and Revenue
Revenue

Sales value of goods and services that
have been supplied to customers.
Expense

Value of all the assets and costs that have
been used up to obtain those revenue.
Income
Revenue
Capital Income
Revenue
E.g.
Sales
Rent Received
Interest Received
Capital Income
E.g.
Profit on Disposal of Fixed Assets
Expenses
Trading Expenses
Selling and Distribution Expenses
Administrative Expenses
Financial Expenses
Trading Expenses
E.g.
Purchases
Selling and Distribution
Expenses
E.g.
Carriage
Salaries
Commission
Delivery Charges
Bad Debts
Discounts Allowed
Administrative Expenses
E.g.
Rent and Rates
Office Salaries
Electricity and Utilities
Telephone Charges
Insurance Premiums
Financial Expenses
Discounting Charges
Interest on Loans
Debenture Interest
Expense & Revenue account
An expense account is opened for each
type of expense.
Since assets involve expenditure and
are shown as debit entries, expenses
are also shown as debit entries.
Example
1 June 2006
Paid for postage stamps by cash $5
Effect:


Increase expense of postage
Decease asset of cash
Action:


Dr. Postage
Cr. Cash
Cash
2006
Jun 1
Postage
2006
Jun 1 Cash
$
5
Postage
$
5
Example
2 June 2006
Paid for advertising by cheque $29
Effect:


Increase expense of advertising
Decrease asset of Bank
Action:


Dr. Advertising
Cr. Bank
Bank
2006
Jun 2 Advertising
Advertising
2006
Jun 2 Bank
$
29
$
29
Example
5 June 2006

Part of our premises were not needed by
us. We let someone else use them and
received rent of $40 by cheque.
 The asset of bank is increased.
 The total of the revenue of rent received is
increased.
Bank
2006
Jun 5
Rent received
$
40
Rent received (revenue)
2006
Jun 5
Bank
$
40
The Nature of Profit or
Loss
Profit

Revenues are greater than expenses for a
set of transaction.
Loss

Our expenses may exceed our revenues
The effect of profit/Loss on
capital
After making profit:
Assets = Liabilities + Capital + Profit
(i.e revenue – expenses)
Example
On 1 January


Assets: Fixtures $10,000, stock $7,000,
cash at bank $3,000
Liabilities: Creditors $2,000
Assets $10,000 + $7,000 + $3,000 –
Liabilities $2,000 = $18,000
On 2 January
The whole of the $7,000 stock was sold for $11,000
cash.


Asset: Fixtures $10,000, stock nil, cash at bank $14,000
Liabilities: Creditors $2,000
Assets $10,000 + $14,000 – Liabilities $2,000 =
$22,000
Capital has increased from $18,000 to $22,000 =
$4,000.
Because the $7,000 stock was sold for $11,000,
which represents a profit of $4,000.
Profit increase capital.
Loss would reduce the capital
Drawings
The owner will want to take cash out of
the business for his private use.
Drawings will reduce capital
Each item of drawings is not entered in
the capital account
A drawings account is opened, and the
debits are entered there.
Accounting entries:
Drawings account to be opened:



Dr. Drawings
Cr. Cash/Purchases/Assets
(the owner may take firm’s
cash/assets/goods for private use.)
Drawings account to be closed:


