Essay On Gross Profit Method
Gross Profit Method is a system used to estimate the balance of ending inventory. This method could be used to compute the monthly financial statements when a physical inventory is not feasible. (However, this is not a substitute for an annual physical inventory). This can also used to estimate the missing amount of inventory caused by fire, theft or other disaster.
The gross profit method works as follows. First step, estimate cost of goods sold. This estimation relies on the historical relationship among the (a) net sales, (b) cost of goods sold, and (c) gross profit.
Formulas for Gross Profit Method are as follows:
ENDING INVENTORY
Goods Available for Sale (GAS) xxx
Less: Cost of Sales xxx
…show more content…
The gross profit of P30 divided by the selling price of P100, then you can get 0.3, it means that the gross profit margin is 30% of sales. This also means that the retailer's cost of goods sold percentage is 70% of sales.
Gross Profit 30
Divide: Selling Price 70
Gross Profit Margin 0.3
(100% - 30% = 70% Cost of Goods Sold Percentage)
Thereafter, let us compute for the sales value of the sold merchandise. Let's assume that the sales amounted to P100,000. Given the sales value of P100,000 the cost of the goods sold should be approximately P70,000 (70% multiplied by P100,000).
To get the Goods Available for Sale let’s assume that the previous inventory was amounted to P20,000 and that there were purchases of P80,000. That means that the cost of goods that were available for sale totals P100,000.
Beginning Inventory P20,000
Add: Purchases P80,000
Cost of Goods Available for Sale
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