business organisation. Besides purchases, the remaining expenses are divided

business organisation. Besides purchases, the remaining expenses are divided into two categories, viz. direct expenses and indirect expenses. Direct expenses means all expenses directly connected with the manufacture, purchase of goods and bringing them to the point of sale.

Direct expenses include carriage inwards, freight inwards, wages, factory lighting, coal, water and feul, royalty on production, etc. In our example- , besides purchases, four more items of expenses are listed. These are wages, salaries, rent of building and bad debts. Out of these items, wages is treated as direct expense while the other three are treated as indirect expenses .

Similarly, sales constitute the main item of revenue for the business. The excess of sales over purchases and direct expenses is called gross profit . If the amount of purchases including direct expenses is more than the sales revenue, the resultant figure is gross loss . The computation of gross profit can be shown in the form of equation as : Gross Profit = Sales – (Purchases + Direct Expenses) The gross profit or the gross loss is transferred to profit and loss account.

The indirect expenses are transferred to the debit side of the second part,