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Introduction to bookkeeping and accounting
Introduction to bookkeeping and accounting

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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.