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Difficulty: MediumProfit and Loss Account and Net Profit Determination

The following details were extracted from the books of Emeka Ventures for the financial year ended 31st December 2025:

ItemAmount (N\text{N})
Gross profit320,000320,000
Commission received15,00015,000
Rent and rates paid45,00045,000
General expenses28,00028,000
Motor vehicle repairs12,00012,000
Provision for doubtful debts (1st Jan 2025)4,0004,000

Adjustments at 31st December 2025:
- Rent prepaid: N5,000\text{N}5,000
- Provision for doubtful debts is to be adjusted to 5%5\% of Trade Debtors standing at N100,000\text{N}100,000.

What is the Net Profit of Emeka Ventures for the year in Naira?

Answer: 254000 Naira

Answer

The net profit of Emeka Ventures for the financial year ended 31st December 2025 is N254,000.
Net profit is obtained by deducting total operating expenses from total operating income. Total income consists of Gross Profit (N320,000) plus Commission received (N15,000), giving N335,000. Adjusted rent expense is N45,000 paid minus N5,000 prepayment, equaling N40,000. The provision for doubtful debts required at the end of the year is 5% of N100,000 = N5,000. Since N4,000 was already provided at the beginning of the year, only the net increase of N1,000 is charged as an expense. Total expenses are N40,000 + N28,000 + N12,000 + N1,000 = N81,000. Deducting N81,000 from N335,000 yields a net profit of N254,000.

Step-by-Step Solution

1
Calculate total income credited to the Profit and Loss Account
N335,000
Gross profit of N320,000 plus other operating income (Commission received of N15,000) gives total income.
2
Deduct rent prepayment from rent paid
N40,000
Prepayments relate to the next financial period and must be subtracted from current period expenses.
3
Calculate the increase in provision for doubtful debts
N1,000
Required provision is 5% of N100,000 = N5,000. Comparing this with the opening provision of N4,000 gives an increase of N1,000 to be charged to the Profit and Loss Account.
4
Sum total expenses debited to the Profit and Loss Account
N81,000
Total expenses = Adjusted Rent (N40,000) + General expenses (N28,000) + Motor vehicle repairs (N12,000) + Increase in provision for doubtful debts (N1,000).
5
Deduct total expenses from total income to determine Net Profit
N254,000
Net Profit = Total Income (N335,000) - Total Expenses (N81,000).

Key Concept

Net Profit Determination with Expense Prepayments and Provision Adjustments
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Topics

Profit and Loss Account and Net Profit Determination

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