The Trading and Profit and Loss

Account and the Balance Sheet

 What’s Inside ?

Learning Objectives

hink Corner
Net purchases and net sales
Trading and profit and loss account
Capital account 1 2
Departmental accounts

uiz Corner
Trading account
Trading and profit and loss account
 Learning Objectives
After reading this chapter, you will be able to:
 Describe the flow of preparing final accounts.

 Prepare the trading account and calculate the

cost of goods sold and gross profit or gross loss.
 Prepare the trading account with appropriate
adjustments for sales and for items affecting
the cost of goods sold.
 Prepare the profit and loss account and calculate
the net profit or net loss.
 Prepare the trading and profit and loss account.
 Learning Objectives
After reading this chapter, you will be able to:
 Balance off the capital account at the year end.

 Draw up the balance sheet and put relevant

account balances under appropriate headings.
 Prepare the final accounts in vertical format.
 Prepare departmental accounts for companies
having several departments.
 Prepare a profit and loss account for a business
in the service sector that is not trading in goods.
 Flow of preparing final accounts
When business transactions occur, we need to enter these
transactions into accounts
_______.
At the end of each month, the accounts need to be
closed to have an overview of the business.
_____
At the end of the financial year, the accounts need to
final accounts
be closed to prepare the ___________.
A trial
__________
balance needs to be drawn up before the final
accounts are prepared.
A _____________
trading account and a ___________________
profit and loss account are
prepared to calculate the profit or loss made by the firm.
The ______
capital account needs to be closed by transferring
the net profit / loss and the drawings against it.

A balance
___________
sheet can then be drawn up.
Learning Objectives
 Trading account and cost of goods sold
A trading account is an account in which __________
gross profit or
________
gross loss is calculated.

Gross profit is the excess of ____

sales over the _______
cost of
_________
goods sold for the period.

Gross loss is the excess of _______________

cost of goods sold over
____ for the period.
sales

Gross profit = Sales – Cost of goods sold

Gross loss = Cost of goods sold – Sales

Trading account is a double entry account where the left-

debit side and the right-hand side is the
hand side is the _________
credit side
_________.
 Trading account and cost of goods sold
At the end of a financial year, businesses usually
closing stock An
have unsold goods; we call this __________.
annual stocktaking
_________ is usually held at the end of a
financial year to ascertain the value of closing stock.
Closing stock is carried forward to the next
opening stock
financial year; we call this the ___________.
A ____
stock account is opened to record closing stock and
opening stock.

Cost of = Opening stock + Purchases – Closing stock

goods sold
Total stock available Stock remained
unsold
 Trading account and cost of goods sold
Example 1: Flora Company’s financial year ended on
31 December 20X8. Here is the information extracted
from her books:
$
Sales 100,000
Purchases 60,000
Opening stock 8,000
Closing stock 10,000

The steps for preparing the trading account are as

follows:
 Trading account and cost of goods sold

tep Close the sales account and transfer the credit

balance to the trading account.

Sales
20X8 $ 20X8 $
Dec 31 Trading 100,000 Dec 31 Total for the year 100,000

Trading
$ $
Sales 100,000
 Trading account and cost of goods sold

tep Close the purchases account and transfer the

debit balance to the trading account.

Purchases
20X8 $ 20X8 $
Dec 31 Total for the year 60,000 Dec 31 Trading 60,000

Trading
$ $
Purchases 60,000 Sales 100,000
 Trading account and cost of goods sold

tep Calculate the cost of goods sold by transferring

the opening and closing stock from the stock
account to the trading account.

Stock
20X8 $ 20X8 $
Jan 1 Balance b/f 8,000 Dec 31 Trading 8,000
Dec 31 Trading 10,000 “ 31 Balance c/f 10,000
18,000 18,000

Trading
$ $
Purchases 60,000 Sales 100,000
Opening stock 8,000 Closing stock 10,000
 Trading account and cost of goods sold

tep Balance off the trading account and transfer

the balance to the profit and loss account.

