A trading account works out gross profit: net sales minus the cost of the goods sold. It uses only figures about buying and selling goods.
This lesson is part of financial statements of a sole trader. Figures come from the year-end trial balance, so a tidy trial balance makes this lesson much easier.
What goes into the cost of goods sold?
Cost of goods sold is what the business paid for the goods it actually sold this year. You build it in a fixed order: opening inventory, plus net purchases, plus carriage inwards, minus closing inventory.
Think of a shelf. What was on it at the start, plus what you bought in, minus what is still on it at the end, equals what left the shelf.
Worked example: Kedai Runcit Hamidah
This is a worked example for the year ended 31 December. The trial balance gives these figures:
| Item | RM |
|---|---|
| Sales | 86 000 |
| Sales returns | 1 500 |
| Opening inventory | 9 000 |
| Purchases | 52 000 |
| Purchases returns | 2 000 |
| Carriage inwards | 800 |
| Carriage outwards | 600 |
| Closing inventory (given in the notes) | 11 000 |
Step 1: net sales. Sales RM86 000 minus sales returns RM1 500 gives RM84 500.
Step 2: net purchases. Purchases RM52 000 minus purchases returns RM2 000 gives RM50 000. Add carriage inwards RM800 to get RM50 800.
Step 3: cost of goods sold. Opening inventory RM9 000 plus RM50 800 gives goods available for sale of RM59 800. Deduct closing inventory RM11 000 and the answer is RM48 800, the amount that left the shelf.
Step 4: gross profit. From net sales of RM84 500, take away RM48 800 and gross profit is RM35 700.
Notice that carriage outwards RM600 did not appear anywhere in the four steps. It is waiting for the next statement.
The mistake that changes gross profit
A student sees the word “carriage” and adds both amounts to purchases. The working looks complete, which makes the error hard to spot.
| Line | Wrong | Right |
|---|---|---|
| Carriage added to purchases | RM1 400 | RM800 |
| Amount that left the shelf | RM49 400 | RM48 800 |
| Gross profit | RM35 100 | RM35 700 |
Gross profit is RM600 too low. Net profit would still come out right if the same RM600 were then left out of expenses, which is why a balanced-looking answer can hide this slip. The test is simple: ask whether the cost is about getting goods in, or about getting goods to the customer.
Check yourself
A trader has these figures: sales RM40 000, sales returns RM1 000, opening inventory RM5 000, purchases RM24 000, purchases returns RM500, carriage inwards RM300, closing inventory RM6 000. Find the gross profit.
Answer
Net sales: 40 000 − 1 000 = RM39 000.
Net purchases: 24 000 − 500 = RM23 500. Add carriage inwards RM300 to get RM23 800.
Cost of goods sold: 5 000 + 23 800 − 6 000 = RM22 800.
Gross profit: 39 000 − 22 800 = RM16 200.
What to study next
Gross profit is the first line of the next statement. Continue with preparing a profit and loss statement, then see why the two profits differ in distinguishing gross and net profit.
To log the slips you find, use the mistake log and paper-error review. If you want a teacher to question your placement of each figure, see online one-to-one Accounting tuition.