Question

Goods costing Rs.10,000 distributed as free samples 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 (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. Increase in the value of purchases or direct expenses leads to decrease in gross profit.

When goods are distributed as free samples, the journal entry is-

Advertisement A/c Dr 10000

To Purchases A/c 10000

This 10000 is credited to the purchases account ledger. The debit balance of the purchase account is transferred to the trading account. When the entry is not recorded i.e., amount of goods distributed as free samples is not deducted from the purchase account, the balance of the purchase account is more and the gross profit calculated is decreased.