Trading
$ $
Purchases 60,000 Sales 100,000
Opening stock 8,000 Closing stock 10,000
Gross profit 42,000
110,000 110,000

Transferred to
the profit and loss
account
 Trading account and cost of goods sold
Example 2: On 31 December 20X7, Panda Company
had the following account balances:

$
Sales 70,000
Purchases 80,000
Opening stock 4,000
Closing stock 5,000

The accounts would be closed as follows:

 Trading account and cost of goods sold
Sales
20X7 $ 20X7 $
Dec 31 Trading 70,000 Dec 31 Total for the year 70,000

Purchases
20X7 $ 20X7 $
Dec 31 Total for the year 80,000 Dec 31 Trading 80,000

Trading
$ $
Purchases 80,000 Sales 70,000
 Trading account and cost of goods sold
Stock
20X7 $ 20X7 $
Jan 1 Balance b/f 4,000 Dec 31 Trading 4,000
Dec 31 Trading 5,000 “ 31 Balance c/f 5,000
9,000 9,000

Trading
$ $
Purchases 80,000 Sales 70,000
Opening stock 4,000 Closing stock 5,000
Gross loss 9,000
84,000 84,000

Transferred to
the profit and loss account
Learning Objectives
 hink Corner
You have learned that goods may be returned to
suppliers or returned from customers. How do
these two items affect purchases and sales?

Goods returned from customers reduce sales,

nswer therefore, the actual sales would be:
Net sales = Sales – Returns inwards
Goods returned to suppliers reduce purchases, therefore
the actual purchases would be:
Net purchases = Purchases – Returns outwards
Therefore, both returns inwards and returns outwards
should be entered in the trading account.
 Trading account and adjustments
At the end of the financial year, returns accounts are closed
and their balances are transferred to the _____________.
trading account
Example 3: Assume that the total returns inwards and total
returns outwards for Flora Company for the year were $3,000
and $5,000, respectively.
Returns Inwards
20X8 $ 20X8 $
Dec 31 Total for the year 3,000 Dec 31 Trading 3,000

Trading
$ $
Purchases 60,000 Sales 100,000
Opening stock 8,000 Closing stock 10,000
Returns inwards 3,000
 Trading account and adjustments
Returns Outwards
20X8 $ 20X8 $
Dec 31 Trading 5,000 Dec 31 Total for the year 5,000

Trading
$ $
Purchases 60,000 Sales 100,000
Opening stock 8,000 Closing stock 10,000
Returns inwards 3,000 Returns outwards 5,000
Gross profit 44,000
115,000 115,000

Since returns outwards reduce the amount of purchases, the

cost of goods sold = Opening stock
+ Purchases – Returns outwards
Net purchases – Closing stock
 Trading account and adjustments
Items affecting the cost of goods sold:
To calculate the actual cost of goods sold, besides
deducting returns outwards from purchases, we should
expenses that increase the cost of goods.
include all _______

1. Carriage inwards: This is the cost of delivering goods

purchased from suppliers.

This cost of delivery _______

increases the cost of buying
goods; thus, it should be included in the cost of
goods sold by transferring the balance in the
carriage inwards account to the trading account
____________.
 Trading account and adjustments
Items affecting the cost of goods sold:
2. Cost of making goods ready for resale: Some goods
may need to be processed before they are sold to
customers. This cost of making goods ready for
increases the cost of goods sold and should
resale ________
be shown in the trading account
____________.

