Question

Good purchased from C for Rs.10,000 passed through the Purchase Return Book. The error will result in :

• A. Increase in gross profit
• B. Decreases in gross profit
• C. No effect on gross profit
• D. Either (a) or (b)

Answer 1

Answer: (B)

Decreases in gross profit

When the entry for goods purchased is passed through purchase return book, this is an error of posting to the wrong account. In the case purchase account balance will not be affected because no posting has been made to the account. The purchase return account will have more credit balance because of the posting made to the account. This purchase return balance is deducted from the purchases account balance in the trading account, reducing the overall purchase account balance. For calculating the gross profit, the difference between sales, opening stock and net purchases, direct expenses is calculated.

If the purchase account balance decreases the gross profit will increase. Hence for purchases, when posting is made to the purchase return account, the gross profit will decrease.