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Difficulty: Very hardStatement of Affairs Method for Capital and Profit Determination

Mrs. Adebayo operates a retail provision store without keeping a full set of accounting books. On 1 January 2024, her financial position was as follows: Premises ₦500,000, Motor Van ₦200,000, Inventory ₦80,000, Trade Debtors ₦45,000, Prepaid Rent ₦5,000, Trade Creditors ₦60,000, Accrued Electricity ₦10,000, and Bank Overdraft ₦20,000.

On 31 December 2024, her financial position showed: Premises ₦500,000, Motor Van (net of 10% depreciation on cost) ₦180,000, Inventory ₦110,000, Trade Debtors (gross ₦60,000 less 5% provision for doubtful debts) ₦57,000, Cash in Hand ₦15,000, Trade Creditors ₦50,000, and Accrued Wages ₦8,000.

During the year, Mrs. Adebayo introduced additional capital of ₦50,000 into the business. She also withdrew ₦3,000 per month in cash and goods worth ₦4,000 for her personal use.

What is the net profit earned by the business for the year ended 31 December 2024?

  1. A
    ₦74,000
  2. B
    ₦69,000
  3. ₦54,000Answer
  4. D
    ₦14,000

Answer

The net profit earned by the business for the year ended 31 December 2024 is ₦54,000.
The correct answer of ₦54,000 is derived by establishing Opening Capital (₦740,000) and Closing Capital (₦804,000) from their respective statement of affairs balances. Adjusting Closing Capital by adding total drawings (₦40,000) and subtracting additional capital introduced (₦50,000) yields an adjusted closing equity of ₦794,000. Subtracting the opening capital of ₦740,000 results in a net profit of ₦54,000.

Step-by-Step Solution

1
Calculate Opening Capital as of 1 January 2024
Total Opening Assets = ₦500,000 + ₦200,000 + ₦80,000 + ₦45,000 + ₦5,000 = ₦830,000. Total Opening Liabilities = ₦60,000 + ₦10,000 + ₦20,000 = ₦90,000. Opening Capital = ₦830,000 - ₦90,000 = ₦740,000.
Opening Capital is computed by taking Total Assets minus Total Liabilities at the start of the accounting period.
2
Calculate Closing Capital as of 31 December 2024
Total Closing Assets = ₦500,000 + ��180,000 + ₦110,000 + ₦57,000 + ₦15,000 = ₦862,000. Total Closing Liabilities = ₦50,000 + ₦8,000 = ₦58,000. Closing Capital = ₦862,000 - ₦58,000 = ₦804,000.
Closing Capital is computed by taking net valuation of assets minus liabilities at the end of the accounting period.
3
Determine total drawings made during the year
Cash drawings = ₦3,000 × 12 = ₦36,000. Goods drawn = ₦4,000. Total Drawings = ₦36,000 + ₦4,000 = ₦40,000.
Drawings include both cash taken periodically and inventory consumed for personal use.
4
Apply the Statement of Affairs profit formula
Net Profit = (Closing Capital + Drawings - Additional Capital) - Opening Capital = (₦804,000 + ₦40,000 - ₦50,000) - ₦740,000 = ₦794,000 - ₦740,000 = ₦54,000.
To arrive at profit, capital introduced must be removed from the capital growth while owner withdrawals must be restored.

Key Concept

Statement of Affairs Method for Capital and Profit Determination
Estimated Time:3m 0s
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Statement of Affairs Method for Capital and Profit Determination

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