Jess Rolfe
First year 2024
Fin Acc 188
A2S1 notes
chapter 10
profit determination and the closing process
what is the main objective of a business ?
• To make a profit when selling goods or providing a service
what is profit ?
• profit is the difference between the amount received for the selling of goods or
provision of a service (income) and the amount paid for the goods , including all
expenses incurred or the amount spent in providing the service (expense)
• ∴ profit = income - expenses
Two “types” of companies :
1. Trading entities
• Trades in products in order to realise a profit
• e.g. woolworths , zara , food market
2. Service providing
• Delivers a service in return for income
• e.g. hairdresser , car wash , domestic worker
Determine profit of a service entity :
• Assets & expenses utilised to render services
• Operating income from delivering services - primary activity
• If assets are sold - secondary , not the intention to trade in assets
Determine profit of trade entity :
• Assets and expenses utilised to trade products
• Certain assets (inventory) :
- sell as quickly as possible
- as many times as possible
- at the highest price possible (profit)
- primary activity
1
,SUMMARY : differences between service & trade entity
Service providing entity Trade providing entity
Generates income (from rendering of Generates sales (from sale of assets in the
services) ordinary course of business)
I = income I = sales*
(Sales - sales returns)
No cost of sales Cost of sales
No gross profit Gross profit
(Sales - COS)
General ledger accounts & “convenience accounts”
• Standard accounts
• Convenience account : during the closing-off process certain convenience accounts
are created in the ledger to make reporting easier. This is done by grouping accounts
together
1. General ledger account - trade
Sales - income account
Less : COS - convenience account
Gross profit - trade account (convenience account)
Other income - income account
Less : expenses - expense account
Net profit - profit and loss account (convenience account)
2. General ledger accounts - service
Income - income account
Other income - income account
Less : expenses - expense account
Net profit - convenience account
Important !!
Gross profit = sales - cost of sales
Profit / net profit = end of all incomes - expenses (closing number on I/S)
2
, Where does sales come from ?
• Sales = sales (SJ & CRJ) - sales returns (SRJ & CPJ)
Where does cost of sales come from ?
Gross profit as % of sales / cost of sales :
The trading cycle
• Problem - earns acceptable profits , but profit is not always in acceptable form
• Would rather want cash , instead of debtors , to pay creditors
• Creditors in return will be willing to supply stock and services
The trading cycle should be managed properly
3
First year 2024
Fin Acc 188
A2S1 notes
chapter 10
profit determination and the closing process
what is the main objective of a business ?
• To make a profit when selling goods or providing a service
what is profit ?
• profit is the difference between the amount received for the selling of goods or
provision of a service (income) and the amount paid for the goods , including all
expenses incurred or the amount spent in providing the service (expense)
• ∴ profit = income - expenses
Two “types” of companies :
1. Trading entities
• Trades in products in order to realise a profit
• e.g. woolworths , zara , food market
2. Service providing
• Delivers a service in return for income
• e.g. hairdresser , car wash , domestic worker
Determine profit of a service entity :
• Assets & expenses utilised to render services
• Operating income from delivering services - primary activity
• If assets are sold - secondary , not the intention to trade in assets
Determine profit of trade entity :
• Assets and expenses utilised to trade products
• Certain assets (inventory) :
- sell as quickly as possible
- as many times as possible
- at the highest price possible (profit)
- primary activity
1
,SUMMARY : differences between service & trade entity
Service providing entity Trade providing entity
Generates income (from rendering of Generates sales (from sale of assets in the
services) ordinary course of business)
I = income I = sales*
(Sales - sales returns)
No cost of sales Cost of sales
No gross profit Gross profit
(Sales - COS)
General ledger accounts & “convenience accounts”
• Standard accounts
• Convenience account : during the closing-off process certain convenience accounts
are created in the ledger to make reporting easier. This is done by grouping accounts
together
1. General ledger account - trade
Sales - income account
Less : COS - convenience account
Gross profit - trade account (convenience account)
Other income - income account
Less : expenses - expense account
Net profit - profit and loss account (convenience account)
2. General ledger accounts - service
Income - income account
Other income - income account
Less : expenses - expense account
Net profit - convenience account
Important !!
Gross profit = sales - cost of sales
Profit / net profit = end of all incomes - expenses (closing number on I/S)
2
, Where does sales come from ?
• Sales = sales (SJ & CRJ) - sales returns (SRJ & CPJ)
Where does cost of sales come from ?
Gross profit as % of sales / cost of sales :
The trading cycle
• Problem - earns acceptable profits , but profit is not always in acceptable form
• Would rather want cash , instead of debtors , to pay creditors
• Creditors in return will be willing to supply stock and services
The trading cycle should be managed properly
3
