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

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 9.1

Chapter 9Income statements and

statements of financial position:

further considerations

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 9.6

Gross profit calculation

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 9.7

The income statement

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 9.10

The income statement

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 9.11

Activity

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 9.13

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 9.14

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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 account2.That returns outwards should be deducted

from purchases in the trading account3.That carriage inwards is shown as an expense

item in the trading account4.That carriage outwards in shown as an

expense in the profit and loss account

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th 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