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Difficulty: EasyProfit and Loss Account and Net Profit Determination

Zainab Enterprises extracted the following financial figures for the year ended 31st December 2025:

Financial ItemAmount (N\text{N})
Gross Profit120,000120,000
Rent Received8,0008,000
Salaries and Wages45,00045,000
Insurance Paid12,00012,000
Carriage Outwards5,0005,000

Additional Information:
Insurance paid includes an advance payment of N2,000\text{N}2,000 for the next financial year.

What is the net profit of Zainab Enterprises for the year?

  1. N68,000\text{N}68,000Answer
  2. B
    N64,000\text{N}64,000
  3. C
    N60,000\text{N}60,000
  4. D
    N52,000\text{N}52,000

Answer

The net profit of Zainab Enterprises for the year is N68,000\text{N}68,000.
The net profit is N68,000\text{N}68,000. Total revenue consists of Gross Profit (N120,000\text{N}120,000) plus Rent Received (N8,000\text{N}8,000), yielding N128,000\text{N}128,000. Deducting adjusted expenses of N60,000\text{N}60,000 (Salaries N45,000\text{N}45,000 + Insurance N10,000\text{N}10,000 + Carriage Outwards N5,000\text{N}5,000) gives N68,000\text{N}68,000.

Step-by-Step Solution

1
Adjust the insurance expense for prepayment
Adjusted Insurance Expense = N12,000−N2,000=N10,000\text{N}12,000 - \text{N}2,000 = \text{N}10,000
Prepaid expenses relate to the subsequent accounting period and must be deducted from cash paid.
2
Calculate total operating expenses
Total Expenses = Salaries (N45,000\text{N}45,000) + Adjusted Insurance (N10,000\text{N}10,000) + Carriage Outwards (N5,000\text{N}5,000) = N60,000\text{N}60,000
Sum all expenses incurred during the accounting period to determine total overheads.
3
Calculate net profit
Net Profit = Gross Profit (N120,000\text{N}120,000) + Rent Received (N8,000\text{N}8,000) - Total Expenses (N60,000\text{N}60,000) = N68,000\text{N}68,000
Net Profit is calculated by adding other income items to gross profit and subtracting total operating expenses.

Key Concept

Calculation of Net Profit with Year-End Prepayment Adjustment
Estimated Time:50s
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Topics

Profit and Loss Account and Net Profit Determination

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