Lesson objectives:

1.       definition of trading account.

2.       definition of profit and loss account.

3. purpose of preparing trading, profit and loss account.

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A trading account refers to an account prepared to indicate profit realized on trading.

Profit that is made on trading is called gross profit. Gross profit is the difference between sales and cost of sales.

Gross profit = sales – cost of sales.

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PURPOSE OF PREPARING TRADING PROFIT AND LOSS ACCOUNT

The trading account is prepared in order to ascertain the gross profit while the profit and loss account is prepared in order to ascertain the net profit or net loss as the case may be.      

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ITEMS USED IN PREPARING TRADING ACCOUNT

1.       Opening stock

2.       Closing stock

3.       Sales on return inwards

4.       Purchases on return outwards

5.       Carriage inwards

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ITEMS NEEDED IN PREPARING THE PROFIT AND LOSS ACCOUNTS

1.       Gross profit brought down from the trading account.

2.       Discount received.

3.       Discount allowed

4.       All expenses incurred such as rent, rate, advertising, insurance, motor-transport, wages, salaries, stationeries etc.

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From the data below, prepare trading, profit and loss account for the year ended 31st December, 2022.

Sales                                 33,000

Opening stock                  2,400

Purchases                        21,520

Closing stock                    3,600

Return inwards                   580

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Return outwards                300

Salaries                             4,300

Rent and rates                 1,200

General expenses               600

Insurance                             200

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Discount allowed                150

Discount received               340

Electricity                             350

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Link for video on preparation of trading profit & loss account

https://www.google.com/search?q=video+on+trading+profit+and+loss+account&oq=video+on+trading+profit+and+loss+&aqs=chrome.1.69i57j33i160l2j33i22i29i30.15122j0j7&sourceid=chrome&ie=UTF-8#fpstate=ive&vld=cid:0acc7f1f,vid:W-e77RfF6yU

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