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Difficulty: MediumTreatment of Owner's Capital, Drawings, and Goods Withdrawn

A sole trader began the financial year with an opening capital of ₦800,000₦800,000 and introduced additional capital of ₦150,000₦150,000 during the year. The proprietor withdrew goods costing ₦60,000₦60,000 (which had a retail selling price of ₦75,000₦75,000) for domestic consumption. If the closing capital at the end of the year was recorded as ₦1,020,000₦1,020,000 and no cash drawings were made, what was the net profit for the year?

  1. A
    ₦145,000₦145,000
  2. ₦130,000₦130,000Answer
  3. C
    ₦10,000₦10,000
  4. D
    ₦70,000₦70,000

Answer

The net profit for the year is ₦130,000₦130,000.
The correct answer is ₦130,000₦130,000. The business entity concept requires that goods withdrawn by the owner for personal use be credited to the Purchases account at cost price (₦60,000₦60,000) and debited to Drawings. Applying the capital accounting equation: Closing Capital=Opening Capital+Additional Capital+Net Profit−Drawings\text{Closing Capital} = \text{Opening Capital} + \text{Additional Capital} + \text{Net Profit} - \text{Drawings}, we get ₦1,020,000=₦800,000+₦150,000+Net Profit−₦60,000₦1,020,000 = ₦800,000 + ₦150,000 + \text{Net Profit} - ₦60,000, which simplifies to Net Profit=₦130,000\text{Net Profit} = ₦130,000.

Step-by-Step Solution

1
Determine the total drawings amount and correct valuation
Drawings = ₦60,000₦60,000 (cost price)
According to accounting principles, goods taken by the proprietor for personal use must be valued at cost price, not selling price, because the business cannot make a profit from the owner.
2
Set up the statement of affairs capital equation
Closing Capital = Opening Capital + Additional Capital + Net Profit - Drawings
This fundamental accounting equation relates opening and closing owner's equity.
3
Substitute the known figures into the equation
₦1,020,000=₦800,000+₦150,000+Net Profit−₦60,000₦1,020,000 = ₦800,000 + ₦150,000 + \text{Net Profit} - ₦60,000
Plugging in the values given in the problem.
4
Solve for Net Profit
Net Profit = ₦1,020,000−₦890,000=₦130,000₦1,020,000 - ₦890,000 = ₦130,000
Simplifying the equation gives ₦1,020,000=₦890,000+Net Profit₦1,020,000 = ₦890,000 + \text{Net Profit}.

Key Concept

Accounting treatment of goods withdrawn at cost price and the capital equation
Estimated Time:1m 30s
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Topics

Treatment of Owner's Capital, Drawings, and Goods Withdrawn

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