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Hi ACCA tutor!
great website!
I have a question.. sorry if its stupid.. but why is bank interest treated as an expense, and deducted from gross profit when calculating net profit?
It depends whether you have money in the bank or if you have an overdraft.
If you have an overdraft then you will be paying interest – so it will be an expense.
If you have money in the bank, then you will be receiving interest and then it will be income.
thank you sir!
ok i see.. well the question is
Non-current assets 50,000 (dr)
Inventory 2,600 (dr)
Capital 28,000 (cr)
Receivables 4,180 (dr)
Cash 290 (dr)
Payables 5,000 (cr)
Sales 120,000 (cr)
Purchases 78,900 (dr)
Rental expense 3,400 (dr)
Sundry expenses 13,900 (dr)
Bank interest 270 (cr)
(dr)=153270
(CR)=153270and the question is asking me to calculate the net profit.
Sales 120,000
+open inve 2600
+purchases 78,900
-closing inve (1900)cost of good 79,600
therefore gross profit = 120,000-79,600
=40,400to calculate net profit, i total up the expenses:
rent 3400
sundary expenses 13900
but then… the answer subtracts bank interest (270) which makes me think that the bank interest is income.. i guess the cr balance on the trial balance gives it away…. why dont i add the bank interest to gross profit? why do i have to subtract from net profit? is it not the same thing as deducting it from net pay?If the bank interest is a credit balance, then yes – it is income.
Because it is income it increases the net profit – if the answer has decreased the net profit then it is wrong. If it has decreased the expenses then this is OK, because lower expenses results in higher net profit.
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