AccountsISC Class 11 · Introduction to Accounting

Transactions, Revenue, Expenses and Profit: ISC Class 11 Accounts

Updated 17 October 2026 · Fact-checked

A transaction is a business event involving money or money's worth that changes the financial position and can be measured; it is supported by a voucher. Revenue is the amount earned from selling goods or services, expenses are costs incurred to earn it, and profit is the excess of revenue over expenses (a loss if expenses exceed revenue).

Follow the steps down: sales minus goods cost is gross profit, minus expenses is net profit; if expenses beat sales, it is a loss.

Illustration drawn for QuestionBuddy.

Understand Transactions, Revenue, Expenses, Profit and Loss

Event and transaction. An event is anything that happens in the business. Only an event that can be measured in money and changes assets, liabilities or capital is a *transaction*. Hiring an employee is an event but not a transaction; paying his salary is a transaction. Transactions are cash (settled immediately) or credit (payment later).

Voucher. The written proof of a transaction (cash memo, invoice, receipt, bank slip). Entries are made only on the basis of vouchers; this gives the accounts evidence.

Goods, purchases, sales, stock.

*Goods* are the items the business buys to resell or makes to sell. *Purchases* mean goods bought for resale, cash or credit; a machine bought for use is not a purchase of goods.
*Sales* are goods sold, cash or credit. *Stock* is the goods unsold at a date: opening stock at the beginning, closing stock at the end.
Cost of goods sold = Opening stock + Purchases - Closing stock (carriage and similar direct costs added).

Revenue, income, expense. *Revenue* is the amount earned from the main business activity (sales, fees). *Income* is a wider word: revenue plus other earnings such as interest and commission. An *expense* is a cost used up in earning revenue in the period (rent, wages, salary). *Gain* is a profit from an occasional item (profit on sale of an old machine). *Loss* is a reduction in capital without a matching benefit (fire loss, theft).

Profit. Gross profit = Sales - Cost of goods sold. Net profit = Gross profit + other incomes - indirect expenses. A negative result is a net loss. Profit increases the owner's capital; loss decreases it.

Capital and revenue nature. Note the difference between buying furniture (an asset) and paying carpenter's repair charges (an expense).

Transactions, Revenue, Expenses, Profit and Loss: key facts

Cost of goods sold: COGS = Opening stock + Purchases - Closing stock | Add direct expenses; Net purchases after returns.
Gross profit: Gross profit = Net sales - COGS | Net sales = Sales - Sales returns; Loss if COGS is more.
Net profit: Net profit = Gross profit + Other income - Indirect expenses | Result may be a loss; Added to capital.

How to answer Transactions, Revenue, Expenses, Profit and Loss questions

Separate what is a transaction, what is an item of the period, and then compute step by step.

1Check if the event is measurable in money; if not, it is not a transaction.
2Classify each item as purchase, sale, expense or income.
3Compute COGS, then gross profit, then net profit.
4State whether it is profit or loss.

Transactions, Revenue, Expenses, Profit and Loss 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.

Event versus transaction

Suppose a bakery owner signs a letter promising a customer a 10% discount next month, and on another day buys 50 kg of flour for Rs 2,500 on credit.

Which of the two is a transaction?

Try it first, then show the solutionSolution

The promise has no money exchange yet and changes no asset or liability now.
The flour purchase on credit increases stock and creditors by Rs 2,500.

Answer: Only the credit purchase of flour is a transaction.

Memory hook: No money measured, no entry.

Tricks to remember Transactions, Revenue, Expenses, Profit and Loss

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

MEC
Transaction needs Money, Evidence (voucher), and Change in financial position.
Use it when: Defining a transaction.
GP then NP
First Gross, then Net: add other income, subtract indirect expenses.
Use it when: Profit steps.
Gain is occasional
Revenue is regular; gain is a one-off.
Use it when: Revenue versus gain.

Transactions, Revenue, Expenses, Profit and Loss: solved examples

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

Example 1: Which is a transaction? · 1 mark · MCQBoard level

Which of these is a transaction?
(a) Appointment of a manager (b) Purchase of goods on credit (c) Signing a letter of intent (d) Receiving a visit from an auditor

Try it first, then show the solutionSolution

Only the purchase on credit is measurable in money and changes the financial position.

Answer: (b) Purchase of goods on credit

Example 2: Differentiate revenue and gain · 3 marks · Short answerBoard level

Distinguish between revenue and gain with one example of each. (3 marks)

Try it first, then show the solutionSolution

Revenue comes from regular business activity: sales of goods.
Gain is an incidental profit: profit on sale of old furniture.
Revenue is earned repeatedly, a gain is occasional.

Answer: Revenue: earned from the main activity (sales). Gain: occasional profit not from the main activity (profit on sale of an old machine).

Example 3: Cost of goods sold and profit · 6 marks · Long answerHarder board level

Opening stock Rs 40,000; purchases Rs 3,10,000; purchases returns Rs 10,000; carriage inwards Rs 5,000; sales Rs 4,60,000; sales returns Rs 20,000; closing stock Rs 55,000; salaries Rs 48,000; rent Rs 24,000; commission received Rs 6,000. Find gross profit and net profit. (6 marks)

Try it first, then show the solutionSolution

Net purchases = 3,10,000 - 10,000 = 3,00,000.
COGS = 40,000 + 3,00,000 + 5,000 - 55,000 = Rs 2,90,000.
Net sales = 4,60,000 - 20,000 = 4,40,000. Gross profit = 4,40,000 - 2,90,000 = Rs 1,50,000.
Net profit = 1,50,000 + 6,000 - 48,000 - 24,000 = Rs 84,000.