Dr. Capital
Cr. Drawings
Example
25 August 2006
Proprietor took $50 cash out of the
business for his own use.
30 August 2006
Drawings account was to be closed.
2006
Aug 25
Cash
Drawings
$ 2006
50 Aug 30 Capital
$
50
Cash
2006
Aug 25
Drawings
$
50
Capital
2006
Aug 30 Drawings
$
50
2006
Aug 1
Bal b/d
$
500
Balance off
The balance of each ledger account can
be calculated at the end of each
financial period by balancing off the
accounts.
In computerized accounts, the balance
will be calculated after the posting of
‘each transaction’.
Debit balance
Debit Balance
= Total amount of the “Debit” side >
Total amount of the “Credit” side
Credit balance
Credit balance = Total amount of the
“Credit” side > Total amount of the
“Debit” side
Balance Carried Down (c/d)
The different between the total “Debit”
side and the total “Credit” side at the
end of each financial period will be
carried to the beginning of next
financial period.
Balance Brought Down
(b/d)
Any balance of an account brought from
the last financial period to the
beginning of the current financial period
will be named as “Balance b/d”
Debit
Balance
Step 1 Posting the
transactions to the account
1998
Jul
1 xxxxx
12 xxxxx
15 xxxxx
17 xxxxx
25 xxxxx
Name of the Account
$ 1998
80 Jul
8 xxxxx
20
25 xxxxx
75
30 xxxxx
25
80
$
60
40
112
Step 2 Calculate and compare
the total amount of “Debit”
side “Credit” side
1998
Jul
1
12
15
17
25
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
Total amount of debit side is
$280
Name of the Account
$ 1998
80 Jul
8 xxxxx
20
25 xxxxx
75
30 xxxxx
25
80
$
60
40
112
Total amount of credit side is
$212
* A debit balance of $68 will be carried down to the next
period.
Step 3 Carried down (c/d) the “Debit”
balance to next period and inserting
the total amount on each side
1998
Jul
Aug
1
12
15
17
25
xxxxx
xxxxx
xxxxx
xxxxx
xxxxx
1 Balance b/d
Name of the Account
$ 1998
80 Jul
8
20
25
75
30
25
31
80
280
68
xxxxx
xxxxx
xxxxx
Balance c/d
$
60
40
112
68
280
Credit
Balance
Step 1 Posting the
transactions to the account
1998
Jul 1 xxxxx
12 xxxxx
15 xxxxx
17 xxxxx
Name of the Account
$ 1998
25 Jul 8 xxxxx
80
25 xxxxx
30
30 xxxxx
65
31 xxxxx
$
100
30
50
110
Step 2 Calculate and compare
the total amount of “Debit”
side “Credit” side
1998
Jul
1 xxxxx
12 xxxxx
15 xxxxx
17 xxxxx
Total amount of debit side is $200
Name of the Account
$ 1998
25 Jul
8 xxxxx
80
25 xxxxx
30
30 xxxxx
65
31 xxxxx
$
100
30
50
110
Total amount of credit side is $290
* A credit balance of $90 will be carried down to the next
period.
Step 3 Carried down (c/d) the “Debit”
balance to next period and inserting
the total amount on each side
1998
Jul
1 xxxxx
12 xxxxx
15 xxxxx
17 xxxxx
31 Balance c/d
Name of the Account
$ 1998
25 Jul
8 xxxxx
80
25 xxxxx
30
30 xxxxx
65
31 xxxxx
90
290
Aug
1 Balance b/d
$
100
30
50
110
290
90
Balance Carried Forward
(c/f)
“Balance c/f” is the same meaning of
“Balance c/d” except the balance will be
carried to the next page of the account.
Balance Brought Forward
(b/f)
The “Balance b/f” should be appeared
on the top of a new page of an account.
Trial Balance
At the end of the accounting period
Find errors (If there is no error, total
debit entries = total credit entries)
Facilitate the preparation of the trading
and profit and loss account, and also
the balance sheet.
Purpose of trading and profit and
loss accounts
To see how profitably the business is being run.
Trading account
 Gross profit is calculated.
Profit and loss account



Net profit is calculated
One account called a trading account, and another
called a profit and loss account
Combined together to form on e account called the
trading and profit and loss account
These accounts can therefore be seen as part of the
double entry system
Trading account
Gross profit is calculated.
Gross profit = Sales – Cost of goods sold
Gross profit = Sales – ( Purchases – Closing
stock)
In Trading Account
Step 1
Transfer the credit balance of the Sales
account to the credit of the Trading
account


Dr. Sales account
Cr. Trading account
Step 2
Transfer the debit balance of the
Purchases account to the debit of the
Trading account.


Dr. Trading account
Cr. Purchases account
Step 3
Remember, in this case there is no stock of
unsold goods. This means that:
Purchases = Cost of Goods Sold.
Some of the goods bought (purchases) have
not been sold by the end of the accounting
period. The record the stock we have
entered the following:


Dr. Stock account
Cr. Trading account
Purchases - Closing Stock = Cost of Goods Sold
(what we bought (Goods bought but
not sold in the period)
in the period)
Step 4
If sales are greater than the cost of
goods sold, the difference is gross profit.
If not, the answer would be a gross loss.
Sales – Cost of Goods Sold = Gross Profit
Profit and loss account
Net profit is calculated.
Net profit
=Gross profit + income – expenses
In Profit and Loss Account
Step 1
Carry this gross profit figure from the
Trading account part down to the profit
and loss part.


