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Difficulty: Very hardBalance Sheet Classification of Assets and Liabilities

The following financial balances were extracted from the accounting records of Danjuma Trading Enterprise as at 31 December 2025:

Account TitleAmount (₦\text{₦})
Motor Vans (Cost)500,000500,000
Accumulated Depreciation on Motor Vans100,000100,000
Closing Inventory85,00085,000
Trade Debtors120,000120,000
Provision for Doubtful Debts10,00010,000
Prepaid Insurance10,00010,000
Bank Overdraft45,00045,000
Trade Creditors65,00065,000
Accrued Rent Expense15,00015,000
10-Year Long-Term Bank Loan200,000200,000

What is the net working capital (net current assets) of Danjuma Trading Enterprise?

  1. ₦80,000\text{₦}80,000Answer
  2. B
    ₦90,000\text{₦}90,000
  3. C
    ₦125,000\text{₦}125,000
  4. D
    ₦60,000\text{₦}60,000

Answer

₦80,000\text{₦}80,000
The net working capital is determined by subtracting total current liabilities from total current assets. Current assets comprise closing inventory (₦85,000\text{₦}85,000), net debtors after deducting provision (₦110,000\text{₦}110,000), and prepaid insurance (₦10,000\text{₦}10,000), summing to ₦205,000\text{₦}205,000. Current liabilities comprise bank overdraft (₦45,000\text{₦}45,000), trade creditors (₦65,000\text{₦}65,000), and accrued rent expense (₦15,000\text{₦}15,000), summing to ₦125,000\text{₦}125,000. Subtracting ₦125,000\text{₦}125,000 from ₦205,000\text{₦}205,000 yields ₦80,000\text{₦}80,000.

Step-by-Step Solution

1
Calculate Net Trade Debtors and Total Current Assets
Net Debtors = ₦120,000−₦10,000=��110,000\text{₦}120,000 - \text{₦}10,000 = \text{��}110,000. Total Current Assets = Closing Inventory (₦85,000\text{₦}85,000) + Net Debtors (₦110,000\text{₦}110,000) + Prepaid Insurance (₦10,000\text{₦}10,000) = ₦205,000\text{₦}205,000.
Current assets consist of cash or liquid assets expected to be converted into cash within one accounting year. Provision for doubtful debts must be subtracted from gross trade debtors to reflect net realizable value.
2
Identify and Calculate Total Current Liabilities
Total Current Liabilities = Bank Overdraft (₦45,000\text{₦}45,000) + Trade Creditors (₦65,000\text{₦}65,000) + Accrued Rent Expense (₦15,000\text{₦}15,000) = ₦125,000\text{₦}125,000.
Current liabilities are short-term obligations payable within one accounting period. Bank overdraft is a short-term current liability, while the 10-year bank loan is a long-term (non-current) liability.
3
Compute Net Working Capital
Working Capital = Total Current Assets - Total Current Liabilities = ₦205,000−₦125,000=₦80,000\text{₦}205,000 - \text{₦}125,000 = \text{₦}80,000.
Working capital measures the short-term liquidity operating buffer of a business.

Key Concept

Classification of Assets and Liabilities and Working Capital Calculation
Estimated Time:2m 0s
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Topics

Balance Sheet Classification of Assets and Liabilities