Answer: Gross profit Rs 1,50,000; net profit Rs 84,000.

Example 4: Work back to sales · 5 marks · Long answerHarder board level

A trader's COGS is Rs 2,40,000 and gross profit is 25% of sales. Find sales and gross profit. Also find the closing stock if opening stock is Rs 30,000 and purchases are Rs 2,50,000. (5 marks)

Try it first, then show the solutionSolution

COGS is 75% of sales, so sales = 2,40,000 / 0.75 = Rs 3,20,000.
Gross profit = 3,20,000 - 2,40,000 = Rs 80,000 (25% of 3,20,000 = 80,000).
COGS = Opening + Purchases - Closing: 2,40,000 = 30,000 + 2,50,000 - Closing, so closing = Rs 40,000.

Answer: Sales Rs 3,20,000; gross profit Rs 80,000; closing stock Rs 40,000.

Example 5: Profit but poor cash? · 4 marks · Short answerHOTS / competency

A shop earned a profit of Rs 90,000 this year, but its cash fell by Rs 20,000. Give two reasons why profit and cash may move differently, using the idea of credit transactions. (4 marks)

Try it first, then show the solutionSolution

Credit sales raise sales and profit but cash arrives only later.
Credit purchases and stock buying: stock bought uses cash but is not an expense until sold; owner drawings reduce cash but not profit.

Answer: Profit counts credit sales as revenue before cash is received, and cash may be spent on stock, assets or drawings, which are not expenses.

Where students lose marks in Transactions, Revenue, Expenses, Profit and Loss

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

Mistake: Calling every event a transaction
Confusing news with business.
Wrong working
Appointment of manager: debit salaries
Right working
No entry until a payment or liability arises
Do this: Ask if it is measurable and changes financial position.
Usually costs: 1 mark.
Mistake: Forgetting sales returns when finding net sales
Using gross sales.
Wrong working
Gross profit = 4,60,000 - 2,90,000 = 1,70,000
Right working
Gross profit = 4,40,000 - 2,90,000 = 1,50,000
Do this: Deduct returns first.
Usually costs: 1-2 marks.
Mistake: Counting closing stock twice or not at all in COGS
Mixing sides.
Wrong working
COGS = 40,000 + 3,00,000 + 55,000
Right working
COGS = 40,000 + 3,00,000 + 5,000 - 55,000
Do this: Closing stock is subtracted.
Usually costs: 2 marks.

Exam tips

Give a distinguishing example for every definition question.
Show net purchases and net sales separately before the profit.
State "profit" or "loss" in words at the end of numericals.

Practice questions on Transactions, Revenue, Expenses, Profit and Loss

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
The excess of revenue over expenses is called:
(a) capital (b) profit (c) drawings (d) gain
Hint
Basic result of the period.
Answer
(b) profit
Q2 · 3 marks · Short answerBoard level
What is a voucher? Why are entries made only on its basis? (3 marks)
Hint
Evidence.
Answer
A voucher is the written proof of a transaction such as an invoice or receipt. Entries based on vouchers are verifiable, so the books can be checked and relied on.
Q3 · 5 marks · Long answerHarder board level
Opening stock Rs 25,000; purchases Rs 1,80,000; sales Rs 2,60,000; closing stock Rs 35,000; wages Rs 12,000 (direct); rent Rs 18,000; interest received Rs 4,000. Find COGS, gross profit and net profit. (5 marks)
Hint
Wages are a direct cost.
Answer
COGS = 25,000 + 1,80,000 + 12,000 - 35,000 = 1,82,000. Gross profit = 2,60,000 - 1,82,000 = 78,000. Net profit = 78,000 + 4,000 - 18,000 = Rs 64,000.
Q4 · 4 marks · Short answerHarder board level
A trader's capital at the start was Rs 3,00,000. He earned a gross profit of Rs 1,20,000, paid indirect expenses of Rs 45,000, received other income of Rs 10,000, and drew Rs 30,000. Find closing capital. (4 marks)
Hint
Net profit first.
Answer
Net profit = 1,20,000 + 10,000 - 45,000 = 85,000. Closing capital = 3,00,000 + 85,000 - 30,000 = Rs 3,55,000.
Q5 · 3 marks · Short answerHOTS / competency
A firm sold goods worth Rs 50,000 on credit in March and the customer paid in April. In which year's accounts is the sale recorded, and does the profit depend on the cash receipt? Explain. (3 marks)
Hint
Revenue is earned when goods are sold.
Answer
The sale belongs to the year in which it is made (March) because revenue is earned on sale; the profit does not wait for cash. Cash only affects the debtors balance at the year end.

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.Formula for COGS?Show answer
Opening stock + Purchases - Closing stock (+ direct expenses).
2.Gross profit equals?Show answer
Net sales - cost of goods sold.
3.Is hiring an employee a transaction?Show answer
No, it is only an event.
4.Name two proofs of transactions.Show answer
Invoice and cash memo.
5.Is profit on sale of old furniture revenue?Show answer
No, it is a gain.

Transactions, Revenue, Expenses, Profit and Loss: frequently asked questions

Is purchase of machinery a purchase?

No, purchases mean goods meant for resale.

Are drawings an expense?

No, they reduce capital.

Is income the same as revenue?

Revenue is from the main activity; income also includes other earnings.

Can profit be negative?

Yes, it is called a loss.