Acc week 5
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Transcript of Acc week 5
Introduction to the Trial Balance, Trading and Profit and Loss
Accounts, and the Balance Sheet
Week 5
In Your Textbook...
Roshayani Arshad, et al. (2007), Financial Accounting An Introduction, 2nd Edition, Malaysia, McGraw Hill.
• Chapter 4: Accounting Cycle
(pp. 54 – 65)
Flowchart of Accounting Records
Source Documents
Journals
Trading, Profit & Loss Acc
Balance Sheet
Ledgers
Trial Balance
You’ve learnt that under double entry bookkeeping– for each debit entry there is a credit entry
– for each credit entry there is a debit entry
Let’s see if you can remember the basics of double entry.What is the double entry for the following transaction:
(a) Purchase of a new van for RM9,000 which was paid in full by cheque.
Dr.
Cr.
(b) Goods which cost RM40 taken out by the owner for her own use.
Dr.
Cr.
Motor Vehicle - Van
RM9,000
Bank
RM9,000
Drawings
Purchases
RM40
RM40
Recap
• All the items recorded in all the accounts on the debit side should equal in total all the items recorded on the credit side of the accounts.
• In order to check that there is a matching credit entry for every debit entry, we prepare something called a Trial Balance.
Trial Balance
• A Trial Balance is a list of all ledger accounts with balances at a particular date.
• All accounts with debit balances will be listed in one column and those with credit balances will be listed in the second column.
Determining the Balance
Accounts with debit balances
Accounts with credit balances
Asset Liability
Expenses Capital
Drawings Revenue
• At the end of each month, quarter-year, half-year or one year, all the accounts are balanced to determine whether they have debit or credit balances.
Purpose of Trial Balance
1. A test of the equality of the debit and credit balances in the ledger, i.e. it checks the mathematical accuracy of the double-entry rules used.
2. Helps to facilitate the preparation of the financial statements.
Trial Balance: ExampleQuickpower Trading
Trial Balance as at 5th February 2006
Account Title Debit ($) Credit ($)
Cash in Hand 4,900
Cash at Bank 55,400
Debtors 4,000
Stock 18,000
Fixtures and Fittings 10,000
Creditors 9,000
Bank Loan 30,000
Capital 50,000
Drawings 100
Sales 3,500
Electricity Expense 100
93,000 93,000
Lecture Exercise• From the following list of balances extracted from the ledger of
Wen on 31 Dec 02, prepare a Trial Balance as at that date.
RM RM
Loan 30,000 Carriage 2,000
Cash in hand 400 Creditors 5,425
Cash at bank 10,800 Sales 12,400
Capital 18,000 Purchases 9,400
Drawings 300 Return outwards 275
Motor vehicle 28,500 Wages 5,000
Debtors 6,100 Rent & rates 3,600
Trading and Profit and Loss Accounts
Flowchart of Accounting Records
Source Documents
Journals
Trading, Profit & Loss Acc
Balance Sheet
Ledgers
Trial Balance
Gross Profit
• A trader buys goods at a certain price and resells them at a higher price to earn profit = gross profit.
• • Derived from the difference between the selling
price and the cost price of the good.• Expenses incurred in running the business have
not been taken into account yet.
Gross Profit = Sales – Cost of Goods Sold
Preparation of the Trading Account
• Revenue and expenses affect the profits of a business.
• Their accounts are closed and balances transferred to the Trading and Profit and Loss Accounts for the calculation of profits.
• Accounts affecting the calculation of gross profit are transferred to the Trading Account.
• Accounts affecting the calculation of net profit are transferred to the Profit and Loss Account.
Dr Sales Account Cr
2002 $ 2002 $
Jul 31 Transfer to Trading 5,680 Jul 31 Balance 5,680
Dr Purchases Account Cr
Jul 31 Balance $3,900 Jul 31 Transfer to Trading $3,900
Dr Returns Outwards Account Cr
Jul 31 Transfer to Trading $150 Jul 15 Lin & Co $150
Dr Returns Inwards Account Cr
Jul 22 A. Huang $450 Jul 31 Transfer to Trading $450
Closing Stock
• Goods that remain unsold at the end of the accounting period.
• Recorded in the books as an asset.• To record the closing stock, a Stock
Account is debited with amount of goods in hand.
Opening Stock
• The closing stock of one accounting period will become the opening stock of the next accounting period.
• This is done by balancing the Stock Account and bringing down its balance to the next period.
Additional Cost on Purchases
1. Carriage Inwards – cost of transport borne by the buyer.
2. Duty on Purchases – import duties levied on goods imported and excise duties imposed on locally manufactured goods.
3. Wages on Purchases – wages which form part of the cost of preparing the goods or getting them ready for resale.
4. Other purchase expenses: packing & grading expenses, insurance on purchases, inward freight.
Trading Account: Example
On 31 December 2002, the books of B. Wu show the following balances:
$Stock, 1 January 2002 980Purchases 12,950Sales 10,590Returns inwards 340Returns outwards 480Carriage inwards 120Duty on purchases 150The closing stock is valued at $680.
Dr Trading Account for the year ended 31 Dec 2002 (horizontal) Cr
$ $ $ $
Opening stock 980 Sales 10,590
Purchases 12,950 Less Return Inwards 340
Less Return Outwards 480 10,250
12,470 Gross loss 2,790
Add Carriage Inwards 120
Duty on purchase 150 12,740
Cost of goods available for sale 13,720
Less Closing stock 680
Cost of goods sold 13,040
13,040 13,040
Trading Account for the year ended 31 Dec 2002 (vertical)
RM RM RM
Sales 10,590
Less: Return inwards 340
10,250
Less: Cost of goods sold
Opening stock 980
Add: Purchases 12,950
Less: Return outwards 480
13,450
Add: Carriage inwards 120
Duty on purchases 150 270
Cost of goods available for sales 13,720
Less: Closing stock 680 13,040
Gross loss (2,790)
Lecture Exercise
1. Using the information given below, prepare the Trading Account for the year ended 31 December 2002.
Purchases 26,850Sales 39,640Returns: Sales 250
Purchases 400Closing stock 2,630
(Gross Profit $15,570)
Dr Trading Account for the year ended 31 Dec 2008 Cr
Purchases 26,850
RM RM
Less return o/wards 400
Less closing stock 2,630
Cost of Goods available for sale
26,450
Sales
Less Return inwards 250
39,640
39,390 39,390
Gross profit 15,570
Cost of Goods sold 23,820
RM
RM RM RMSales 39,640 Less: Return inwards 250 Net sales 39,390
Less: Cost of goods soldOpening stock -Purchases 26,850 Less: Return outwards (400) 26,450 Cost of goods available for sales 26,450 Less: Closing stock (2,630) 23,820
Gross profit 15,570
Trading Account for the year ended 31 Dec 2008
Lecture Exercise2. Using the information given below, prepare the
Trading Account for the year ended 31 December 2002.
Purchases 34,750Expenses on purchases:
Duty 1,460Freight 1,650
Sales 43,800Returns: Sales 145
Purchases 95Stock: Opening 4,215
Closing 8,370
(Gross Profit $10,045)