inancial Statements - I 343

f good~ and/ or rendering of services to customers h~ve proved profitable for

1e busmess ?r not. Purchases is one of the main constituents of expenses in
usiness organisation. Besides purchases, the remaining expenses are divided
1to two categories, viz. direct expenses and indirect expenses. ·
Direct expenses means all expenses directly connected with the manufacture,
urchase of goods and bringing them to the point of sale. Direct expenses
1clude carriage inwards, freight inwards, wages, factory lighting, coal, water
nd feul, royalty on production, etc. _In our example- I, besides ,purchase·s,
>Ur more items of expenses are listed. These are wages, _salaries, rent of
uilding and bad debts. Out of these items, wages is treated as direct expense
rhile· the other thr~e are treated as indirect expenses. .
Similarly, sales constitute the main item of revenue for the business. The
Kcess of sales over purchases and direct expenses is called gross profit. If
1e .amount of purchases including direct expenses is more than the sales
~venue, the resultant figure is gros~ loss. The computation of gross profit .
an be shown in the form of equation as : •
G:r:oss Profit= Sales - (Purchases+ Direct Expenses)
The gross profit or the gross loss is transferred to profit and loss account.
The indirect expenses are transferred to the debit side of the second part,
iz. profit and loss account. All reventie/g~ns other than sales are transferred
) the credit side of the profit and loss account. If the total of the credit side of
1e profit and l?ss account is more than the total of the debit side,_the difference
, the net profit fol' the period of which it is being prepared. On the other hand,
· the total of the debit side is more than the total of the credit side, the
ifference is the net loss incurred by the business frrm. In an equation form,
: i~ shown as follows :
Net Profit = Gross Profit + Other Incomes - Indirect Expenses ·
Net profit or net loss so computed is transferred to the capital account in
he balance sheet by way of the following entry :
(i) For transfer of net profit
· Profit and Loss A/ c Dr.
To Capital A/ C
(ii) For transfer of net loss
Capital A/ c Dr.
To Profit .and Loss A/ c .
_ we are now redrafting the trading and profit and loss account to show gross
1rofit and net profit of Anldt for 'the year ended March ~l, 2011._The r~drafted
radlng and profit and Joss account will look like as shown JS shown m fig111 e 9.3.