Question

Goods costing Rs.10,000 given as charity were not recorded. The errors will result in :

• A. Increases in Net Profit
• B. Decreases in Net Profit
• C. No Effect on Net Profit
• D. None of these

Answer 1

The correct option is B Decreases in Net Profit

Gross profit from the trading account is transferred to the profit and loss account to calculate net profit. In the trading account When purchases account balance is more, gross profit is less and vice versa.

Journal entry for goods given as charity is -

Charity A/c Dr 10000

To Purchases A/c 10000

This implies purchases account balance is reduced, but if the transaction is not recorded, the purchase account will show increased balance leading to lesser gross profit and simultaneously net profit will decrease.