AccountancyCBSE Class 11 · Financial Statements - I

Trading and Profit and Loss Account Class 11: Gross Profit, Operating Profit and Net Profit

Updated 17 October 2026 · Fact-checked

The Trading Account finds gross profit: net sales minus cost of goods sold, where cost of goods sold = opening stock + net purchases + direct expenses − closing stock. The Profit and Loss Account starts from gross profit, deducts indirect (operating) expenses and non-operating expenses and adds incomes to find net profit. Operating profit = Net profit + non-operating expenses − non-operating incomes.

Understand Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit

Trading Account (to find gross profit).

Debit: opening stock, purchases less purchases return, direct expenses (carriage inwards, wages, freight inwards), and gross profit if credit exceeds.
Credit: sales less sales return, closing stock.
Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock.
Gross profit = Net sales − Cost of goods sold.

Profit and Loss Account (to find net profit).

Credit: gross profit and other incomes (interest received, commission received, gain on sale of assets, discount received).
Debit: indirect expenses (rent, salaries, advertisement, depreciation, discount allowed) and non-operating expenses (interest on loan, loss by fire, loss on sale of assets).
Net profit = Gross profit + Other incomes − Indirect and non-operating expenses.

Operating profit. Profit from the main business before non-operating items. Operating profit = Gross profit − Operating expenses, or equivalently Net profit + Non-operating expenses − Non-operating incomes. Examples of non-operating expenses: interest on loans, loss by fire or theft, loss on sale of fixed assets. Non-operating incomes: interest and dividend received, gain on sale of fixed assets.

Direct and indirect. Direct expenses relate to bringing goods to a saleable condition; indirect expenses relate to selling, administration and finance.

Stock errors. Closing stock undervalued by x: gross profit and net profit of the year fall by x, and the next year's opening stock is too low, raising next year's profit by x. Overvaluation has the opposite effect.

Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit: key facts

Cost of goods sold: Opening stock + Net purchases + Direct expenses − Closing stock; Net purchases = Purchases − Purchases return.
Gross profit: Net sales − Cost of goods sold; Net sales = Sales − Sales return.
Net profit: Gross profit + Other incomes − Indirect expenses − Non-operating expenses; After all expenses and incomes.
Operating profit: Net profit + Non-operating expenses − Non-operating incomes; Also Gross profit − Operating expenses.

How to answer Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit questions

Do the trading account in a fixed order, then the P&L account.

1Sort every item: trading debit, trading credit, P&L debit, P&L credit, or balance sheet.
2Compute net sales, net purchases and cost of goods sold.
3Find gross profit; carry it to the P&L account.
4Add incomes and subtract all expenses to get net profit.
5For operating profit, remove non-operating items; check both formulas give the same figure.

Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

A tailoring shop

Suppose a shop begins the year with fabric stock ₹40,000, buys fabric for ₹3,00,000 net, spends ₹25,000 on direct costs, and ends with fabric stock of ₹60,000, with net sales of ₹5,25,000.

Find the gross profit.

Try it first, then show the solutionSolution

Cost of goods sold = 40,000 + 3,00,000 + 25,000 − 60,000 = ₹3,05,000.
Gross profit = 5,25,000 − 3,05,000 = ₹2,20,000.

Answer: Gross profit ₹2,20,000.

Memory hook: Stock in, spend, stock left; the rest is cost sold.

Tricks to remember Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit

Short memory aids. Say each one aloud once, then use it on a question the same day.

SPaN
Stock + Purchases (net) + direct expenses, then deduct closing stock = cost of goods sold.
Use it when: COGS.
Non-operating out
Operating profit leaves out interest on loan, losses by fire, gains on sale of assets.
Use it when: Operating profit.

Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Cost of goods sold · 1 mark · MCQBoard level

Cost of goods sold is calculated as:
(a) Opening stock + Purchases − Closing stock
(b) Sales − Purchases
(c) Opening stock + Net purchases + Direct expenses − Closing stock
(d) Closing stock − Opening stock

Try it first, then show the solutionSolution

Include net purchases and direct expenses.

Answer: (c) Opening stock + Net purchases + Direct expenses − Closing stock

Example 2: Gross profit · 3 marks · Short answerBoard level

A cloth merchant began the year with stock worth ₹40,000, bought cloth for ₹3,10,000 (₹10,000 of it returned to suppliers), paid ₹5,000 carriage on the purchases and ₹20,000 wages to the cutters, sold cloth for ₹5,40,000 (₹15,000 of it returned by customers) and ended the year with stock worth ₹60,000. Find the gross profit. (3 marks)

Try it first, then show the solutionSolution

Net purchases = 3,10,000 − 10,000 = 3,00,000.
Cost of goods sold = 40,000 + 3,00,000 + 5,000 + 20,000 − 60,000 = ₹3,05,000.
Net sales = 5,40,000 − 15,000 = 5,25,000; gross profit = ₹2,20,000.

Answer: Gross profit ₹2,20,000.

Example 3: Full account · 5 marks · Long answerHarder board level

Continuing with the same data and gross profit of ₹2,20,000, further balances: rent ₹24,000; salaries ₹48,000; interest on loan ₹4,000; loss by fire ₹10,000; interest received ₹6,000; gain on sale of old asset ₹5,000. Find the net profit and the operating profit. (5 marks)

Try it first, then show the solutionSolution

P&L credit side: gross profit 2,20,000; interest received 6,000; gain 5,000 = 2,31,000.
P&L debit side: rent 24,000; salaries 48,000; interest on loan 4,000; loss by fire 10,000 = 86,000.
Net profit = 2,31,000 − 86,000 = ₹1,45,000.
Operating profit = 1,45,000 + (4,000 + 10,000) − (6,000 + 5,000) = ₹1,48,000. Check: 2,20,000 − 24,000 − 48,000 = 1,48,000.