Dr. Trading account
Cr. Profit and Loss account
Step 2
Transfer the debit balances on Expenses
accounts to the debit of the Profit and
Loss Account.


Dr. Profit and Loss account
Cr. Expenses account
Step 3
Transfer the credit balance on revenue
account to the credit side of the profit
and loss account.


Dr. Revenue account
Cr. Profit and Loss account
Step 4
Transfer the net profit, when found, to
the Capital account to show the
increase in capital


Dr. Profit and Loss account
Cr. Capital account
Gross Profit – Expenses = Net Profit
Sales
2005
$ 2005
Dec 31 Trading a/c (2) 3,850 Dec 31 Balance b/d (1)
$
3,850
L. Sang
Trading and Profit and loss account for the year ended 31 Dec 2005
Sales
$
3850
Purchases
2005
$ 2005
Dec 31 Balance b/d (3) 2,900 Dec 31 Trading a/c (4)
$
2,900
L. Sang
Trading and Profit and loss account for the year ended 31 Dec 2005
Purchases
$
2900
Sales
$
3850
2005
Dec31 Trading a/c
Stock
$
300
L. Sang
Trading and Profit and loss account for the year ended 31 Dec 2005
$
Purchases
2900
Less: Closing stock 300
Cost of goods sold 2600
Gross profit c/d
1250
3850
Sales
Closing stock
$
3850
300
3850
Rent
2005
Dec 31 Balance b/d (6)
$ 2005
240 Dec 31 Profit & loss a/c (7)
$
240
L. Sang
Trading and Profit and loss account for the year ended 31 Dec 2005
Purchases
Less: Closing stock
Cost of goods sold
Gross profit c/d
Rent
Lighting
General expenses
Net profit
$
2900
300
Sales
Closing stock
2600
1250
3850
240
150
60
800
1250
$
3850
300
3850
Gross profit b/d
1250
1250
Vertical Style:
L. Sang
Trading and Profit and Loss Account for the year ended 31 December 2005
$
$
Sales
3,850
Less Cost of goods sold:
Purchases
2,900
Less Closing stock
300
2,600
Gross profit
1,250
Less Expenses:
Rent
240
Lighting
150
General expenses
60
450
Net profit
800
The Balance Sheet
It is a statement showing the assets,
capital and liabilities of a business at a
particular date.
Not part of the double entry system
To list the closing balance on assets,
capital and liabilities
Balance Sheet Layout
Assets


Fixed Assets
Current Assets
Fixed Assets
Are of long life
Are to be used in the business, and
Were not bought only for the purpose
of resale
Fixed assets are listed starting with
those the business will keep the longest,
down to those which will not be kept so
long.
Fixed Assets
(I) Land and buildings
(II) Fixtures and fittings
(III) Machinery
(IV) Motor vehicales
Current Assets
Cash in hand, cash at bank, debtors,
items held for resale at a profit (i.e.
stock) or items that have a short life
These are listed starting with the asset
furthest away from being turned into
cash, finishing with cash itself
Current Assets
(I)
Stock
(II) Debtors
(III) Cash at bank
(IV) Cash in hand
Long-term Liabilities
Repayable beyond the next accounting
year
E.g. Loan, Debentures
Current Liabilities
Repayable within the next 12 months
E.g.


