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Difficulty: EasyStatement of Affairs Method for Capital and Profit Determination

Nneka, a laundry service provider, maintains single-entry records for her business. At the beginning of the financial year, her opening capital was ₦120,000, and at the end of the year, her closing capital stood at ₦180,000. During the year, she introduced additional capital of ₦30,000 and withdrew ₦15,000 for her personal use. What was her net profit for the year?

  1. A
    ₦15,000
  2. ₦45,000Answer
  3. C
    ₦75,000
  4. D
    ₦105,000

Answer

₦45,000
Under the Statement of Affairs method, Net Profit is calculated as (Closing Capital + Drawings - Capital Introduced) - Opening Capital. Substituting the values gives (₦180,000 + ₦15,000 - ₦30,000) - ₦120,000 = ₦165,000 - ₦120,000 = ₦45,000.

Step-by-Step Solution

1
Identify the relevant formula for determining profit under the Statement of Affairs method.
Net Profit = (Closing Capital + Drawings - Additional Capital Introduced) - Opening Capital
Drawings reduce equity during the period and must be added back to closing capital, while additional capital increases equity and must be deducted to isolate operational profit.
2
Substitute the given values into the capital equation.
Adjusted Closing Capital = ₦180,000 + ₦15,000 - ₦30,000 = ₦165,000
Adding drawings of ₦15,000 to closing capital of ₦180,000 gives ₦195,000; subtracting additional capital of ₦30,000 leaves ₦165,000.
3
Deduct opening capital from the adjusted closing capital to compute net profit.
Net Profit = ₦165,000 - ₦120,000 = ₦45,000
The difference between adjusted closing capital and opening capital represents the net profit earned over the accounting period.

Key Concept

Statement of Affairs Method for Capital and Profit Determination
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Statement of Affairs Method for Capital and Profit Determination

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