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Goods which had cost $2000 has been sent to customer just before the year end on a sale and return basis. These had been accounted for as a firm sale, with a profit of 20% of cost. No confirmation of the sale has been received from customer.
For the adjustment of profit, of course, should deduct $400 as no sale confirmation.
Further thinking, if the question also mentioned that stock which costs $2000 is not included in the closing stock as it is not in the warehouse.
To adjust the profit, am I right to add $2000 profit for this case, so together with the above effect, a net off amount of $1600 profit should be added to the profit?
No.
You would increase the inventory (we stopped calling it stock many years ago 🙂 ) by 2,000; but we would also reduce the sales by 2,400.
So the net effect is that profit is reduced by 400.
(I do actually explain this bit in the lecture – you should not use the course notes without the lectures because it is in the lectures that we explain and expand on the course notes)
Thanks John.
Therefore originally we deduct $400 from profit already implies that $2000 cost in not included in the inventory?
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