Page 144 - Book-keeping for Secondary Schools Student’s Book Form One

Book-Keeping for Secondary Schools

inventory held by that enterprise on 31 Calculation of a gross profit
st
December would be the opening inventory A gross profit is the difference between
of the enterprise in the following year. the net sales and the cost of goods sold.
The figure of the net sales is the balance
Cost of goods available for sale of the sales account in the general ledger
The figure of the cost of goods available at the end of a period. However, it may
FOR ONLINE READING ONLY
for sale is the sum of the figure of opening happen that some of the goods sold during
inventory and the figure of net purchases. the period were returned. The figure to be
used in the income statement in this case
will be that of the net sales, that is, sales
Cost of goods sold less the sales returns. The sales returns
The figure of the cost of goods sold is the figure is obtained from the sales returns
difference between the figure of the cost account in the general ledger.
of goods available for sale and closing
inventory. In other words, the cost of As for the figure of the cost of goods
goods sold is obtained by deducting the sold, the main ingredient is the value of
cost of closing inventory from the cost of the purchases. In some cases, the figure
goods available for sale. of net purchases will be used instead. For
the same reasons as discussed in the case
Gross profit of sales returns, if there are some goods
The figure of gross profit is obtained by which were returned to suppliers, there
deducting the cost of goods sold from the will be a need to deduct them from the
net sales figure. Gross profit is the profit purchases figure. In addition to the figure
obtained by the enterprises from trading of purchases (net purchases), this figure
activities only without including other can be adjusted with the cost incurred
operation expenses. by the business to transport the goods to
its premises. This cost is also known as
Gross loss carriage inwards. The figure of this cost
The figure of gross loss is obtained by is the balance of carriage inwards account
deducting net sales from the cost of goods found in the general ledger.
sold. Gross loss is the excess of cost of
goods sold over net sales. Effect of inventory on gross profit

calculation
Profit or loss for the period In the absence of an inventory, the net
Profit or loss can be computed by taking
the total revenue minus the total expenses purchases figure is the cost of goods sold.
for the period. The excess of total revenue This would also mean that a gross profit
over total expenses is usually termed as equals to the net sales less net purchases.
a profit. Alternatively, the excess of total However, many businesses, except those
expenses over total revenue is termed as selling highly perishable goods, would
a loss. have an inventory of goods at the end

136
Student’s Book Form One

Book Keeping Form 1 New 2024 FINAL.indd 136 18/10/2024 10:14