Factors that affect the Gross Profit of an Organization
The following factors may increase the gross profit of an organization.
1. If the trading expenses are wrongly debited to the profit and loss account.
2. If the outstanding expenses such as wages, carriage inward., etc, are not included in the trading account.
3. When the goods received on sale or approval basis or on consignment basis are included in the closing stock.
4. When the goods purchased are returned and debited to the supplier but included in the closing stock and the goods returned by the customers included in the closing stock but not credited to the customers.
5. If the goods sold but not delivered are included in the closing stock.
6. When the method of valuation of stock is varied.
7. Inclusion of fictitious items of stock or over-valuing the items in the closing stock.
8. When fictitious sales entries are made
Factors that decrease the gross profit of an Organization
1. If the direct expenses are provided in excess.
2. If the goods sent on approval or on a consignment sale is not included in the closing stock.
3. If the expenses to be debited to the profit and loss account (packing materials, carriage outward etc.,) are wrongly debited to trading account.
4. Overvaluing the items in the opening stock or omitting to include certain items in the opening stock.
5. When the method of valuation of stocks is altered.
6. If the goods destroyed or given out as samples are not accounted for.
7. If the insurance claim received on account of goods destroyed by fire and other calamities or lost in transit is not accounted.
8. When the fictitious sales entries made in the previous year are reversed in the current year.
Only some of the situations which may affect the gross profit are mentioned above. One should take all necessary steps to ensure that the profits are neither overstated nor understated.