Calculating Jim's Gross Profit

First we calculate the Gross Profit using the Trading Account.

We Debit Sales and Credit the Trading account.

This zeros out the Sales account balance, closing down the account.

We repeat this for each of the Expense accounts directly associated with getting the stock ready for sale. For example Purchases and Freight Inwards.

All that remains is to allow for the difference between the Opening and Closing stock figures.

The Opening stock is the initial balance in the Inventory account.

The Closing Stock figure is found by physically counting the Stock. In this case the Closing Stock is $1500.

The Opening Stock figure is transferred to the Trading Account.

The Physical stock figure is transferred from the Trading Account.

In this way the Inventory account's Closing balance is the physical stock on hand at the end of the accounting period.

Notice how the Closing stock from one period becomes the Opening stock in the next period.

Now we have all the entries in the Trading Account we need to calculate the Gross Profit.

The Gross Profit is the balancing figure.

This balancing figure is carried forward into the Profit &Loss Account.

In calculating Gross Profit we have closed down the Trading Account.

Next we calculate Net Profit.