Page 164 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes Following are the main points of difference between gross profit and net profit.
Table 8.1

Gross Profit Net Profit
It is the excess of net sales over cost of purchase It is the excess of gross profit over all indirect
or manufacture (all expense relating to expenses.
purchase or manufacture of goods) of goods.
It is not true profit of the business. It is true profit of the business.
It shows credit balance of the trading account It shows credit balance of the profit and loss
account.
The progress of the business can be judged by The profitability of the business can be measured
the comparison of gross profit with net sales by the comparison of net profit with net sales.

Detailed Study of Different Items Appearing in Trading Account

1. Opening Stock: Whenever Trading account is prepared, stock of the last year is shown as
opening stock of the current year, which is passed through an opening entry and appears
in the trial balance. It is generally shown as a first time in the Trading account but if the
business is a new one, just started, then there would not be any opening stock. In case of a
trading concern finished goods is the only item which is available for sale whereas in case
of a manufacturing concern, opening stock is of: (a) Raw Materials, (b) Finished Goods,
and (c) Semi-finished Goods.
Following entries are passed in books of the business:
For Adjustment of Opening Stock
S. No. Particulars L.F. Amount (Dr.) Amount (Cr.)
( ) ( )
1. Purchases A/c Dr.
To opening stock A/c
(Adjustment for opening stock)

For Adjustment of Closing Stock

S. No. Particulars L.F. Amount (Dr.) Amount (Cr.)
( ) ( )
2. Closing stock A/c Dr.
To purchases A/c
(Adjustment for closing stock)

Note Thus, there will be no opening stock in the trial balance because of the above
adjustment for opening stock and amount of adjusted purchases is to be shown on the
debit side of trading account and amount of closing stock on the assets side of the Balance
sheet.
2. Purchases are shown in the trial balance: It is the sum of cash purchases + credit purchases.
The balance of Purchases A/c is always debit balance and if there is any return to be shown
by purchases returns (returns - outwards) A/c, which is having a credit balance, must be
deducted from the total purchases in order to arrive at the correct figure of Net Purchases.

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