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Difficulty: MediumProfit and Loss Account and Net Profit Determination

Amaka Traders extracted the following financial details from its records at the end of its accounting year on 31st December 2025:

- Gross Profit: N220,000\text{N}220,000
- Rent Received: N15,000\text{N}15,000 (including N3,000\text{N}3,000 received in advance for 2026)
- Salaries and Wages paid: N45,000\text{N}45,000 (with an accrued amount of N5,000\text{N}5,000 unpaid at year-end)
- Discount Allowed: N4,000\text{N}4,000
- Sundry Expenses: N16,000\text{N}16,000

What is the Net Profit for Amaka Traders for the year ended 31st December 2025?

Answer: N162,000 / 162,000 / N162000 / 162000 / N 162,000 / 162 000

Answer

The Net Profit for Amaka Traders for the year ended 31st December 2025 is N162,000\text{N}162,000.
Net Profit is determined by taking Gross Profit (N220,000\text{N}220,000), adding earned Rent Received of N12,000\text{N}12,000 (N15,000−N3,000\text{N}15,000 - \text{N}3,000 prepaid), and deducting all operating expenses: adjusted Salaries of N50,000\text{N}50,000 (N45,000+N5,000\text{N}45,000 + \text{N}5,000 accrued), Discount Allowed of N4,000\text{N}4,000, and Sundry Expenses of N16,000\text{N}16,000. This gives N232,000−N70,000=N162,000\text{N}232,000 - \text{N}70,000 = \text{N}162,000.

Step-by-Step Solution

1
Calculate the adjusted Rent Received income to include in the Profit and Loss Account
Rent Received=N15,000−N3,000=N12,000\text{Rent Received} = \text{N}15,000 - \text{N}3,000 = \text{N}12,000
Prepaid income represents income received for the following period and must be deducted under the matching concept.
2
Calculate the adjusted Salaries and Wages expense for the current accounting period
Salaries and Wages=N45,000+N5,000=N50,000\text{Salaries and Wages} = \text{N}45,000 + \text{N}5,000 = \text{N}50,000
Accrued expenses incurred during the current period must be added to the cash paid.
3
Sum all operating expenses incurred
Total Expenses=N50,000+N4,000+N16,000=N70,000\text{Total Expenses} = \text{N}50,000 + \text{N}4,000 + \text{N}16,000 = \text{N}70,000
Discount allowed and sundry expenses are direct indirect operational costs deducted in the Profit and Loss Account.
4
Determine the Net Profit
Net Profit=(Gross Profit+Adjusted Rent Received)−Total Expenses=(N220,000+N12,000)−N70,000=N162,000\text{Net Profit} = (\text{Gross Profit} + \text{Adjusted Rent Received}) - \text{Total Expenses} = (\text{N}220,000 + \text{N}12,000) - \text{N}70,000 = \text{N}162,000
Net Profit is calculated by adding other operating income to Gross Profit and deducting total operating expenses.

Key Concept

Calculation of Net Profit in a Sole Trader Profit and Loss Account taking accruals and prepayments into account.
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Topics

Profit and Loss Account and Net Profit Determination

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