This tutorial will assist students to understand Final Account of a sole proprietorship.

1. FINAL ACCOUNTS
OF A SOLE TRADER
xi. Net Profit
Answer the following questions:
1. How many Accounts contain in the Final Accounts?
1. Briefly Explain the following terminologies
I. Purchases ii. Sales iii. Opening Stock
iv. Closing Stock
v. Return Outwards vi. Return inwards vii. Carriage Inwards
viii. Carriage Outwards ix. Cost of goods sold
x. Gross Profit
Xii. Assets Xiii. Liabilities
xv. Capital
xvi. Drawings
End of Tutorial

2. The final accounts consists of the following:
1. Trading account
2. Profit and loss accounts
3. Balance sheet
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End of Tutorial

3. The Trading Account is prepared to show the gross
profit or gross loss for the period. The reason why we
prepare trading account is to calculate gross profit or
gross loss. It is prepared to conform to the rules of
double entry. Since it contains the result of operation of
a business over a period, the heading should be
Trading, Profit and Loss account for the year
ended……….
The trading account looks at the difference between
the sales and the cost of goods sold. It is a revenue
account which follows the principle of double entry.
The left side is the debit side and the right side is
the credit side.
Click here to see the workings Go back to the questions
Click here to learn more about
Trading Account Component End of Tutorial

4. The profit and loss account is the account
that shows the net profit or net loss of an
organization. Income or gains are credited,
while expenses are debited
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Profit and Loss Account
End of Tutorial

5. Balance sheet can be defined as the
statement that shows the presentation of the
summary of assets and liabilities in a well
arranged form, so that the financial position
may be clearly ascertained.
Balance Sheet is not an account, it just a
financial statement showing assets and
liabilities.
Go back to the questions
Definition of Assets
Definition of Liabilities
End of Tutorial

6. Dr Trading Account for the year ended 31st December, 2007 Cr
Opening Stock XX
Add Purchases XX
Add Carriage Inwards XX
XX
Less Returns Outwards XX XX
XX
Less goods withdrawn for own XX
Cost of goods available for sales XX
Less closing stock XX
Cost of goods sold XX
Gross Profit XX
XX
Click here to see the vertical method
Sales XX
Less Returns Inwards XX XX
XX
Go back to the questions End of Tutorial

7. Vertical Method
Sales XX
Cost of goods sold
Opening Stock XX
Add Purchases XX
Add Carriage InwardsXX
XX
Less Returns Outwards XX XX
Cost of goods available for sales XX
Less Closing Stock XX XX
Gross Profit XX
Go back to the questions End of Tutorial

8. Purchases
Purchases can be defined as the goods bought
for resale. It is the total of credit and cash
purchases.
Purchases must be debited to the trading
account.
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End of Tutorial

9. Sales
Sales is the total of cash and credit sales during
the trading period.
Sales is credited to the trading account.
Net sales = Sales – Returns Inwards
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End of Tutorial

10. Opening Stock
Opening stock is the stock of goods available for
sales at the beginning of the year.
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End of Tutorial

11. Closing Stock
Closing Stock is the stock of goods available at
the end of the trading period.
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End of Tutorial

12. Returns Outwards
Returns Outwards are goods returned to the
suppliers. It must be deducted from the
purchases for the period. It is also called
Returns on Purchases
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End of Tutorial

13. Returns Inwards
Returns Inwards are goods returned by the
customers. It must be deducted from the sales
for the period. It can also be called Returns on
sales
Go back to the questions End of Tutorial

14. Carriage Inwards
Carriage Inwards is the cost of transporting
goods to the company. It is normally added to
purchases.
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End of Tutorial

15. Carriage Outwards
Carriage Outwards is the cost of
transporting goods to the customers.
It is called carriage on sales and must
be treated as expenses.
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End of Tutorial

16. Cost of goods available for sale
This is the amount arrived at, after adding the
purchases to the opening stock.
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End of Tutorial

17. Cost of goods sold
This is the cost of goods actually sold.
When the closing stock is deducted
from the cost of goods available for
sales, the remaining balance is the
cost of goods sold.
Cost of goods sold = cost of goods
available for sales – closing stock
Go back to the questions End of Tutorial

18. Gross Profit
Gross Profit is the excess of the sales (less
returns) over the cost of goods sold.
It can equally be defined as the profit arrived
at before the expenses are deducted.
Formula is
Gross Profit = Net Sales -- Cost of goods sold
Go back to the questions End of Tutorial

19. Net Profit
Net Profit is the profit arrived at after
the deduction of all expenses
incurred in a period.
The formula is
Net Profit = Gross Profit – Expenses
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End of Tutorial