Opening stock
+ Net purchases
+ Carriage inwards
+ Cost of making goods
ready for resale
- Closing stock
Cost of goods sold
 Trading account and adjustments
Items affecting the cost of goods sold:
Example 4: Assume that Flora Company paid $5,000 for
carriage inwards and $4,000 for goods packaging during
the year.
Carriage Inwards
20X8 $ 20X8 $
Dec 31 Total for the year 5,000 Dec 31 Trading 5,000

Trading
$ $
Purchases 60,000 Sales 100,000
Opening stock 8,000 Closing stock 10,000
Returns inwards 3,000 Returns outwards 5,000
Carriage inwards 5,000
 Trading account and adjustments
Packing Goods
20X8 $ 20X8 $
Dec 31 Total for the year 4,000 Dec 31 Trading 4,000

Trading
$ $
Purchases 60,000 Sales 100,000
Opening stock 8,000 Closing stock 10,000
Returns inwards 3,000 Returns outwards 5,000
Carriage inwards 5,000
Goods packaging 4,000
Gross profit 35,000
115,000 115,000

Learning Objectives uiz Corner

 uiz Corner

Using the following information, prepare a trading

account for the year ended 31 December 20X8.
$
Sales 55,000
Purchases 41,250
Stock as at 1 January 20X8 11,500
Stock as at 31 December 20X8 10,750
Returns inwards 1,500
Returns outwards 1,200
Carriage inwards 2,100
Goods packaging 2,500
 Profit and loss account
net profit
A profit and loss account is an account in which ________
or ______
net loss is calculated. All day-to-day running expenses
and revenues are entered in this account.

Net profit is the excess of ___________________

gross profit plus other
revenues over expenses
_______ _______ for the period.

Net loss is the excess of ________

expenses over the total of
gross profit and ____________
__________ other revenues for the period.

Net profit = Gross profit + Other revenues – Expenses

Net loss = Expenses – Gross profit – Other revenues

Profit and loss account is also a _________________

double entry account with
a debit side and a credit side.
 Profit and loss account
Example 5: Flora Company received a commission of $2,000
and paid salaries amounting to $10,000, electricity amounting
to $5,000 and $10,000 in rent during the year.
Steps for preparing a profit and loss account are:
tep Close the other revenues accounts and transfer
the credit balances to the profit and loss account.
Commission Receivable
20X8 $ 20X8 $
Dec 31 Profit and loss 2,000 Dec 31 Total for the year 2,000

Profit and Loss

$ $
Gross profit b/f 35,000
Commission receivable 2,000
 Profit and loss account
tep Close the expenses accounts and transfer the
debit balances to the profit and loss account.
Salaries
20X8 $ 20X8 $
Dec 31 Total for the year 10,000 Dec 31 Profit and loss 10,000

Electricity
20X8 $ 20X8 $
Dec 31 Total for the year 5,000 Dec 31 Profit and loss 5,000

Profit and Loss

$ $
Salaries 10,000 Gross profit b/f 35,000
Electricity 5,000 Commission receivable 2,000
 Profit and loss account
Rent
20X8 $ 20X8 $
Dec 31 Total for the year 10,000 Dec 31 Profit and loss 10,000

Profit and Loss

$ $
Salaries 10,000 Gross profit b/f 35,000
Electricity 5,000 Commission receivable 2,000
Rent 10,000

tep Balance off the profit and loss account. A credit

balance represents a net profit and a debit
balance represents a net loss. Then, transfer the
debit or credit balance to the capital account.
 Profit and loss account
Profit and Loss
$ $
Salaries 10,000 Gross profit b/f 35,000
Electricity 5,000 Commission receivable 2,000
Rent 10,000
Net profit 12,000
37,000 37,000

Transferred to
the capital account

Note: After the profit and loss account is prepared, the other
revenues and expenses accounts are closed and their
balances will not be carried forward to the next year.
 Profit and loss account
Example 6: Assume that the electricity paid by Flora
Company was $20,000, the profit and loss account would
appear as:
Electricity
20X8 $ 20X8 $
Dec 31 Total for the year 20,000 Dec 31 Profit and loss 20,000

Profit and Loss

$ $
Salaries 10,000 Gross profit b/f 35,000
Electricity 20,000 Commission receivable 2,000
Rent 10,000 Net loss 3,000
40,000 40,000
Transferred to
the capital account Learning Objectives
 Trading and profit and loss account
If the final accounts are to be presented to outsiders like
banks, investors and the Inland Revenue Department, we need
to combine the trading account and the profit and loss account
trading and profit and loss account
into one, called the ____________________________.

