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Difficulty: Very hardBalance Sheet Classification of Assets and Liabilities

The following financial balances were extracted from the books of Tunde Trading Store as at 31 December 2025:

- Premises: ₦2,500,000\text{₦}2,500,000
- Motor Vehicles (at cost): ₦1,200,000\text{₦}1,200,000
- Accumulated Depreciation on Motor Vehicles: ₦300,000\text{₦}300,000
- Fixtures and Fittings (Net Book Value): ₦450,000\text{₦}450,000
- Closing Inventory: ₦240,000\text{₦}240,000
- Trade Debtors: ₦380,000\text{₦}380,000
- Provision for Doubtful Debts: ₦20,000\text{₦}20,000
- Prepaid Insurance: ₦15,000\text{₦}15,000
- Accrued Rent Receivable: ₦25,000\text{₦}25,000
- Trade Creditors: ₦290,000\text{₦}290,000
- Bank Overdraft: ₦110,000\text{₦}110,000
- Accrued Electricity Expenses: ₦35,000\text{₦}35,000
- 5-Year Bank Loan: ₦800,000\text{₦}800,000

Based on the balance sheet classification rules for a sole trader, what is the value of the Working Capital (Net Current Assets) in Naira (₦\text{₦})?

Answer: 205000 ₦

Answer

The Working Capital of Tunde Trading Store as at 31 December 2025 is ₦205,000.
Working capital is calculated as total current assets minus total current liabilities. Total current assets equal ₦640,000 (comprising net debtors ₦360,000, closing inventory ₦240,000, prepaid insurance ₦15,000, and accrued rent income ₦25,000). Total current liabilities equal ₦435,000 (comprising trade creditors ₦290,000, bank overdraft ₦110,000, and accrued electricity ₦35,000). Subtracting current liabilities from current assets yields ₦205,000.

Step-by-Step Solution

1
Determine the net value of trade debtors by deducting the provision for doubtful debts
Net Trade Debtors = ₦380,000 - ₦20,000 = ₦360,000
Provision for doubtful debts is a contra-asset account and must be subtracted from trade debtors to reflect net realizable current assets.
2
Identify and sum all items classified as Current Assets
Total Current Assets = ₦360,000 (Net Debtors) + ₦240,000 (Closing Inventory) + ₦15,000 (Prepaid Insurance) + ₦25,000 (Accrued Rent Income) = ₦640,000
Current assets consist of cash and other assets expected to be converted into cash or consumed within one accounting year. Non-current assets (Premises, Motor Vehicles net of depreciation, Fixtures) are excluded.
3
Identify and sum all items classified as Current Liabilities
Total Current Liabilities = ₦290,000 (Trade Creditors) + ₦110,000 (Bank Overdraft) + ₦35,000 (Accrued Electricity) = ₦435,000
Current liabilities are short-term obligations payable within one accounting period. Long-term obligations such as the 5-Year Bank Loan are non-current liabilities and are excluded.
4
Calculate Working Capital (Net Current Assets)
Working Capital = Total Current Assets - Total Current Liabilities = ₦640,000 - ₦435,000 = ₦205,000
Working Capital represents the operational liquidity available to a business, defined as Current Assets minus Current Liabilities.

Key Concept

Working Capital (Net Current Assets) Calculation
Estimated Time:3m 0s
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Topics

Balance Sheet Classification of Assets and Liabilities