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Difficulty: EasyStatement of Affairs Method for Capital and Profit Determination

Mr. Babatunde, a sole trader who keeps incomplete accounting records, had an opening capital of ₦120,000 on 1st January 2023 and a closing capital of ₦180,000 on 31st December 2023. During the year, he introduced additional capital of ₦30,000 and withdrew ₦15,000 for personal use. What is the net profit of the business for the year ended 31st December 2023 in Naira?

Answer: 45000 NGN

Answer

The net profit for the year ended 31st December 2023 is ₦45,000.
Under the Statement of Affairs method, net profit is calculated by taking closing capital, adding back drawings, subtracting additional capital introduced, and deducting opening capital. Here, (₦180,000 + ₦15,000 - ₦30,000) - ₦120,000 = ₦45,000.

Step-by-Step Solution

1
Apply the Statement of Affairs profit determination formula.
Net Profit = (Closing Capital + Drawings - Additional Capital) - Opening Capital
Drawings reduce ending capital so they must be added back, while additional capital increases ending capital so it must be deducted to determine profit generated purely from business operations.
2
Substitute the financial figures into the formula.
Net Profit = (₦180,000 + ₦15,000 - ₦30,000) - ₦120,000
Inserting the given values into the equation allows direct evaluation.
3
Perform arithmetic calculations to find the net profit.
₦45,000
₦165,000 - ₦120,000 = ₦45,000.

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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