Question

Goods costing Rs.10,000 destroy by fire were not recorded.The error will result in :

• A. Increase in Net Profit
• B. Decrease in Net Profit
• C. No effect on Net Profit
• D. None of these

Answer 1

Answer: (B)

Decrease in Net Profit

Net profit is calculated from gross profit and any increase or decrease in value of gross profit leads to simultaneous increase or decrease in value of net profit. Increase in purchase account balance leads to fall in gross profit and vice versa.

When goods are destroyed by fire, the purchases account balance decreases, when the transaction is recorded. When the transaction is not recorded, the purchase account balance remains more which should actually be less, leading to fall in gross profit. This profit is then transferred to profit and loss account to calculate net profit, which eventually decreases.