The format of the trading and profit and loss account is

similar to that of the trading account and the profit and
loss account; only a few changes are made to make the
informative and easier to _________.
account more _________ understand

When the two accounts are combined, it is described as a

________________. name of the company and the
financial statement The ____
______________
period concerned are shown.

Example 7: Using the information in Examples 4 and 5, the

trading and profit and loss account for Flora Company
would appear as:
 Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year ended 31 December 20X8
$ $ $
Opening stock 8,000 Sales 100,000
Purchases 60,000 Less Returns inwards 3,000
Less Returns outwards 5,000 97,000
55,000 Name of
Add Carriage inwards 5,000 the company
Goods packaging 4,000 64,000
72,000
Less Closing stock 10,000
Cost of goods sold 62,000
Gross profit c/d 35,000
97,000 97,000
Salaries 10,000 Gross profit b/d 35,000
Electricity 5,000 Commission receivable 2,000
Rent 10,000
Net profit 12,000
37,000 37,000
 Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year ended 31 December 20X8
$ $ $
Opening stock 8,000 Sales 100,000
Purchases 60,000 Less Returns inwards 3,000
Less Returns outwards 5,000 97,000
55,000
Add Carriage inwards 5,000
Goods packaging 4,000 64,000 Period concerned
72,000
Less Closing stock 10,000
Cost of goods sold 62,000
Gross profit c/d 35,000
97,000 97,000
Salaries 10,000 Gross profit b/d 35,000
Electricity 5,000 Commission receivable 2,000
Rent 10,000
Net profit 12,000
37,000 37,000
 Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year ended 31 December 20X8
$ $ $
Opening stock 8,000 Sales 100,000
Purchases 60,000 Less Returns inwards 3,000
Less Returns outwards 5,000 97,000
55,000
Add Carriage inwards 5,000
Goods packaging 4,000 64,000 Net sales
72,000
Less Closing stock 10,000
Cost of goods sold 62,000
Gross profit c/d 35,000
97,000 97,000
Salaries 10,000 Gross profit b/d 35,000
Electricity 5,000 Commission receivable 2,000
Rent 10,000
Net profit 12,000
37,000 37,000
 Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year ended 31 December 20X8
$ $ $
Opening stock 8,000 Sales 100,000
Purchases 60,000 Less Returns inwards 3,000
Less Returns outwards 5,000 97,000
55,000 Net purchases
Add Carriage inwards 5,000
Goods packaging 4,000 64,000
72,000
Less Closing stock 10,000
Cost of goods sold 62,000
Gross profit c/d 35,000
97,000 97,000
Salaries 10,000 Gross profit b/d 35,000
Electricity 5,000 Commission receivable 2,000
Rent 10,000
Net profit 12,000
37,000 37,000
 Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year ended 31 December 20X8
$ $ $
Opening stock 8,000 Sales 100,000
Purchases 60,000 Less Returns inwards 3,000
Less Returns outwards 5,000 97,000
55,000
Add Carriage inwards 5,000
Goods packaging 4,000 64,000 Total cost of goods
72,000 purchased for the year
Less Closing stock 10,000
Cost of goods sold 62,000
Gross profit c/d 35,000
97,000 97,000
Salaries 10,000 Gross profit b/d 35,000
Electricity 5,000 Commission receivable 2,000
Rent 10,000
Net profit 12,000
37,000 37,000
 Trading and profit and loss account
Flora Company
Trading and Profit and Loss Account for the year ended 31 December 20X8
$ $ $
Opening stock 8,000 Sales 100,000
Purchases 60,000 Less Returns inwards 3,000
Less Returns outwards 5,000 97,000
55,000
Add Carriage inwards 5,000
Goods packaging 4,000 64,000
72,000 Total goods available
Less Closing stock 10,000 for sale for the year
Cost of goods sold 62,000
Gross profit c/d 35,000
97,000 97,000
Salaries 10,000 Gross profit b/d 35,000
Electricity 5,000 Commission receivable 2,000
Rent 10,000
Net profit 12,000
37,000 37,000
 hink Corner
What are the differences between the format of the
trading and profit and loss account and that of the
trading account and the profit and loss account?

