The Income Statement – A. The Trading Account


The Trading Account measures two things - the difference between what it cost the business to buy or make the goods that they sold, and the total they received for selling them.


1. The money earned from selling any stock is called Sales. 2. The direct costs involved in buying or making that stock is called Cost of Sales.


When we take the money spent on selling the goods (Cost of Sales) away from what we received in Sales, it shows if the business made a Gross Profit or a Gross Loss that year.


Sales minus Cost of Sales = Gross Profit / Loss SALES


All money earned from selling stock during the year is included in Sales. MINUS


COST OF SALES


These are costs directly linked to buying or producing the goods that are sold. Purchases


Import duties Carriage inwards


The cost of purchasing goods for resale or the


cost of materials used to manufacture goods.


Customs duties charged on goods/materials imported from outside the EU.


These are delivery costs


for transporting stock into the business.


= GROSS PROFIT / GROSS LOSS Adjusting for Stock Levels


Final accounts measure what happened in the business for one year from the first day (01/01) to the last day of it (31/12). To ensure the Cost of Sales only includes the value of the goods that were actually sold during that year, a business needs to make adjustments based on their stock.


Opening stock: This is the value of stock the business held on 1st January. When this stock is sold during that accounting year, it will then need to be added to the Cost of Sales for that year, even if it was bought or made the previous year.


Closing stock: The value of the stock the business has leftover, unsold on 31st December. This stock is not a cost of sale for the year as it was not sold in that year, so it must be deducted from the Cost of Sales figure.


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STRAND 2 CHAPTER 26: Final accounts


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