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Hallo,
The following example says:
A business has prepared its draft income statement which shows gross profit of $5,500 and net profit of $3,000.
It is then realised that an invoice for $250 relating to cost of sales has been treated as an administration expense
by mistake.The answer says: This $250 must be ‘moved up’ to the trading account. This reduces gross profit and has no effect on net profit.
My Q: Why the NP is not affected, even if we move up the expense of 250 to the trading a/c, doesn’t this mean that we have to decrease the NP as well by 250 as long as we take something out of it?
Thank you!
If the 250 is treated as cost of sales (as it should be) then it makes the cost of sales higher and therefore the gross profit lower.
At the same time the 250 should not be treated as an administration expense, which makes administration expenses lower. Since the gross profit is lower by 250, but the admin expenses are also lower by 250, then the net profit will not change.
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