The trading account

1. The trading account

2. Gross profit A trading account is prepared by a business to show how much gross profit has been made for the financial period. Gross profit = Sales – Cost of sales Cost of sales = Opening stocks + Purchases – Closing stocks

3. Trading account layout £ £ Sales 50,000 Opening stock 10,000 Purchases 20,000 30,000 Closing stock 5,000 Cost of sales 25,000 Gross profit 25,000

4. Sales returns Customers may return sales to the business. The total of sales returns must be deducted from sales to show the net sales in the trading account. Sales returns are also known as returns inwards.

5. Purchase returns A business may return goods purchased from suppliers. The total of purchase returns must be deducted from purchases to show the net purchases in the trading account. Purchase returns are also known as returns outwards.

6. Example: returns £ £ Sales 40,000 Returns 5,000 35,000 Opening stock 2,000 Purchases 25,000 27,000 Returns 3,000 24,000 Closing stock 4,000 Cost of sales 20,000 Gross profit 15,000

7. Carriage inwards A business may have to pay to have a supplier deliver goods to the business. This is called carriage inwards. Carriage inwards will increase the purchase cost. Carriage inwards must be added to the purchases in the trading account.

8. Example transactions B Grant transactions for year ended 31 December 2007: • Sales £200,000 • Purchases £90,000 • Carriage inwards £2,000 • Sales returns £10,000 • Opening stock £6,000 • Purchase returns £3,000 • Closing stock £4,000

9. B Grant trading account for year ending 31 December 2007 £ £ Sales 200,000 Returns 10,000 190,000 Opening stock 6,000 Purchases 90,000 Carriage inwards 2,000 98,000 Returns 3,000 95,000 Closing stock 4,000 Cost of sales 91,000 Gross profit 99,000

10. A trading account is prepared by a business which sells good for resale to make a profit. A service business like a travel agent will not prepare a trading account.

11. Exam tips It is very important that you understand how to prepare the trading account because it will be examined at AS level. Learn this equation: Opening stock plus Purchases plus Carriage inwards minus Purchase returns minus Closing stock = Cost of sales

12. The trading account is prepared at the end of the financial year. • It is important that the trading account is given the correct heading which must include: • Name of the business • Date of the year ended.

13. Practice makes perfect. Try the tasks on the worksheets. Good luck!