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Difficulty: MediumTrading Account and Gross Profit Calculation

Ade Enterprise extracted the following financial details from its ledger for the year ended 31 December 2025:

- Gross Sales: ₦220,000\text{₦}220,000
- Returns Inwards: ₦10,000\text{₦}10,000
- Opening Inventory: ₦35,000\text{₦}35,000
- Purchases: ₦140,000\text{₦}140,000
- Returns Outwards: ₦8,000\text{₦}8,000
- Carriage Inwards: ₦5,000\text{₦}5,000
- Carriage Outwards: ₦7,000\text{₦}7,000
- Closing Inventory: ₦42,000\text{₦}42,000

What is the Gross Profit for Ade Enterprise for the year ended 31 December 2025?

  1. A
    ₦73,000\text{₦}73,000
  2. ₦80,000\text{₦}80,000Answer
  3. C
    ₦90,000\text{₦}90,000
  4. D
    ₦64,000\text{₦}64,000

Answer

₦80,000\text{₦}80,000
The gross profit of ₦80,000\text{₦}80,000 is correctly derived by subtracting the cost of goods sold (₦130,000\text{₦}130,000) from net sales (₦210,000\text{₦}210,000). Carriage inwards is added to net purchases as a direct cost, while carriage outwards is excluded from the trading account.

Step-by-Step Solution

1
Calculate Net Sales
Net Sales=Gross Sales−Returns Inwards=₦220,000−₦10,000=₦210,000\text{Net Sales} = \text{Gross Sales} - \text{Returns Inwards} = \text{₦}220,000 - \text{₦}10,000 = \text{₦}210,000
Returns inwards reduce gross sales revenue to arrive at net sales.
2
Calculate Net Purchases and Cost of Goods Available for Sale
Net Purchases=Purchases−Returns Outwards=₦140,000−₦8,000=₦132,000\text{Net Purchases} = \text{Purchases} - \text{Returns Outwards} = \text{₦}140,000 - \text{₦}8,000 = \text{₦}132,000
Cost of Goods Available=Opening Inventory+Net Purchases+Carriage Inwards=₦35,000+₦132,000+₦5,000=₦172,000\text{Cost of Goods Available} = \text{Opening Inventory} + \text{Net Purchases} + \text{Carriage Inwards} = \text{₦}35,000 + \text{₦}132,000 + \text{₦}5,000 = \text{₦}172,000
Carriage inwards is a direct expense added to purchases, while returns outwards are subtracted.
3
Calculate Cost of Goods Sold (COGS)
COGS=Cost of Goods Available−Closing Inventory=₦172,000−₦42,000=₦130,000\text{COGS} = \text{Cost of Goods Available} - \text{Closing Inventory} = \text{₦}172,000 - \text{₦}42,000 = \text{₦}130,000
Carriage outwards is an operating expense (P&L) and must be excluded from trading account COGS.
4
Calculate Gross Profit
Gross Profit=Net Sales−COGS=₦210,000−₦130,000=₦80,000\text{Gross Profit} = \text{Net Sales} - \text{COGS} = \text{₦}210,000 - \text{₦}130,000 = \text{₦}80,000
Gross Profit is the excess of net sales over the cost of goods sold.

Key Concept

Trading Account and Gross Profit Calculation
Estimated Time:1m 30s
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Topics

Trading Account and Gross Profit Calculation

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