1. TRADING AND PROFIT AND LOSS ACCOUNT: AN INTRODUCTION
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The body of the profit and loss statement consists of two main components, one containing all revenue items and other containing all expense items.
The profit and loss statement can be presented in two ways:
Vertical presentation
Horizontal, T-account or traditional form.
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Trading and profit and loss account (or income statement) is a financial statement.
Gross profit calculated in the Trading Account.
Net profit is calculated in the Profit and Loss Account.
The main purpose for trading and profit and loss account is to calculate the net profit.
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RETURN INWARDS AND OUTWARDS
A large number of businesses return goods to their suppliers (returns outwards) and will have goods returned to them by customers (return inwards).
When the gross profit is calculated, these returns will have to come into the calculations.
(Sales - Return Inwards)
Less: (Cost of Goods Sold - Return Outwards)
Gross Profit
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CARRIAGE INWARDS AND OUTWARDS
When goods are delivered by suppliers or sent to customers, the cost of transporting the goods is often an additional charge. In accounting, this charge is called ‘carriage’.
When it is charged for delivery of goods purchased, it is called carriage inwards.
Carriage charged on goods sent out by a business to its customers is called carriage outwards.
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In order to ensure the true cost of buying goods for resale is always included in the calculation of gross profit, carriage inwards is always added to the cost of purchases in the trading account.
Carriage outwards is not part of the selling price of our goods. Customers could come and collect and collect the goods themselves, in which case there would no carriage out expense for us to pay or to recharge our customers.
Carriage outwards is always entered in the profit and loss account. It is never included in the calculation of gross profit.
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BALANCE SHEET
The balance sheet is a financial statement.
The two most commonly practiced ways of presentation are the two sided (traditional or horizontal) form and the statement (vertical) form.
(Further information could refer to the textbook from page )
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