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Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.1 Chapter 9 Income statements.

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Presentation on theme: "Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.1 Chapter 9 Income statements."— Presentation transcript:

1 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.1 Chapter 9 Income statements and statements of financial position: further considerations

2 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.2 Learning objectives After you have studied this chapter, you should be able to: Explain the terms returns inwards, returns outwards, carriage inwards and carriage outwards Record returns inwards and returns outwards in the income statement

3 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.3 Learning objectives (Continued) Explain the difference between the treatment of carriage inwards and carriage outwards in the income statement Explain why carriage inwards is treated as part of the cost of purchasing goods Explain why carriage outwards is not treated as part of the cost of purchasing goods Prepare an inventory account showing the entries for opening and closing inventory

4 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.4 Learning objectives (Continued) Prepare an income statement and a statement of financial position containing the appropriate adjustments for returns, carriage and other items that affect the calculation of the cost of goods sold Explain why the costs of putting goods into a saleable condition should be charged to the trading account

5 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.5 Returns inwards and outwards The sales account deals with goods sold. The returns inwards account deals with goods returned by customers. The purchases account deals with goods purchased. The returns outwards account deals with goods returned to the supplier. All four of these accounts need to be included in a profit calculation.

6 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.6 Gross profit calculation

7 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.7 The income statement

8 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.8 Carriage When goods are delivered by suppliers or sent by customers the cost of transporting the goods is often an additional charge to the buyer – this charge is called carriage. When carriage is charged on goods purchased, it is called carriage inwards. When carriage is charged on goods sent out, it is called carriage outwards.

9 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.9 Carriage in the accounts To ensure that the true cost of buying goods for resale is always included in the calculation of gross profit, carriage inwards is always added to the cost of purchases in the trading account. Carriage outwards is always entered in the profit and loss account section of the income statement. It is never included in the calculation of gross profit.

10 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.10 The income statement

11 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.11 Activity

12 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.12 Activity (Continued) We also need to know the closing stock figure for the year end, which was £5,500.

13 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.13 Activity (Continued)

14 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.14 Activity (Continued)

15 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.15 Learning outcomes You should have now learnt: 1.That returns inwards should be deducted from sales in the trading account 2.That returns outwards should be deducted from purchases in the trading account 3.That carriage inwards is shown as an expense item in the trading account 4.That carriage outwards in shown as an expense in the profit and loss account

16 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.16 Learning outcomes (Continued) 5.How to prepare the inventory account and carry forward the balance from one period to the next 6.That in the second and later years of a business, both opening and closing inventory are brought into the trading account 7.That it is normal practice to show cost of goods sold as a separate figure in the trading account

17 Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 9.17 Learning outcomes (Continued) 8.How to prepare an income statement that includes the adjustments for carriage inwards and both opening and closing inventory in the trading section and carriage outwards as an expense in the profit and loss section 9.That expense items concerned with getting goods into a saleable condition are charged in the trading account 10. That where there is import duty or insurance charged on goods purchased, these costs are treated as part of the cost of goods sold


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