(i) Gross Profit: The word Gross means "before any deductions". This implies that the profit before any deductions is called the Gross Profit. It is also called "Sales Profit".
(ii) Net Profit: The word Net means "after all deductions". This implies that Profit after all deductions is called Net Profit. It is also called "Net Income & Net Earnings". It is difference between total revenue earned and total cost incurred.

(i) The business entities are interested in knowing periodically the results of business operations carried on and the financial soundness of the business. In other words, they want to know the profitability and the financial position of the business. These can be ascertained by preparing the final accounts or financial statements.
(ii) The final accounts or financial statements include the following: 
1. Income Statement or Trading and Profit and Loss Account and
2. Position Statement or Balance Sheet.
(iii) The purposes of preparing the financial statements are:
1. To ascertain the financial performance of an enterprise and
2. To ascertain the financial position of an enterprise.
(iv) The income statement and balance sheet are prepared for these purposes respectively. Income statement gives the manner in which the profit or loss for an accounting period is arrived at.
(v) Hence, at the close of the accounting period, all nominal accounts (i.e. expenses, losses, revenues and gains) and accounts relating to goods (purchases, purchases returns, Sales, Sales returns and stock in hand at the beginning and at the end) are to be closed by transferring to the income statement or trading and profit and loss account.

Note: Carriage inwards will not appear in profit and loss account as it is a direct expense.

Cost of goods sold = Opening stock + Net purchases + Direct expenses – Closing stock
= 20,000 + 70,000 + 10,000 - 30,000
= Rs. 70,000
Let the sales be                                              100
Less: Gross profit (20% on sales, i.e., 100)     20
Cost of goods sold                                           80
Therefore, percentage of Gross profit on Cost of goods sold is \(\frac{20}{80}\times 100=\) 25%
Gross profit = 25 % on Rs. 70,000 i.e: \(\frac{25}{100}\times 70,000=\) Rs. 17,500
Sales = Cost of goods sold + Gross profit
= 70,000 + 17,500 = Rs. 87,500.