Creditors
Bank overdraft
Completion of capital
account
Old Capital + Net Profit – Drawings = New Capital
Horizontal Style
Fixed Assets
Fixtures and fittings
Current Assets
Stock
Debtors
Bank
Cash
L. Sang
Balance Sheet as at 31 December 2005
$
$ Capital
500 Cash intorduced
Add Net profit for the year
300
680
Less Drawings
1,510
20
Current Liabilities
2,510 Creditors
3,010
$
2,000
800
2,800
700
$
2,100
910
3,010
Vertical Style
L. Sang
Balance Sheet as at 31 December 2005
$
Fixed Assets
Fixtures and fittings
Current Assets
Stock
Debtors
Bank
Cash
Less Current Liabilities
Creditors
Working Capital
Financed by:
Capital
Cash introduced
Add Net profit for the year
Less Drawings
$
500
300
680
1,510
20
2,510
910
1,600
2,100
2,000
800
2,800
700
2,100
Trading and profit and loss account
and balance sheet: Further
Considerations
Adjustments needed for stock
Return inwards
Return outwards
Carriage inwards
Carriage outwards
Adjustments needed for stock
For new businesses only, they started
without stock and therefore had closing
stock only
For the second year of trading, to 31
December 2006, both opening stock
and closing stock figures will be in the
calculations.
Trading Account
for period
Opening stock 1.1. 2005
Closing stock 31. 12.2005
Opening stock 1.1. 2006
Closing stock 31. 12.2006
Year to
Year to
31 December 2005 31 December 2006
(1st year of trading) (2 nd year of trading)
None
$300
$300
$550
2005
Jan 1 Bal b/d
Stock
$
2005
X
Jan 1 Trading a/c
$
X
Trading and profit and loss account for the year ended 31 Dec 2005
Opening stock
Purchase
$
X Sales
X
$
X
Return inwards
Return inwards represent goods sold
which have now been returned by
customer
To keep the actual sales of goods,
return inwards is always deducted from
sales in the trading account
(1)
(2)
Dr. Return inwards a/c
Cr. Debtor
Dr. Trading a/c
Cr. Return inwards a/c
Return inwards
2005
$
2005
Dec 31 Bal b/d
X Dec 31 Trading a/c
$
X
Trading and profit and loss account for the year ended 31 Dec 2005
$
Return inwards
X
Sales
Less: Return inwards
$
X
X
X
Carriage inwards
Carriage inwards is the cost of transport of
goods into a business
Suppose one supplier might sell the goods to
you for $95, but you would have to pay $5 to
a haulage firm for carriage inwards – a total
cost of $100
Cost of buying goods
Carriage inwards is always added to
purchases in the trading account. The
transfer is made
(1)
(2)
Dr. Carriage inward a/c
Cr. Bank
Dr. Trading a/c
Cr. Carriage inward a/c
Carriage inwards
2005
$
2005
Dec 31 Bal b/d
X Dec 31 Trading a/c
$
X
Trading and profit and loss account for the year ended 31 Dec 2005
$
Opening stock
X
Purchase
X
Add: Carriage inwards
X
$
Sales
Less: Return inwards
X
X
X
Return outwards
Return outwards represent goods which
were purchasing and are now being
returned to the supplier
To keep the actual cost of buying goods,
return outwards is always deducted
from purchases in the trading account
(1)
(2)
Dr. Creditor a/c
Cr. Return outward a/c
Dr. Return outward a/c
Cr. Trading
Return outwards
2005
$
2005
Dec 31Trading a/ c X Dec 31 Bal b/d
$
X
Trading and profit and loss account for the year ended 31 Dec 2005
$
Opening stock
X
Purchase
X
Add: Carriage inwards
Less: Return outwards
$
Sales
Less: Return inwards
X
X
X
X
X
Return outwards
X
Carriage outwards
Carriage outwards is the cost of
transport of goods to the customer of a
business
This is always treated as an expense to
be transferred to the debit of the profit
and loss account
(1)
(2)
Dr. Carriage outward a/c
Cr. Bank
Dr. Profit and loss a/c Cr.
Carriage outwards a/c
Carriage outwards
2005
$
2005
Dec 31 Bal b/d
X Dec 31 P/L a/c
$
X
Trading and profit and loss account for the year ended 31 Dec 2005
$
$
Sales
X
Rent
X
Carriage outwards
X
X
X
Gross profit b/d
X
L. Sang
Trial Balance as at 31 December 2006
Dr.
$
Sales
Purchases
Lighting expenses
Rent
Wages: Store assistant
General expenses
Carriage outwards
Shop premises
Fixtures and fittings
Debtors
Creditors
Bank
Cash
Loan from T. Wong (repayable 2009)
Drawings
Capital
Stock (at 31 December 2005)
The closing stock at 31 December was $550.
Cr.
$
6,700
4,260
190
240
520
70
110
2,000
750
1,200
900
120
40
1,000
900
2,100
300
10,700
10,700
L. Sang
Trading and Profit and Loss Account for the year ended 31 December 2006
$
$
Opening stock
300 Sales
6,700
Add Purchases
4,260
4,560
Less Closing stock
550
Cost of goods sold
4,010
Gross profit c/d
2,690
6,700
6,700
Wages
Carriage outwards
Lighting expenses
Rent
General expenses
Net Profit
520 Gross profit b/d
110
190
240
70
1,560
2,690
2,690
2690
Final Accounts
Final accounts are often used to mean
the trading and profit loss account and
the balance sheet.