Question

Goods costing Rs.10,000 destroyed by fire were not recorded. the error will result in

• A. Increase in Gross Profit
• B. Decrease in Gross Profit
• C. No effect on Gross Profit
• D. Either c(a) or (b)

Answer 1

The correct option is B Decrease in Gross Profit

Gross profit is calculated from the trading account. It is the difference between sales, closing stock and purchases,direct expenses. Any increase in the balance of purchases account results in decrease in the value of gross profit.

When goods are destroyed by fire, the value of the purchase account decreases. The journal for this transaction is -

Loss by fire A/c Dr 10000

To Purchases A/c 10000

Let us assume the entry is not recorded in the books, total of credit side of trading account is 500000 and debit side (including purchases) is 120000, the gross profit will be 380000.

When the entry is recorded in the books, purchases account balance will reduce by 10000, the gross profit the calculated will be (500000-110000) 390000. Thus when entry of loss by fire is not recorded, the gross profit decreases.