The trading account

Gross profitA 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

£ £Sales 50,000Opening stock 10,000Purchases 20,000 30,000Closing stock 5,000Cost of sales 25,000Gross profit 25,000

Trading account layout

Sales returnsCustomers 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.

Purchase returnsA 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.

£ £Sales 40,000

Returns 5,00035,000

Opening stock 2,000Purchases 25,000

27,000Returns 3,000

24,000Closing stock 4,000

Cost of sales 20,000Gross profit 15,000

Example: returns

Carriage inwardsA 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.

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

B Grant trading account for year ending 31 December 2007

£ £Sales 200,000Returns 10,000

190,000Opening stock 6,000Purchases 90,000Carriage inwards 2,000

98,000Returns 3,000

95,000Closing stock 4,000Cost of sales 91,000Gross profit 99,000

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.

Exam tipsIt 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

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.

Practice makes perfect.

Try the tasks on the worksheets.

Good luck!