The Two Sections
The Trading and Profit & Loss Account is prepared at the end of the period to work out the profit of the business. The Trading account section finds the gross profit, while the Profit & Loss section finds the net profit.
Key idea
Net sales = Sales − Returns inward
Cost of goods sold = Opening inventory + Net purchases + Carriage inwards − Closing inventory
Gross profit = Net sales − Cost of goods sold
Net profit = Gross profit + Other income − Expenses
Worked Example
Example
Given: Sales RM80,000; Returns inward RM2,000; Opening inventory RM8,000; Purchases RM50,000; Returns outward RM1,000; Carriage inwards RM500; Closing inventory RM6,000. Expenses: wages RM8,000, rent RM4,000, insurance RM1,500. Other income: discount received RM500.
| Item | RM |
| Net sales (80,000 − 2,000) | 78,000 |
| Cost of goods sold (8,000 + 50,000 + 500 − 1,000 − 6,000) | 51,500 |
| Gross profit | 26,500 |
| Add: discount received | 500 |
| Less: expenses (8,000 + 4,000 + 1,500) | (13,500) |
| Net profit | 13,500 |
Net purchases is purchases less returns outward; carriage inwards is added because it is part of the cost of getting goods into the premises.
Expenses and Income in Profit & Loss
Once gross profit is found, all expenses for the period are deducted. Common expenses include wages, rent, insurance, utilities, depreciation and bad debts. Any other income apart from sales — such as discount received, commission received or rent received — is added to gross profit before expenses are deducted. The final figure is the net profit (or a net loss if expenses exceed gross profit plus other income). This net profit is then transferred to the capital account in the Statement of Financial Position.
Remember
Carriage inwards goes into the Trading account (cost of sales); carriage outwards is a selling expense in the Profit & Loss account.