The income concept is used even in those organizations which are run on no profit objectives. Thus to ascertain income, same type of accounting is essential in all types of businesses.
Cost of Goods Sold or Merchandising Cost: To earn profits from a business, some money must be spent on purchasing the goods (in case of trading concern) and expenses like freight, cartage etc. will be incurred to bring the goods to the shop. The cost of purchasing the goods plus expenses directly related to the purchase of goods is technically called cost of goods sold. Cost of goods sold is deducted from sales to get the 'Trading Profit' (Gross profit).
Expenses of Doing Business: Gross profit does not give the correct picture of the working results of a concern. There are many indirect expenses like salaries, rent, commission, advertising, interest etc. which must be deducted from the gross profit in order to calculate the net profit. Such expenses of doing the business is called operating expenses. These expenses are incurred to run the business and to maintain its operational efficiency.
Different terms used with reference to final accounts can be defined as under:
1. Cost of goods sold: It is the cost of acquiring the goods for sale le, purchase price plus expenses incurred in bringing the goods to shop with due adjustment of opening and dosing stocks.
2. Operating expenses: Those expenses which are incurred to run the business day to day and to maintain its operational efficiency.
3. Gross Profit: It is the excess of sales over cost of goods sold.
4. Gross Loss: It is the excess of cost of goods sold over sales.
5. Net Profit: It is the excess of gross profit over operating expenses. If there is any other income to the business, that must be added in gross profit before deducting the operating expenses. It is also known as business income.
6. Net Loss: It the excess of operating expenses over gross profit and other incomes.
