Amina, a poultry farm operator, maintains incomplete accounting records. The following balances were extracted from her business records for the year 2025:
| Assets and Liabilities | 1 January 2025 (₦) | 31 December 2025 (₦) |
|---|---|---|
| Equipment (Cost) | 300,000 | 300,000 |
| Inventory | 120,000 | 160,000 |
| Debtors | 80,000 | 110,000 |
| Cash at Bank | 50,000 | 75,000 |
| Creditors | 60,000 | 85,000 |
| Accrued Rent | 10,000 | — |
| Prepaid Insurance | — | 15,000 |
Additional information for the year ended 31 December 2025:
1. Equipment is to be depreciated at per annum on cost.
2. A provision for doubtful debts of is to be created on closing debtors.
3. Amina introduced additional capital of ₦50,000 into the business during the year.
4. Total drawings made by Amina for personal use amounted to ₦40,000.
What is the net profit earned by the business for the year ended 31 December 2025?
- ₦49,500Answer
- B₦69,500
- C₦9,500
- D₦85,000
Answer
The net profit earned by the business for the year ended 31 December 2025 is ₦49,500.
The correct figure of ₦49,500 is derived by establishing Opening Capital (₦480,000) and Closing Capital after adjustments for depreciation and doubtful debts (₦539,500). Applying the standard capital comparison formula: Net Profit = Closing Capital (₦539,500) + Drawings (₦40,000) - Additional Capital Introduced (₦50,000) - Opening Capital (₦480,000) gives ₦49,500.
Step-by-Step Solution
Key Concept
Determination of profit using the capital comparison (statement of affairs) method with end-of-year accounting adjustments.