How to find profit using the Analysis Method

Incomplete Records

What you need

• A complete cash book showing receipts and payments, including cash sales and cash purchases.
• Opening and closing balances of debtors and creditors for the accounting period.
• Adjustment details such as discount allowed, discount received, bad debts, returns inwards and returns outwards.
• Opening stock, closing stock and the list of expenses for the period.

Step by step

1. 1

   Analyse the cash book

   Separate the receipts from the payments in the cash book. For Perniagaan Maju Jaya (year ended 31 December 2025), receipts include collections from debtors RM45,000 and cash sales RM12,000; payments include payments to creditors RM30,000 and cash purchases RM8,000. Set aside cash sales RM12,000 and cash purchases RM8,000 for later, while the RM45,000 received and RM30,000 paid will be carried into the control accounts.

2. 2

   Prepare the Debtors Control Account to estimate credit sales

   Enter opening debtors on the debit side and closing debtors on the credit side. Debit side: Balance b/d RM8,000 and Credit sales (unknown). Credit side: Bank RM45,000, Discount allowed RM500, Bad debts RM300, Returns inwards RM200 and Balance c/d RM10,000. Credit sales = (45,000 + 500 + 300 + 200 + 10,000) − 8,000 = RM48,000.

3. 3

   Prepare the Creditors Control Account to estimate credit purchases

   Enter opening creditors on the credit side and closing creditors on the debit side. Credit side: Balance b/d RM6,000 and Credit purchases (unknown). Debit side: Bank RM30,000, Discount received RM400, Returns outwards RM150 and Balance c/d RM7,500. Credit purchases = (30,000 + 400 + 150 + 7,500) − 6,000 = RM32,050.

4. 4

   Calculate total sales and total purchases

   Add the cash portion to the credit portion. Total sales = cash sales RM12,000 + credit sales RM48,000 = RM60,000. Total purchases = cash purchases RM8,000 + credit purchases RM32,050 = RM40,050. These are the figures carried into the Trading Account.

5. 5

   Prepare the Trading Account for gross profit

   Adjust for returns first. Net sales = 60,000 − returns inwards 200 = RM59,800. Net purchases = 40,050 − returns outwards 150 = RM39,900. Cost of goods sold = opening stock RM5,000 + net purchases RM39,900 − closing stock RM6,000 = RM38,900. Gross profit = 59,800 − 38,900 = RM20,900.

6. 6

   Prepare the Profit and Loss Account for net profit

   Start with gross profit RM20,900, add other income, namely discount received RM400, giving RM21,300. Deduct expenses: salaries RM6,000, rent RM3,600, discount allowed RM500, bad debts RM300 and general expenses RM1,000 (total expenses RM11,400). Net profit = 21,300 − 11,400 = RM9,900.

7. 7

   Cross-check the figures

   Make sure items taken from the control accounts are used consistently: discount allowed RM500 and bad debts RM300 appear on the credit side of the Debtors Control Account and also as expenses in the Profit and Loss Account; discount received RM400 appears on the debit side of the Creditors Control Account and as income in the Profit and Loss Account. Confirm that Perniagaan Maju Jaya's net profit is RM9,900.

Second example

Now take Kedai Harmoni, which trades only on credit (no cash sales). Opening debtors are RM4,000 and closing debtors RM5,500. During the year, collections from debtors were RM26,000, discount allowed RM300 and returns inwards RM400, with no bad debts. In the Debtors Control Account, the debit side shows Balance b/d RM4,000 and Credit sales, while the credit side shows Bank RM26,000, Discount allowed RM300, Returns inwards RM400 and Balance c/d RM5,500. Credit sales = (26,000 + 300 + 400 + 5,500) − 4,000 = RM28,200. Since there are no cash sales, Kedai Harmoni's total sales are also RM28,200.

A common variation arises when a debtor's cheque is dishonoured. Suppose the RM26,000 received includes a RM600 cheque from a debtor that was later dishonoured. That amount must be re-entered on the debit side of the Debtors Control Account as a revived debt. Because the debit side now has an extra item, the estimated credit sales are lower: (26,000 + 300 + 400 + 5,500) − (4,000 + 600) = RM27,600. Make sure every such adjustment is placed on the correct side before the account is balanced.

Common mistakes

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