Prepare the trading and profit and loss account for F Brown for the year ended 30 September 20X8 and the balance sheet as at that date from this trial balance, given closing stock at 30 September 20X8 is £89,404.

Answer

Net sales are £389,290 and cost of goods sold is £237,336, giving a gross profit of £151,954 for the year ended 30 September 20X8. Total expenses are £54,173, so net profit is £97,781. Closing capital is £118,856 (capital £49,675 + profit £97,781 − drawings £28,600). The balance sheet balances with total assets £145,156 less creditors £26,300, leaving net assets £118,856.

Explanation

What you are producing from the trial balance

From the trial balance, you split items into:

Trading account items (sales, purchases, returns, stock, carriage inwards) to find gross profit.
Profit and loss (income statement) expenses (carriage outwards, rent, wages, etc.) to find net profit.
Balance sheet items (assets, liabilities, capital), remembering closing stock appears on the balance sheet.

Trading account: net sales and cost of sales

Net sales

Sales: £391,400
Less returns inwards: £2,110
Net sales = £391,400 − £2,110 = £389,290

Net purchases

Purchases: £254,810
Less returns outwards: £1,240
Net purchases = £254,810 − £1,240 = £253,570

Cost of goods sold (COGS) Carriage inwards is part of getting goods to you, so it is included in cost of sales.

$$\text{COGS} = \text{Opening stock} + (\text{Net purchases} + \text{Carriage inwards}) - \text{Closing stock}$$

$$\text{COGS} = 72{,}410 + (253{,}570 + 760) - 89{,}404 = 237{,}336$$

Gross profit $$\text{Gross profit} = \text{Net sales} - \text{COGS} = 389{,}290 - 237{,}336 = 151{,}954$$

Trading account (year ended 30 September 20X8)

	£
Net sales (391,400 − 2,110)	389,290
Less: Cost of goods sold	237,336
Gross profit	151,954

Profit and loss account: operating expenses and net profit

Carriage outwards is a selling/distribution expense, so it goes in the profit and loss account.

Expenses

Carriage outwards: £2,850
Motor expenses: £1,490
Rent: £8,200
Telephone charges: £680
Wages and salaries: £39,600
Insurance: £745
Office expenses: £392
Sundry expenses: £216

Total expenses = £54,173

Net profit $$\text{Net profit} = 151{,}954 - 54{,}173 = 97{,}781$$

Profit and loss account (year ended 30 September 20X8)

	£
Gross profit	151,954
Less: Carriage outwards	2,850
Motor expenses	1,490
Rent	8,200
Telephone charges	680
Wages and salaries	39,600
Insurance	745
Office expenses	392
Sundry expenses	216
Total expenses	54,173
Net profit	97,781

Updating the capital figure

For a sole trader: $$\text{Closing capital} = \text{Opening capital} + \text{Net profit} - \text{Drawings}$$

$$\text{Closing capital} = 49{,}675 + 97{,}781 - 28{,}600 = 118{,}856$$

Balance sheet as at 30 September 20X8

Assets

Non-current assets

Van: £5,650
Office equipment: £7,470
Total non-current assets: £13,120

Current assets

Stock (30 Sept 20X8): £89,404
Debtors: £38,100
Cash at bank: £4,420
Cash in hand: £112
Total current assets: £132,036

Total assets = £13,120 + £132,036 = £145,156

Liabilities

Creditors: £26,300

Net assets = £145,156 − £26,300 = £118,856

Balance sheet (as at 30 September 20X8)

	£
Non-current assets
Van	5,650
Office equipment	7,470
Total non-current assets	13,120

Current assets
Stock	89,404
Debtors	38,100
Cash at bank	4,420
Cash in hand	112
Total current assets	132,036
Total assets	145,156

Less: Current liabilities
Creditors	26,300
Net assets	118,856

Capital
Opening capital	49,675
Add: Net profit	97,781
Less: Drawings	(28,600)
Closing capital	118,856

Quick checks students use to confirm it is right

Closing stock (£89,404) appears in two places: deducted in COGS and shown as a current asset.
The balance sheet balances: Net assets £118,856 = closing capital £118,856.

Skills You Achive

financial accounting preparing final accounts trial balance interpretation income statement preparation balance sheet preparation