CIMA BA3 Syllabus B. RECORDING ACCOUNTING TRANSACTIONS - From TB to Statement of Profit or Loss - Notes ^{11 / 35}

What is a trading account?

After a trial balance is completed and errors have been corrected, the profit for the period is calculated. 

The statement of profit or loss is used to do this. 

The first part of the statement of profit or loss deals with the trading activities of an entity and compares sales revenue with cost of goods sold to give gross profit.

This part of the statement of profit or loss is referred to as the trading account, although this title does not appear within the statement of profit or loss.

How to calculate Gross Profit?

Sales
Less Cost of Sales 
= Gross Profit 

Cost of Sales = Opening Inventory + Purchases - Closing inventory

A little more detail on the purchases figure:
- Reduce it by purchases returned 
- Increase it by carriage inwards

Sometimes, the cost of sales formula is re-arranged to find purchases only, so it would look like this:

Purchases = Cost of sales + Closing inventory - Opening inventory + Purchase returns

How to calculate Net Profit?

Gross Profit
Less Operating expenses (Interest paid / Rent / Sundry)
Add Bank interest received 
= Net profit

Adjustments to be made when transferring the trial balance to the statement of profit of loss

1. Prepayments / Accruals

   (If a prepayment is made - reduce the expense, 
if an accrual exists - increase the expense.

2. Allowances for receivables 


   If the allowance increases, then reduce the profit and vice versa.

3. Irrecoverable Debts - Deduct from Profit