The trading account finds gross profit. The profit and loss account deducts expenses to find net profit. Closing stock is not a guess. It is given, and it is deducted in the cost of goods sold.
The idea
Cost of goods sold is opening stock plus purchases, minus closing stock. Gross profit is sales minus that cost. Returns and carriage change the purchases or the sales figure when the question gives them. Net profit is gross profit minus expenses such as rent, wages and electricity. A loss is the same arithmetic when expenses exceed gross profit. Show the labels. A column of figures with no words does not tell a marker which total is gross profit.
The balance sheet, or statement of financial position, is not part of the profit calculation. It lists assets, liabilities and capital at the end of the period. Net profit is added to capital, and drawings are deducted. Closing stock appears as a current asset, the same figure you deducted in the trading account. Use it in both places. Inventing a different stock figure for the balance sheet breaks the link.
What earns the marks
Opening stock is added. Closing stock is subtracted. Swapping them ruins the gross profit and is not a small slip. Label gross profit and net profit. Expenses do not go in the trading account unless the question is a manufacturing account and names factory costs. For a simple trader, rent and wages are below gross profit. Cedis on every money line.
Practice questions
These are practice questions in the style of the paper, with a model answer and a mark scheme. They are not a promise of what your paper will ask.
Adds opening stock and purchases, and subtracts closing stock1 mark
Cost of goods sold 15,000 cedis1 mark
Gross profit 15,000 cedis1 mark
Deducts the expenses of 6,0001 mark
Net profit 9,000 cedis1 mark
2Question 2
1 mark
Where does the closing stock of 5,000 cedis appear, apart from the trading account? (1 mark)
Model answer
As a current asset in the balance sheet.
Mark scheme
Current asset in the statement of financial position, or balance sheet1 mark
3Question 3
2 marks
Why are the expenses of 6,000 cedis not deducted before gross profit? (2 marks)
Model answer
Gross profit measures the margin on buying and selling the goods. The 6,000 cedis are running expenses of the business, so they are deducted afterwards to reach net profit.
Mark scheme
Gross profit is sales less the cost of the goods1 mark
These expenses are not part of that cost. They belong in the profit and loss account1 mark
Practise Financial Accounting with Anna
More questions on this topic are inside GLearn, marked as you answer, with the reason written out. The first ones need no account.
Sales minus the cost of goods sold. Cost of goods sold is opening stock plus purchases minus closing stock. With sales of 30,000, opening stock 4,000, purchases 16,000 and closing stock 5,000, the cost is 15,000 and the gross profit is 15,000.
How do you get from gross profit to net profit?+
Subtract the running expenses. If gross profit is 15,000 cedis and expenses are 6,000 cedis, net profit is 9,000 cedis. The same closing stock then appears as a current asset. It is not deducted a second time. All WASSCE Financial Accounting past questions