3.8 Summary

• Profit = Income – Expenses (P = I – E).
• Gross profit = Sales – Cost of sales.
• Net profit = Sales – Cost of sales – Other expenses.
• In this course, goods bought for sale are initially treated as an expense (purchases) in the accounts.
• Goods bought for sale that are unsold at the period end are an asset called stock and are carried forward to the next accounting period.
• Closing stock at the period end must be deducted from purchases in order for the cost of sales for the period to be worked out.
• The balance sheet at the end of a period reflects the following expanded accounting equation:
• Capital + (Income – Expenses) =Assets – Liabilities
• The accounting equation can also be represented as:

  Assets + Expenses = Capital + Liabilities + Income

• Capital + Liability + Income accounts are increased via credit entries and decreased via debit entries.
• The trial balance (TB) records all the credit or debit balances from the accounts.
• The P&L account and the balance sheet can be produced from the TB.