Question 3 of 26intermediate💡 UnderstandMCQ1 mark

Choose the correct chronological order of ascertainment of the following profits from the profit and loss account:

Exercise: Test Your Understanding - II | Q: 2 | (Page 22)
For More Understanding

Explanation

Option (C) is the correct chronological order. First, Gross Profit is ascertained from the Trading Account. This Gross Profit is then transferred to the Profit and Loss Account. Next, Operating Profit is calculated by deducting operating expenses (like office expenses, salaries, advertisement) from the Gross Profit. Finally, Net Profit is determined by adding non-operating incomes (like interest received) and deducting non-operating expenses to the Operating Profit.

Solution Steps

  1. Step 1: Ascertain Gross Profit by deducting the cost of goods sold from revenues in the Trading Account.

  2. Step 2: Calculate Operating Profit by deducting office, selling, and distribution expenses from the Gross Profit.

  3. Step 3: Determine Net Profit by adjusting the Operating Profit for non-operating items (abnormal items and financial expenses/incomes).

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