Ama is a sole trader. The following information... | Accounting (9-1) 0985 | Paper 2 Mock 01 | Structured Written Paper

Question 1 Report

Ama is a sole trader. The following information relates to the year ended 31 December 2024.

	$
Revenue	310 000
Returns inwards	5 000
Purchases	186 000
Returns outwards	3 000
Carriage inwards	2 500
Carriage outwards	4 200
Opening inventory	15 000
Closing inventory	18 000
Discount received	2 800
Discount allowed	3 400
Other expenses	42 000

(a) Prepare the income statement of Ama for the year ended 31 December 2024, showing clearly:

(i) net revenue [1]

(ii) cost of sales [3]

(iii) gross profit [1]

(iv) profit for the year [5]

(b) State where each of the following items is shown in the income statement. [4]

Item	Section of income statement
Carriage inwards
Carriage outwards
Discount received
Discount allowed

(c) Explain the difference between trade discount and cash discount. [4]

(d) State whether trade discount is recorded in the books of account. Give a reason. [2]

Answer

(a) Income statement of Ama for the year ended 31 December 2024

(i) Net revenue

Net revenue = Revenue - Returns inwards

= $310 000 - $5 000 = $305 000 [1]

Returns inwards (sales returns) are deducted from revenue because these goods have been sent back by customers and the sale is effectively reversed.

(ii) Cost of sales

Opening inventory	$15 000
Add: Purchases	$186 000
Less: Returns outwards	($3 000) [1]
Net purchases	$183 000
Add: Carriage inwards	$2 500
	$200 500
Less: Closing inventory	($18 000) [1]
Cost of sales	$182 500 [1]

Carriage inwards is a cost of bringing goods to the business, so it is part of cost of sales. Returns outwards (purchases returns) reduce the cost of purchases.

(iii) Gross profit

Gross profit = $305 000 - $182 500 = $122 500 [1]

(iv) Profit for the year

Gross profit	$122 500
Add: Discount received	$2 800 [1]
	$125 300
Less: Expenses
Carriage outwards	$4 200
Discount allowed	$3 400 [1]
Other expenses	$42 000
Total expenses	($49 600) [1]
Profit for the year	$75 700 [1][1]

Discount received is income (added to gross profit). Carriage outwards, discount allowed, and other expenses are all deducted. Profit for the year = $125 300 - $49 600 = $75 700.

(b) Position in the income statement

Item	Section
Carriage inwards	Cost of sales / trading section (added to purchases) [1]
Carriage outwards	Expenses / profit and loss section [1]
Discount received	Income / added to gross profit [1]
Discount allowed	Expenses / deducted from gross profit [1]

Carriage inwards is part of the cost of getting goods ready for sale, so it belongs with cost of sales. Carriage outwards is the cost of delivering goods to customers, which is a selling expense. Discount received is income the business earns for paying suppliers promptly, while discount allowed is a cost the business bears for encouraging prompt payment from customers.

(c) Difference between trade discount and cash discount

A trade discount is a reduction in the list price given to trade customers, typically for buying in bulk or because the buyer is a retailer or wholesaler. [1] It is deducted before the invoice is prepared, so only the net amount appears on the invoice. [1]

A cash discount (also called a settlement discount) is a reduction in the amount owed, offered to encourage prompt or early payment within a specified period. [1] It is recorded in the books of account as discount allowed (by the seller) or discount received (by the buyer). [1]

(d) Is trade discount recorded in the books?

Trade discount is not recorded in the books of account. [1] This is because it is deducted before the transaction is recorded - only the net amount (after the trade discount) is entered in the invoice and the accounting records. [1]

Read lesson note on Sole Traders (CIE)

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