Question

Goods costing Rs.10,000 distributed as free samples were not recorded. The errors will result in

• A. Increases 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 the gross profit of trading account. When the gross profit falls, net profit also decreases and vice versa. While any increase in balance of purchase account leads to simultaneous fall in gross profit.

The journal for goods distributed as free samples is -

Advertisement Expense A/c Dr 10000

To Purchases A/c 10000

This implies, this amount has to be reduced from the balance of purchases account. When the transaction is not recorded i.e., the amount is not reduced from the purchases account, purchase account balance increases leading to fall in gross profit. This leads to decrease in net profit.