nswer
1. Returns inwards are put on the credit side and are
deducted from sales to get the net sales figure.
2. Returns outwards are put on the debit side as a contra
item and are deducted from purchases to get the net
purchases figure.
3. Closing stock is deducted from the figure of total cost of
goods purchased to get the figure of the cost of goods
sold.
 uiz Corner

Below are the balances extracted from the trial

balance of Gowell Company as at 31 March 20X7.
Prepare a trading and profit and loss account for
Gowell Company for the year ended 31 March 20X7.

$
Stock as at 1 April 20X6 16,000
Purchases 66,700
Sales 93,800
Returns inwards 2,500
Returns outwards 2,000
 uiz Corner

$
Carriage inwards 5,000
Packaging goods for resale 5,000
Stock as at 31 March 20X7 12,000
Rent received 20,000
Wages and salaries 10,000
Insurance 5,000

Learning Objectives
 hink Corner
After getting the net profit from the profit and loss
acount, what should we do?

nswer
You have learned that profit increases capital and loss
decreases capital. After calculating the net profit/loss, we
should transfer the net profit or net loss to the capital
account to obtain the updated amount of capital.

Old capital + Net profit = New capital

Old capital – Net loss = New capital

 hink Corner
Can you think of any other items which affect the
amount of capital?

nswer
Drawings. Drawings reduce capital and therefore we
should transfer the balance of the drawings account to the
capital account in order to calculate the amount of new
capital at the end of a financial year.
Old capital + Net profit – Drawings = New capital
Old capital – Net loss – Drawings = New capital
 Closing the capital account
Remember, the balance of capital in the trial
balance is the _____________.
opening balance At the end of the
year, we need to close the capital account by
transferring the net profit or net loss and the
drawings to get the closing
____________.
balance

Example 8: Assume that the opening capital balance

as at 1 January 20X8 and the drawings for the year
ended 31 December 20X8 for Flora Company were
$50,000 and $5,000, respectively. The capital account
would be closed as follows:
 Closing the capital account
The steps for closing the capital account are:

tep Close the drawings account and transfer the

balance to the capital account.

Drawings
20X8 $ 20X8 $
Dec 31 Total for the year 5,000 Dec 31 Capital 5,000

Capital
20X8 $ 20X8 $
Dec 31 Drawings 5,000 Jan 1 Balance b/f 50,000
 Closing the capital account

tep Transfer the net profit or net loss from the profit
and loss account to the capital account.

tep Balance off the capital account. The balance

is carried forward to the next financial year.

Capital
20X8 $ 20X8 $
Dec 31 Drawings 5,000 Jan 1 Balance b/f 50,000
“ 31 Balance c/f 57,000 Dec 31 Net profit for
the year 12,000
62,000 62,000
 Closing the capital account
Example 9: Assume that Flora Company had a net loss of
$3,000 in 20X8 and the opening capital balance and the
drawings for the year ended 31 December 20X8 were
$50,000 and $5,000, respectively. The capital account would
be closed as follows:
Drawings
20X8 $ 20X8 $
Dec 31 Total for the year 5,000 Dec 31 Capital 5,000

Capital
20X8 $ 20X8 $
Dec 31 Drawings 5,000 Jan 1 Balance b/f 50,000
“ 31 Net loss for the year 3,000
“ 31 Balance c/f 42,000
50,000 50,000
Learning Objectives
 Balance sheet
financial
A balance sheet is a statement showing the _______
position
______ of a business at a ____________.
particular date After
trading and profit and loss account is prepared,
the ____________________________
assets
all the accounts should be closed except the _____,
_______ and capital
liabilities _____ accounts. These accounts are
then listed on the balance sheet
___________.

