How to prepare the Trading Account

Financial Statements of a Sole Proprietorship without Adjustments

What you need

• A trial balance or list of account balances at the end of the period (for example 31 December 2024).
• Figures for sales, returns inwards, purchases, returns outwards and opening stock.
• Purchase-related costs such as carriage inwards or duty on purchases, if any.
• The closing stock value obtained from a stock take.

Step by step

1. 1

   Identify and gather the figures

   Take all the relevant balances from the trial balance of Perniagaan Setia for the year ended 31 December 2024: Opening stock RM8,000; Purchases RM50,000; Returns outwards RM2,000; Carriage inwards RM1,500; Sales RM90,000; Returns inwards RM3,000. The closing stock from the stock take is RM10,000. Separate the sales-related items from the cost-related items to keep the layout tidy.

2. 2

   Calculate net sales

   Deduct returns inwards from sales: Sales RM90,000 less Returns inwards RM3,000 = Net sales RM87,000. In the ledger, sales are transferred with Debit Sales RM90,000; Credit Trading Account RM90,000, while returns inwards are recorded as Debit Trading Account RM3,000; Credit Returns Inwards RM3,000.

3. 3

   Calculate net purchases

   Deduct returns outwards from purchases: Purchases RM50,000 less Returns outwards RM2,000 = Net purchases RM48,000. Ledger entries: Debit Trading Account RM50,000; Credit Purchases RM50,000 for purchases, and Debit Returns Outwards RM2,000; Credit Trading Account RM2,000 for returns outwards.

4. 4

   Add carriage inwards to get cost of purchases

   All costs of bringing goods into the premises are added to net purchases. Net purchases RM48,000 plus Carriage inwards RM1,500 = Cost of purchases RM49,500. Ledger entry: Debit Trading Account RM1,500; Credit Carriage Inwards RM1,500. Note: carriage outwards is NOT included here because it is a selling expense in the Profit and Loss Account.

5. 5

   Calculate cost of goods available for sale

   Add opening stock to cost of purchases: Opening stock RM8,000 plus Cost of purchases RM49,500 = Cost of goods available for sale RM57,500. Opening stock is transferred with Debit Trading Account RM8,000; Credit Stock RM8,000.

6. 6

   Deduct closing stock to get cost of sales

   Deduct the closing stock value from the cost of goods available for sale: RM57,500 less Closing stock RM10,000 = Cost of sales RM47,500. Closing stock is recorded with Debit Stock RM10,000 (a current asset in the Statement of Financial Position); Credit Trading Account RM10,000.

7. 7

   Calculate gross profit

   Deduct cost of sales from net sales: Net sales RM87,000 less Cost of sales RM47,500 = Gross profit RM39,500. Because net sales exceed cost of sales, Perniagaan Setia earns a gross profit. It is transferred with Debit Trading Account RM39,500; Credit Profit and Loss Account RM39,500.

8. 8

   Present in the vertical format

   Arrange it in the KSSM vertical format under the heading 'Perniagaan Setia, Income Statement for the year ended 31 December 2024 (Trading section)'. Begin with Sales RM90,000 less Returns inwards RM3,000 giving Net sales RM87,000; then show Cost of sales (Opening stock RM8,000 + Cost of purchases RM49,500 = RM57,500, less Closing stock RM10,000 = RM47,500); and finally Gross profit RM39,500. Make sure every figure is labelled and each total is carried down neatly.

Second example

Consider Kedai Harmoni for the year ended 31 December 2024 with these figures: Opening stock RM5,000; Purchases RM30,000; Duty on purchases RM800; Returns outwards RM1,000; Sales RM55,000; Returns inwards RM2,000; and Closing stock RM6,500. Net sales are RM55,000 less RM2,000 = RM53,000. Net purchases are RM30,000 less RM1,000 = RM29,000, and because duty on purchases is a cost of acquiring stock, it is added: Cost of purchases = RM29,000 plus RM800 = RM29,800.

Cost of goods available for sale is Opening stock RM5,000 plus Cost of purchases RM29,800 = RM34,800. Deducting Closing stock RM6,500 gives Cost of sales RM28,300. The gross profit of Kedai Harmoni is Net sales RM53,000 less Cost of sales RM28,300 = RM24,700. Notice that duty on purchases is treated like carriage inwards: it is added to the cost of purchases, not shown as an expense in the Profit and Loss Account.

Common mistakes

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