Which account shows the difference between sales revenue and direct costs, used to determine gross profit?

Which account shows the difference between sales revenue and direct costs, used to determine gross profit?

• A. Profit after tax
• B. Trading account
• C. Cash flow statement
• D. Statement of financial position

Answer: (B)

Gross profit is found by subtracting direct costs of goods sold from sales revenue. In a trading business, the trading account is specifically set up to show this relationship: it lists total sales and the direct costs (cost of goods sold) to produce gross profit. That focus on sales minus direct costs is exactly what determines gross profit, so the trading account is the place where this figure is shown. The other financial statements have different purposes: profit after tax shows net profit after taxes, the cash flow statement tracks actual cash movements, and the statement of financial position (balance sheet) shows assets, liabilities, and equity rather than profitability.

Gross profit is found by subtracting direct costs of goods sold from sales revenue. In a trading business, the trading account is specifically set up to show this relationship: it lists total sales and the direct costs (cost of goods sold) to produce gross profit. That focus on sales minus direct costs is exactly what determines gross profit, so the trading account is the place where this figure is shown.

The other financial statements have different purposes: profit after tax shows net profit after taxes, the cash flow statement tracks actual cash movements, and the statement of financial position (balance sheet) shows assets, liabilities, and equity rather than profitability.