Book-keeping · Lesson 7

Trading, profit and loss account (with adjustments) and the balance sheet

WAECNECO

What the syllabus asks

WAEC: (1) trading account: definition, purpose, format and preparation of a simple trading account; (2) profit and loss account: definition, purpose, format, rules and preparation; (3) preparation of trading, profit and loss account with adjustments; (4) balance sheet: meaning, contents, format and preparation of a simple balance sheet; users of the balance sheet. Extends fa6.

NECO: (1) trading account: definition, purpose, format and preparation of a simple trading account; (2) profit and loss account: definition, purpose, format, rules and preparation; (3) preparation of trading, profit and loss account with adjustments; (4) balance sheet: meaning, contents, format and preparation of a simple balance sheet; users of the balance sheet. Extends fa6.

What you will learn

State the purpose of financial statements and the year-end routine.
Define the trading account and list its contents.
Prepare a trading account, including special items.
Define the profit and loss account and state its rules.
Prepare a profit and loss account.
Prepare a trading, profit and loss account with adjustments.
Prepare a balance sheet in horizontal and vertical form.
State the users, uses and limitations of the balance sheet.

Key points

Trading account finds gross profit; P&L finds net profit.
Periods: “for the year ended”; balance sheet: “as at”.
COGS = opening stock + net purchases + carriage in − closing stock.
Owner’s goods and samples reduce purchases.
P&L includes only revenue items adjusted to the period.
Drawings and capital spending are not expenses.
Each adjustment has two effects.
Balance sheet: fixed assets less depreciation, current assets, liabilities, capital.
Working capital = CA − CL.
Users: owners, banks, creditors, tax, buyers, managers, employees.

Start here: Purpose of financial statements and the year-end routine

Ledger accounts and the trial balance tell the book-keeper that the records are arithmetically complete, but they do not directly answer the owner’s two big questions: “Did I make a profit?” and “What is my business worth now?” The financial statements (final accounts) answer them.

The trading account shows the gross profit (or gross loss) from buying and selling goods.
The profit and loss account shows the net profit (or net loss) after all other expenses and incomes.
The balance sheet shows the assets, liabilities and capital at the end of the period.

The first two are often combined as the trading, profit and loss account. They cover a period (“for the year ended 31 December 2025”). The balance sheet is a statement at a point in time (“as at 31 December 2025”). Getting these headings right earns marks in every WAEC final-accounts question.

The year-end routine

Extract a trial balance and make sure it agrees.
Count and value the closing stock (bk10).
Collect information on adjustments: unpaid expenses, prepayments, depreciation, bad debts (bk8, bk9).
Transfer the nominal accounts (sales, purchases, expenses, incomes) to the trading and profit and loss account by closing journal entries. These accounts then start the new year at nil.
Transfer the net profit to the capital account and close drawings to capital.
List the remaining balances (assets, liabilities, capital) in the balance sheet.

Financial Accounting (fa6) uses the modern names income statement and statement of financial position. WAEC Book-keeping uses the traditional names, so this unit does too; the content is the same.

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Practice questions

1. The trading account shows

gross profit
net profit
capital
working capital

Show answer

A: gross profit
Sales − cost of sales.

2. Net sales ₦2,340,000; cost of goods sold ₦1,435,000. Gross profit is

₦3,775,000
₦1,435,000
₦2,340,000
₦905,000

Show answer

D: ₦905,000
Difference.

3. Carriage inwards is shown in the

balance sheet
cash book only
trading account
profit and loss account

Show answer

C: trading account
Part of cost of purchases.

4. Carriage outwards is shown in the

journal
profit and loss account
trading account
balance sheet

Show answer

B: profit and loss account
Selling expense.

5. Opening stock 300,000; purchases (net) 1,485,000; closing stock 350,000. Cost of goods sold is

₦1,435,000
₦2,135,000
₦1,535,000
₦1,185,000

Show answer

A: ₦1,435,000
300 + 1,485 − 350 thousand.

Key words

Final accounts: Trading, profit and loss account and balance sheet.
Trading account: Statement finding gross profit.
Gross profit: Net sales less cost of goods sold.
Cost of goods sold: Opening stock + net purchases + carriage in − closing stock.
Profit and loss account: Statement finding net profit.
Net profit: Gross profit plus incomes less expenses.
Carriage inwards: Transport cost on goods bought.
Carriage outwards: Transport cost on goods delivered to customers.
Balance sheet: Statement of assets, liabilities and capital at a date.
Working capital: Current assets less current liabilities.
Order of permanence: Listing assets from most to least permanent.
Closing entries: Journal entries transferring nominal accounts at year end.

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