20. Overtrading
Overtrading occurs when a firm is engaged in
buying too much and selling too little. This
means that the organization accumulates
more volume of trade than its financial
capacity, which results to piling up to debts in
the long run.
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End of Tutorial

21. Signals of Overtrading
The signals of overtrading include:
 Increase amount of creditors
 More capital locked up in stock
 Excessive use of Bank Overdraft
 Constant use of trade discounts to customers
to stimulate sales
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End of Tutorial

22. Example 1
From the following trial balance of Ajayi, draw up a Trading, Profit and Loss Account for the year ended 31st
Dec. 2009.
Dr Cr
Capital 22,636
Stock 2,368
Carriage Outwards 200
Carriage Inwards 310
Returns Inwards 205
Sales 18,600
Purchases 11,874
Returns Outwards 322
Salaries and Wages 3,862
Rent 304
Insurance 78
Sundry expenses 664
Advertising 216
General Expenses 480
Land & Building 5,000
Furniture & fittings 1,800
Motor car 350
Debtors 3,896
Bank 10,482
Creditors 1,731
Drawings 1,200
43,289 43,289
Stock at 31st December 2009 was N3,000
End of Tutorial

23. Components of Trading Account
 Opening Stock
 Purchases
 Purchases returns or returns outward
 Carriage inwards
 Cost of goods available for sale
 Closing stock
 Cost of sales
 Sales
 Sales returns or returns inward
 Gross Profit or Gross loss
Click here to learn the rules for constructing
Trading, Profit and Loss Account
End of Tutorial

24. Procedures for preparing trading
profit and loss account
1. The revenue earned is the first item that will be
recorded as sales on the credit side less return
inwards.
2. The statement contains a cost of goods sold
section that shows the total cost of inventory
that was sold during the period.
3. The cost of goods is deducted from sales to get
intermediate or gross profit.
4. The operating expenses are subtracted from
gross profit to determine net income or net
profit or loss.
Cont. with Balance Sheet End of Tutorial

25. Assets
Assets are those items of a business
which are used to generate income
for the business.
Examples of assets include buildings,
machinery, motor vehicles, stocks for
resale, debts, cash and goodwill.
Types of Assets
Fixed Assets
Current Assets
End of Tutorial

26. Types of assets
• Tangible assets
• Intangible assets
Tangible assets are those assets you can see and
touch. Examples are buildings, furniture,
equipment, freehold premises, motor van etc.
Intangible assets are those assets that exist but not
physically seen. Examples are goodwill, patent
and copyright.
If a vertical method is in use, assets are normally
listed first when preparing a balance sheet. If a T-
account method is in use, assets are presented on
the right-hand side.
Fixed Assets End of Tutorial

27. Fixed Assets
Fixed assets are assets of a more permanent
nature, retained for use in the business in order
to generate income. They are assets that can
last for a long period of time.
Examples of fixed assets include:
I. Land and buildings
II. Fixtures and fittings
III. Plant and machinery
IV.Motor van
V. Goodwill, etc.
Current Assets End of Tutorial

28. Current Assets
Current assets are assets that can last
for a short period of time. They are
assets of a less permanent nature.
Current assets are in frequent change.
Examples are:
Stocks
Debtors
Cash, etc
Current Liabilities
End of Tutorial

29. Liabilities
Liabilities can be defined as the
indebtedness of the business to outsiders.
Liabilities consist of money owing for
goods supplied, and for loans advanced,
to the organization.
Liabilities constitute claims by outside
persons other than the owners of the
business.
Types of Liabilities End of Tutorial

30. Types of Liabilities
There are two types of liabilities:
 Long-term liabilities
 Current liabilities
Long- Term Liabilities
Current Liabilities
Definition of Capital and Drawings
End of Tutorial

31. Long Term Liabilities
Long term liabilities are those claims, due to
outside interest, which are expected to be
settled after one year.
Good example are:
 Mortgage
 % debenture.
Long-Term Liabilities will be on the left-hand
side of the Balance Sheet
Current Liabilities End of Tutorial

32. Current Liabilities
Current liabilities are debts which must be repaid
quickly, probably within one year.
Current Liabilities will be on the left hand side of
the Balance Sheet
Examples current liabilities are:
Creditors
Bank Loan
Bank overdraft
Expenses accrued, etc
Capital
End of Tutorial

33. Capital
Capital is the business owner’s commitment to
the business and represents the value injected
by the owner, either to commence, or to effect
expansion of the business.
Capital will be on the left-hand side of the
Balance Sheet.
Definition of Drawing
End of Tutorial

34. Drawings
Drawing is the converse of capital and
represents the benefits of the business
to the owner. Usually, drawing is
presented on the left-hand side of the
Balance Sheet and deducted from the
net profit.
End of Tutorial
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35. This is End of the Tutorial on
Final Account of a Sole Trader
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