Trading, Profit and Loss Account
Introduction
A Trading Account and a Profit and Loss Account are important financial statements prepared by
businesses at the end of an accounting period. They help determine whether a business has made a
profit or incurred a loss and provide information about its financial performance.
Trading Account
Definition
A Trading Account is a financial statement prepared to determine the gross profit or gross loss made
from buying and selling goods during an accounting period.
Objectives of a Trading Account
To determine gross profit or gross loss.
To ascertain the cost of goods sold.
To compare sales with the direct cost of goods sold.
To evaluate the efficiency of the trading activities.
Components of a Trading Account
Debit Side
Opening Stock
Purchases
Carriage Inwards (Freight Inwards)
Direct Wages
Customs Duty
Factory Expenses (Direct Expenses)
Less: Purchase Returns
Credit Side
Sales
Less: Sales Returns
Closing Stock
Formula for Gross Profit
Gross Profit = Net Sales − Cost of Goods Sold (COGS)
Where:
Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses − Closing Stock
If the cost of goods sold exceeds net sales, the result is a Gross Loss.
Format of a Trading Account
Debit (Dr.) Amount Credit (Cr.) Amount
Opening Stock xxx Sales xxx
Purchases xxx Less: Sales Returns (xxx)
Less: Purchase Returns (xxx) Net Sales xxx
Carriage Inwards xxx Closing Stock xxx
Direct Wages xxx
Direct Expenses xxx
Gross Profit c/d xxx
Total xxx Total xxx
Profit and Loss Account
Definition
A Profit and Loss Account is prepared after the Trading Account to determine the net profit or net loss
of a business after deducting all indirect expenses and adding other incomes.
Objectives of a Profit and Loss Account
To determine net profit or net loss.
To measure business performance.
To assist management in decision-making.
To provide information for investors and creditors.
Components of Profit and Loss Account
Debit Side (Indirect Expenses)
Salaries and Wages (Office)
Rent and Rates
Insurance
Office Expenses
Advertising
Depreciation
Bad Debts
Bank Charges
Electricity
Telephone Expenses
Interest on Loan
General Expenses
Credit Side (Indirect Incomes)
Gross Profit (from Trading Account)
Discount Received
Commission Received
Rent Received
Interest Received
Dividend Received
Other Operating Income
Formula for Net Profit
Net Profit = Gross Profit + Other Income − Indirect Expenses
If indirect expenses exceed gross profit and other income, the result is a Net Loss.
Format of a Profit and Loss Account
Debit (Dr.) Amount Credit (Cr.) Amount
Salaries xxx Gross Profit b/d Xxx
Rent xxx Discount Received Xxx
Insurance xxx Commission Received Xxx Question
The following Trial
Advertising xxx Rent Received Xxx
Balance was extracted from
Depreciation xxx Other Income Xxx the books of Bright Star
Enterprises as at 31
Office Expenses xxx December 2025.
Net Profit transferred to Capital xxx
Total xxx Total Xxx
Particulars ₦
Opening Stock 80,000
Purchases 650,000
Purchase Returns 20,000
Sales 1,050,000
Sales Returns 30,000
Carriage Inwards 15,000
Direct Wages 45,000
Salaries 90,000
Rent and Rates 36,000
Insurance 12,000
Advertising 25,000
Office Expenses 18,000
Discount Received 8,000
Commission Received 12,000
Depreciation 20,000
Additional Information
Closing Stock as at 31 December 2025 was valued at ₦120,000.
Required
Prepare:
a. A Trading Account for the year ended 31 December 2025.
b. A Profit and Loss Account for the year ended 31 December 2025.