Balance sheet is not part of the double

________________;
entry system
it is only a ___
list of assets, liabilities and capital
balances. These accounts are not closed at the year
end, and the balances in these accounts are carried
forward to the _________________.
next accounting year
Balance sheet is a presentation of the _________
accounting
_______
equation in a statement form.
 Balance sheet
Layout of a balance sheet:

Balance Sheet as at (date)

Fixed Assets
Details of fixed assets
Current Assets
Details of current assets
$ $
Capital
XXX Details of capital XXX
Long-term Liabilities
XXX Details of long-term liabilities XXX
Current Liabilities
Details of current liabilities XXX
XXX XXX

Assets Capital + Liabilities

 Balance sheet
Example 10: Based on the information in Examples 7 and 8,
and the following balances extracted on 31 December 20X8
(after the trading and profit and loss account was prepared
and the capital account was closed), prepare a balance
sheet for Flora Company as at 31 December 20X8.
$
Furniture and fittings 30,000
Motor vehicles 20,000
Debtors 20,000
Bank 10,000
Cash 5,000
Long-term loan from Kowloon Bank 30,000
Creditors 8,000
Steps for preparing a balance sheet:
 Balance sheet
tep Classify the balances remaining in our books
(after preparing the trading and profit and loss
account) into fixed assets, current assets, capital,
long-term liabilities and current liabilities.

$
Furniture and fittings 30,000 Fixed asset
Motor vehicles 20,000 Fixed asset
Debtors 20,000 Current asset
Bank 10,000 Current asset
Cash 5,000 Current asset
Long-term loan from Kowloon Bank 30,000 Long-term liability
Creditors 8,000 Current liability
 Balance sheet
tep List the balances of fixed assets and current
assets on the left-hand side of the balance
sheet. Get their subtotals and add them up to
arrive at total assets.
Flora Company
Balance Sheet as at 31 December 20X8
Fixed Assets $ $
Furniture and fittings 30,000
Motor vehicles 20,000
50,000
Current Assets
Stock 10,000
Debtors 20,000
Bank 10,000
Cash 5,000 45,000

95,000
 Balance sheet
tep List the balances of capital, long-term liabilities
and current liabilities on the right-hand side of
the balance. Get their subtotals and add them
up to arrive at the total of capital and liabilities.
Flora Company
Balance Sheet as at 31 December 20X8
Fixed Assets $ Capital $
Furniture and fittings 30,000 Balance as at 1 Jan 20X8 50,000
Motor vehicles 20,000 Add Net profit for the year 12,000
50,000 62,000
Current Assets Less Drawings 5,000
Stock 10,000 57,000
Debtors 20,000 Long-term Liabilities
Bank 10,000 Loan from Kowloon Bank 30,000
Cash 5,000 45,000 Current Liabilities
Creditors 8,000
95,000 95,000
 Balance sheet
tep Enter the totals of the two sides that should be
level with each other.
Flora Company
Balance Sheet as at 31 December 20X8
Fixed Assets $ Capital $
Furniture and fittings 30,000 Balance as at 1 Jan 20X8 50,000
Motor vehicles 20,000 Add Net profit for the year 12,000
50,000 62,000
Current Assets Less Drawings 5,000
Stock 10,000 57,000
Debtors 20,000 Long-term Liabilities
Bank 10,000 Loan from Kowloon Bank 30,000
Cash 5,000 45,000 Current Liabilities
Creditors 8,000
95,000 95,000

Learning Objectives
 Final accounts in vertical format
Final accounts (trading and profit and loss accounts
and balance sheets) are sometimes prepared in
vertical format instead of horizontal format. The
____________
same using either presentation
results are the ____
method.

