Examkin

Question

Difficulty: MediumStatement of Affairs Method for Capital and Profit Determination

Zainab operates a retail bookshop and maintains single-entry accounting records. On 1 January 2025, her business records showed Equipment of ₦350,000₦350,000, Inventory of ₦120,000₦120,000, Trade Debtors of ₦80,000₦80,000, Bank balance of ₦50,000₦50,000, Trade Creditors of ₦100,000₦100,000, and Accrued Rent of ₦20,000₦20,000.

On 31 December 2025, her assets and liabilities were Equipment ₦320,000₦320,000, Inventory ₦150,000₦150,000, Trade Debtors ₦95,000₦95,000, Bank balance ₦110,000₦110,000, Trade Creditors ₦85,000₦85,000, and Accrued Utilities ₦15,000₦15,000.

During the year 2025, Zainab introduced additional capital of ₦40,000₦40,000 into the business and withdrew ₦60,000₦60,000 in cash for personal use.

Using the Statement of Affairs method, calculate the net profit earned by Zainab for the year ended 31 December 2025 in Naira (₦₦).

Answer: 115000 ₦

Answer

The net profit earned by Zainab for the year ended 31 December 2025 is ₦115,000.
The correct answer is ₦115,000. Opening Capital is computed as Total Opening Assets (₦600,000) minus Total Opening Liabilities (₦120,000) = ₦480,000. Closing Capital is computed as Total Closing Assets (₦675,000) minus Total Closing Liabilities (₦100,000) = ₦575,000. Applying the single-entry profit formula: Net Profit = (Closing Capital + Drawings - Additional Capital) - Opening Capital = (₦575,000 + ₦60,000 - ₦40,000) - ₦480,000 = ₦595,000 - ₦480,000 = ₦115,000.

Step-by-Step Solution

1
Calculate Opening Capital as at 1 January 2025.
Opening Capital = ₦480,000
Opening Capital = Total Opening Assets (Equipment ₦350,000 + Inventory ₦120,000 + Debtors ₦80,000 + Bank ₦50,000 = ₦600,000) − Total Opening Liabilities (Creditors ₦100,000 + Accrued Rent ₦20,000 = ₦120,000).
2
Calculate Closing Capital as at 31 December 2025.
Closing Capital = ₦575,000
Closing Capital = Total Closing Assets (Equipment ₦320,000 + Inventory ₦150,000 + Debtors ₦95,000 + Bank ₦110,000 = ₦675,000) − Total Closing Liabilities (Creditors ₦85,000 + Accrued Utilities ₦15,000 = ₦100,000).
3
Calculate Adjusted Closing Capital by adding back drawings and deducting additional capital introduced.
Adjusted Closing Capital = ₦595,000
Adjusted Closing Capital = Closing Capital (₦575,000) + Drawings (₦60,000) − Additional Capital (₦40,000).
4
Calculate Net Profit by subtracting Opening Capital from Adjusted Closing Capital.
Net Profit = ₦115,000
Net Profit = Adjusted Closing Capital (₦595,000) − Opening Capital (₦480,000).

Key Concept

Statement of Affairs Method for Capital and Profit Determination
Rate this question

Topics

Statement of Affairs Method for Capital and Profit Determination

More questions from this topic