Answer: Net profit ₹1,45,000; operating profit ₹1,48,000.

Example 4: Gross profit on cost · 4 marks · Short answerHarder board level

A firm sells goods for ₹6,00,000 at a gross profit of 25% on cost. Opening stock ₹40,000, purchases ₹5,00,000. Find the cost of goods sold and the closing stock. (4 marks)

Try it first, then show the solutionSolution

Sales = cost × 1.25, so cost of goods sold = 6,00,000 ÷ 1.25 = ₹4,80,000.
Closing stock = 40,000 + 5,00,000 − 4,80,000 = ₹60,000.

Answer: COGS ₹4,80,000; closing stock ₹60,000.

Example 5: Stock valuation error · 4 marks · Short answerHOTS / competency

Closing stock of year 1 was undervalued by ₹10,000. Gross profit of year 1 was shown as ₹2,20,000. State the correct gross profit of year 1 and the effect on year 2's profit if the error is not corrected. (4 marks)

Try it first, then show the solutionSolution

Closing stock is credited in the trading account; undervaluing it by ₹10,000 lowers gross profit by 10,000.
Correct gross profit of year 1 = 2,20,000 + 10,000 = ₹2,30,000.
The same undervalued figure is the opening stock of year 2, so cost of goods sold is lower by 10,000 and year 2's profit is overstated by ₹10,000.

Answer: Correct year 1 gross profit ₹2,30,000; year 2 profit overstated by ₹10,000.

Where students lose marks in Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit

The slips examiners see most often, and what to write instead.

Mistake: Subtracting purchases return from sales
Mixing the returns.
Wrong working
Net sales = 5,40,000 − 10,000.
Right working
Net sales = 5,40,000 − 15,000 (sales return).
Do this: Purchases return goes with purchases.
Usually costs: 1 mark
Mistake: Showing closing stock on the debit side
Reversing the side.
Wrong working
Closing stock debit in trading account.
Right working
Closing stock is credited in the trading account.
Do this: It reduces the cost of goods sold.
Usually costs: 1 mark
Mistake: Including non-operating items in operating profit
Not stripping interest and losses.
Wrong working
Operating profit = net profit 1,45,000.
Right working
Operating profit = 1,45,000 + 14,000 − 11,000 = 1,48,000.
Do this: Use the add-back formula.
Usually costs: 1 mark

Exam tips

Label every figure: net sales, net purchases, COGS.
Check operating profit by both formulas.
Show the account in T-form with totals if asked for the account.
Write the stock-error effect on both years.

Practice questions on Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Which of the following is a non-operating expense?
(a) Salaries
(b) Rent
(c) Loss by fire
(d) Carriage inwards
Hint
Not part of normal operations.
Answer
(c) Loss by fire
Q2 · 4 marks · Short answerHarder board level
Sales ₹8,00,000; sales return ₹20,000; cost of goods sold ₹5,46,000; operating expenses ₹1,34,000; non-operating expenses ₹10,000; non-operating income ₹4,000. Find the gross profit, operating profit and net profit. (4 marks)
Hint
Net sales first.
Answer
Net sales 7,80,000. Gross profit = 7,80,000 − 5,46,000 = ₹2,34,000. Operating profit = 2,34,000 − 1,34,000 = ₹1,00,000. Net profit = 1,00,000 − 10,000 + 4,000 = ₹94,000.
Q3 · 3 marks · Short answerHarder board level
A firm's gross profit is 20% of net sales. Its cost of goods sold is ₹6,40,000, closing stock ₹50,000, purchases ₹6,10,000 and there are no direct expenses. Find net sales, gross profit and opening stock. (3 marks)
Hint
COGS is 80% of net sales.
Answer
Net sales = 6,40,000 ÷ 0.8 = ₹8,00,000. Gross profit = 8,00,000 − 6,40,000 = ₹1,60,000. Opening stock = 6,40,000 + 50,000 − 6,10,000 = ₹80,000.
Q4 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Operating profit excludes interest paid on a long-term loan.
Reason (R): Interest on loan is a non-operating expense.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Financing item.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q5 · 4 marks · Short answerHOTS / competency
In year 1, closing stock was overvalued by ₹8,000, giving a net profit of ₹60,000. In year 2, which began with that overvalued stock, the books show a net profit of ₹75,000 and the closing stock is correct. Find the correct net profit of each year and the total profit of two years. (4 marks)
Hint
Year 1 lower, year 2 higher.
Answer
Year 1 correct profit = 60,000 − 8,000 = ₹52,000. Year 2 correct profit = 75,000 + 8,000 = ₹83,000. Total of two years = 1,35,000, the same as the shown total (60,000 + 75,000) because the error reverses in the second year.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.COGS formula?Show answer
Opening stock + net purchases + direct expenses − closing stock.
2.Where is closing stock shown in the trading account?Show answer
Credit side.
3.Net sales?Show answer
Sales − sales return.
4.Operating profit formula?Show answer
Net profit + non-operating expenses − non-operating incomes.
5.Undervalued closing stock affects profit?Show answer
Reduces current year profit.

Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit: frequently asked questions

What is gross profit?

Net sales minus cost of goods sold.

Are wages direct expenses?

Wages for production are direct expenses and go to the trading account.

Why is closing stock not in the trial balance?

It is found after the year ends and entered as an adjustment.