Example 7 is now shown in vertical format:

 Final accounts in vertical format
Flora Company
Trading and Profit and Loss Account for the year ended 31 December 20X8
$ $ $
Sales 100,000
Less Returns inwards 3,000
97,000
Less Cost of goods sold:
Opening stock 8,000
Add Purchases 60,000
Less Returns outwards 5,000 55,000
Add Carriage inwards 5,000
Goods packaging 4,000
72,000
Less Closing stock 10,000 62,000
Gross profit 35,000
Add Other revenues:
Commission receivable 2,000
37,000
Less Expenses:
Salaries 10,000
Electricity 5,000
Rent 10,000 25,000
Net profit 12,000
 Final accounts in vertical format
We have mentioned that the balance sheet is a
presentation of the accounting
_______________
equation in statement
form. In a vertical style balance sheet, it shows
Fixed assets + Net current assets – Long-term
liabilities = Capital.

Net current assets occur when current assets

exceed
______ current liabilities. When current liabilities
exceed current assets, their difference is called
net current liabilities
_________________.

Example 10 is shown in vertical format:

 Final accounts in vertical format
Flora Company
Balance Sheet as at 31 December 20X8
Fixed Assets $ $
Furniture and fittings 30,000
Motor vehicles 20,000
50,000
Current Assets
Stock 10,000
Debtors 20,000
Bank 10,000
Cash 5,000
45,000
Less Current Liabilities
Creditors 8,000
Net current assets 37,000
87,000
Less Long-term Liabilities
Loan from Kowloon Bank 30,000
57,000
Financed by:
Capital as at 1 January 20X8 50,000
Add Net profit for the year 12,000
62,000
Less Drawings 5,000
57,000
 Final accounts in vertical format
Sometimes, long-term liabilities are shown under
capital in a vertical style balance sheet. Below is an
example:
Flora Company
Balance Sheet as at 31 December 20X8 (extract)
Capital $
Balance as at 1 January 20X8 50,000
Add Net profit for the year 12,000
62,000
Less Drawings 5,000
57,000
Long-term Liabilities
Loan from Kowloon Bank 30,000
87,000

Learning Objectives
 hink Corner

Sometimes, businesses may have several

departments. Are the final accounts for these
companies prepared in the same way as
mentioned before?

nswer
No. There will be extra columns in the trading and
profit and loss account for companies with several
departments. Sales revenue and expenses are split
among various departments and are recorded in
these extra columns.
 Departmental accounts
Example 11: The following balances were extracted
from the books of Longway Company as at 31 March
20X7.
$
Sales: Audio department 50,000
Digital camera department 70,000
Stock (1 Apr 20X6): Audio department 10,000
Digital camera department 20,000
Purchases: Audio department 20,000
Digital camera department 40,000
Stock (31 Mar 20X7): Audio department 15,000
Digital camera department 10,000
 Departmental accounts
Longway Company
Trading Account for the year ended 31 March 20X7
Audio Digital Camera
$ $ $ $
Sales 50,000 70,000
Less Cost of goods sold:
Opening stock 10,000 20,000
Purchases 20,000 40,000
30,000 60,000
 Departmental accounts
Longway Company
Trading Account for the year ended 31 March 20X7
Audio Digital Camera
$ $ $ $
Sales 50,000 70,000
Less Cost of goods sold:
Opening stock 10,000 20,000
Purchases 20,000 40,000
30,000 60,000
Less Closing stock 15,000 15,000 10,000 50,000
Gross profit 35,000 20,000

Learning Objectives
 Final accounts for the service sector
In a trading account, we calculate the gross profit by
subtracting the costs of goods sold from the sales.
What if a business does not trade in goods?
For businesses not trading in goods, there is no need to
prepare a trading account. A profit and loss account is
__________________
enough. The final accounts for these businesses are a
profit and loss account and a balance sheet.
Examples of businesses not trading in goods are those
service sector such as dentists, accountants
in the ____________,
and lawyers.
Revenue earned by service providers is usually called
fees earned, commission earned or services charged.