Accountancy · Chapter 6
Study notes aligned to the official NEB syllabus.
At the end of every financial year a company draws up its final accounts to show how much profit it earned and what its position is. The traditional method prepares these in the familiar T shaped ledger form: a trading account, a profit and loss account, a profit and loss appropriation account and a balance sheet. This chapter studies each of these statements, the order in which they are prepared, and the special appropriation items that arise only in a company.
The final accounts translate the year's book keeping into two headline answers. The trading and profit and loss account measures the profit or loss earned during the year, and the balance sheet shows the assets, liabilities and capital of the company on the last day of the year. Together they let owners, lenders and the government judge how the company has performed and where it stands.
The trading account finds the gross profit, which is the profit made purely from buying and selling goods before any office or selling expenses. On its debit side go the opening stock, purchases (less returns), and all direct expenses such as wages, carriage inward and factory power. On its credit side go the sales (less returns) and the closing stock. The balancing figure is the gross profit carried down to the profit and loss account.
$$\text{Gross profit} = (\text{Sales} + \text{Closing stock}) - (\text{Opening stock} + \text{Purchases} + \text{Direct expenses})$$
At the end of every financial year a company draws up its final accounts to show how much profit it earned and what its position is. The traditional method prepares these in the familiar T shaped ledger form: a trading account, a profit and loss account, a profit and loss appropriation account and a balance sheet. This chapter studies each of these statements, the order in which they are prepared, and the special appropriation items that arise only in a company.
The final accounts translate the year's book keeping into two headline answers. The trading and profit and loss account measures the profit or loss earned during the year, and the balance sheet shows the assets, liabilities and capital of the company on the last day of the year. Together they let owners, lenders and the government judge how the company has performed and where it stands.
The trading account finds the gross profit, which is the profit made purely from buying and selling goods before any office or selling expenses. On its debit side go the opening stock, purchases (less returns), and all direct expenses such as wages, carriage inward and factory power. On its credit side go the sales (less returns) and the closing stock. The balancing figure is the gross profit carried down to the profit and loss account.