Cost of Goods Sold = Opening Stock or Inventory + Purchases (Net) + Direct Expenses - Closing

Stock or Inventory.

Adjusted Purchases = Opening Stock + Purchases (Net) - Closing Stock

Gross Profit = Net Sales - Cost of Goods Sold

(i) Net Sales = Total Sales - Sales Return
(ii) Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses - Closing Stock
(iii) Net Purchases = Total Purchases - Purchases Return.
Illustration 10. Opening Stock Rs. 30,000; Purchases Rs. 54,600; Expenses on Purchases Rs. 6,000;
Sales Rs. 90,000 ; Expenses on Sales Rs. 3,000; Closing Stock Rs. 36.600.
Calculate Cost of Goods Sold and Gross Profit.
Solution:
Illustration 11. Opening Stock Rs. 15,000; Sales Rs. 48,000; Carriage Inwards Rs. 3,000; Sales Return Rs.
3,000; Gross Profit Rs. 18,000; Purchases Rs. 30,000; Purchases Return Rs. 2,700.
Calculate Closing Stock and Cost of Goods Sold.
Solution:
 Illustration 12. From the following information, prepare Trading Account for the year ended 31st March, 2021:
Rs. Rs.
Opening Stock 1,00,000 Wages 2,000
Purchases 2,80,000 Freight 3,600
Closing Stock 80,000 Carriage Inwards 1,000

The percentage of gross profit on sales is 20%.

Solution:
Illustration 13. Net Sales for the year ended 31st March, 2021 is Rs. 9,00,000. If Gross Profit is 30% on
Sales, find Cost of Goods Sold.
Solution:
Illustration 14. Net Sales for the year ended 31st March, 2021 is Rs. 9,00,000. If Gross Profit is 25% of
Cost, find Gross Profit and Cost of Goods Sold.
Solution:
Illustration 15. Calculate closing stock from the following details:
Opening Stock—Rs. 20,000; Cash Sales—Rs. 60,000; Credit Sales—Rs. 40,000; Purchase— Rs. 70,000.
Rate of Gross Profit on Cost 33 %.
Solution:
Illustration 16. Calculate Net Sales and Gross Profit from the following information:
Cost of Goods Sold Rs. 1,00,000; Gross Profit 20% on Sales
Solution:
 OPERATING PROFIT AND NET PROFIT
Profit may be divided into:
(i) Operating Profit; and
(ii) Net Profit.
Operating Profit is the profit earned through normal operating activities of the business. It is calculated by
deducting the Operating Expenses from the Gross Profit.
Operating Profit = Gross Profit - Operating Expense
Net Profit is the profit earned through operating and non-operating activities of the business.
Operating Expenses are the expenses incurred by an enterprise that are associated (incurred) with its
operating activities. For example, a retail store’s main or operating activity is buying and selling of goods.
Therefore, cost of goods sold besides salaries paid to staff in Purchase Department, salaries paid to sales
staff or accountants, electricity bill of the store, etc., are operating expenses because without incurring
these expenses, the enterprise cannot carry out its operating activities. Operating expenses include
salaries, electricity expenses, selling and distribution expenses, cash discount allowed, depreciation and
amortisation, rent, repairs and bad debts, etc.
Non-operating Expenses are the expenses which do not relate to the main activity of the enterprise such as
interest on loan, charity, donation, loss on sale of fixed assets and loss by fire or theft or damage, etc. ~
Expenses, Operating and Non-operating, are debited to Profit and Loss Account.
Operating Incomes are the incomes earned by an enterprise that are associated (earned) with its operating
activities. For example, a retail store’s main or operating activity is buying or selling of goods. Incomes
earned in among the operating activities such as income from renting of space in the showroom, renting of
show window, etc., are operating incomes. Besides the above, it includes cash discount received and
commission received, etc.
Non-operating Incomes are incomes earned and which do not relate to the main or operating activity of the
enterprise such as interest, gain (profit) on sale of fixed assets, etc.
 VERTICAL FORM OF TRADING AND PROFIT AND LOSS ACCOUNT
for the year ended...

Particulars Rs. Rs. Rs.

A. Net Sales
Gross Sales , …
Less: Sales Return (…) …
B. Cost of Goods Sold
Opening Stock …
Purchases …
Less: Purchases Return (...) …
Direct Expenses …
Less: Closing Stock (...) (...)
C. Gross Profit (A - B) …
D. Operating Expenses
Selling and Distribution Expenses …
Office and Administrative Expenses …
Miscellaneous Expenses … …
E. Operating Profit (C - D) …
Less: Non-Operating Expenses (...)
Add: Non-Operating Income …
F. Net Profit transferred to Capital Account …
Operating Profit = Net Sales – Cost of Goods sold – Operating Expenses
Or
= Net Sales - Operating Cost (Cost of Goods sold + Operating Expenses)
Or
= Gross Profit - Operating Expenses
Or
= Net Profit + Non-Operating Expenses - Non-Operating Incomes

Operating expenses :
Salaries, electricity expenses, selling and distribution expenses, cash discount allowed,
depreciation and amortisation, rent, repairs and bad debts, etc.
Illustration 20. Compute Operating Profit and Net Profit from the following:
Particulars Rs. Particulars Rs.

Gross Profit 4,40,000 Interest on Loans 22,000

Carriage Outwards 4,800 Interest on Investments 2,800

Advertising 12,000 Printing and Stationery 3,600
Salaries 1,78,000 Loss on Sale of Furniture 35,000
Rent 62,000 General Expenses 1,400
Lighting 15,000 Donation 5,100
Insurance Charges 2,400 Rent Received 6,000
Bad Debts 1,500 Loss by Fire 20,000
Audit Fees 2,000 Gain on Sale of Machine 50,000
14. Calculate Gross Profit and Cost of Goods Sold from the following information;
Net Sales Rs. 1,00,000
Gross Profit is 25% on cost. (KVS 2007)
[Gross Profit—Rs. 20,000; Cost of Goods Sold—Rs. 80,000.]

19. Following information was taken from an Income Statement:

Opening Stock Rs. 5,000; Sales Rs. 16,000; Carriage Inwards Rs. 1,000; Sales Return Rs. 1,000; Gross Profit
Rs. 6,000; Purchases Rs. 10,000; and Purchases Return Rs. 900. _
Calculate Closing Stock and the Cost of Goods Sold.
[Closing Stock—Rs. 6,100; Cost of Goods Sold—Rs. 9,000.]

20. Calculate Gross Profit and Cost of Goods Sold from the following information:
Net Sales Rs. 1,00,000
Gross Profit 33 % on cost.