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Difficulty: MediumTrading Account and Gross Profit Calculation

The accounting records of Bako & Sons, a sole trading business, revealed the following balances at the end of the financial year on 31 December 2025:

- Gross Sales: ₦140,000\text{₦}140,000
- Purchases: ₦85,000\text{₦}85,000
- Opening Inventory: ₦15,000\text{₦}15,000
- Closing Inventory: ₦18,500\text{₦}18,500
- Carriage Inwards: ₦3,500\text{₦}3,500
- Carriage Outwards: ₦2,000\text{₦}2,000
- Returns Inwards: ₦4,000\text{₦}4,000
- Returns Outwards: ₦5,000\text{₦}5,000

What is the gross profit earned by Bako & Sons for the year?

  1. ₦56,000\text{₦}56,000Answer
  2. B
    ₦54,000\text{₦}54,000
  3. C
    ₦60,000\text{₦}60,000
  4. D
    ₦63,000\text{₦}63,000

Answer

The gross profit earned by Bako & Sons for the year is ₦56,000\text{₦}56,000.
The gross profit of ₦56,000\text{₦}56,000 is calculated by deducting the Cost of Goods Sold (₦80,000\text{₦}80,000) from Net Sales (₦136,000\text{₦}136,000). Net Sales is Gross Sales (₦140,000\text{₦}140,000) minus Returns Inwards (₦4,000\text{₦}4,000). Cost of Goods Sold is Opening Inventory (₦15,000\text{₦}15,000) plus Purchases (₦85,000\text{₦}85,000) minus Returns Outwards (₦5,000\text{₦}5,000) plus Carriage Inwards (₦3,500\text{₦}3,500) minus Closing Inventory (₦18,500\text{₦}18,500). Carriage Outwards (₦2,000\text{₦}2,000) is an operating expense and does not enter the Trading Account.

Step-by-Step Solution

1
Calculate Net Sales (Turnover)
Net Sales=Gross Sales−Returns Inwards=₦140,000−₦4,000=₦136,000\text{Net Sales} = \text{Gross Sales} - \text{Returns Inwards} = \text{₦}140,000 - \text{₦}4,000 = \text{₦}136,000
Returns inwards represent goods returned by customers and must be deducted from gross sales.
2
Calculate Net Purchases
Net Purchases=Purchases−Returns Outwards+Carriage Inwards=₦85,000−₦5,000+₦3,500=₦83,500\text{Net Purchases} = \text{Purchases} - \text{Returns Outwards} + \text{Carriage Inwards} = \text{₦}85,000 - \text{₦}5,000 + \text{₦}3,500 = \text{₦}83,500
Returns outwards reduce total purchases, while carriage inwards is a direct transport cost added to bring goods into the business.
3
Calculate Cost of Goods Sold (COGS)
COGS=Opening Inventory+Net Purchases−Closing Inventory=₦15,000+₦83,500−₦18,500=₦80,000\text{COGS} = \text{Opening Inventory} + \text{Net Purchases} - \text{Closing Inventory} = \text{₦}15,000 + \text{₦}83,500 - \text{₦}18,500 = \text{₦}80,000
Cost of goods sold measures the direct cost of inventory sold during the financial period.
4
Calculate Gross Profit
Gross Profit=Net Sales−COGS=₦136,000−���80,000=₦56,000\text{Gross Profit} = \text{Net Sales} - \text{COGS} = \text{₦}136,000 - \text{���}80,000 = \text{₦}56,000
Gross profit is the difference between revenue from sales and the direct cost of those sales.

Key Concept

Trading Account and Gross Profit Calculation
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Topics

Trading Account and Gross Profit Calculation

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