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Difficulty: MediumTreatment of Owner's Capital, Drawings, and Goods Withdrawn

Chioma, a sole trader, started the financial year with an opening capital of ₦850,000₦850,000. During the year ended 31 December 2025, she earned a net profit of ₦320,000₦320,000 and introduced additional capital of ₦100,000₦100,000. She also withdrew ₦60,000₦60,000 in cash and goods costing ₦40,000₦40,000 (with a selling price of ₦55,000₦55,000) for personal use. What is Chioma's closing capital at the end of the financial year in Naira (₦₦)?

Answer: 1170000 ₦

Answer

The closing capital at the end of the financial year is ₦1,170,000₦1,170,000.
The closing capital is calculated as ₦850,000 (opening capital)+₦100,000 (additional capital)+₦320,000 (net profit)−₦100,000 (total drawings at cost price)=₦1,170,000₦850,000 \text{ (opening capital)} + ₦100,000 \text{ (additional capital)} + ₦320,000 \text{ (net profit)} - ₦100,000 \text{ (total drawings at cost price)} = ₦1,170,000. Goods withdrawn for personal use must strictly be recorded at their cost price (₦40,000₦40,000), giving total drawings of ₦60,000+₦40,000=₦100,000₦60,000 + ₦40,000 = ₦100,000.

Step-by-Step Solution

1
Determine the correct valuation of drawings for goods withdrawn and calculate total drawings.
Total drawings = ₦60,000 (cash)+₦40,000 (cost price of goods)=₦100,000₦60,000 \text{ (cash)} + ₦40,000 \text{ (cost price of goods)} = ₦100,000.
Goods taken for personal use must always be valued at cost price, not selling price, to avoid incorrectly recognizing unearned profit.
2
Substitute all values into the owner's equity statement formula.
\text{Closing Capital} = ₦850,000 + ₦100,000 + ₦320,000 - ₦100,000 = ₦1,170,000$.
Opening capital, additional capital introduced, and net profit increase equity, whereas total drawings reduce equity.

Key Concept

Treatment of Owner's Capital, Cash Drawings, and Goods Withdrawn at Cost Price
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Topics

Treatment of Owner's Capital, Drawings, and Goods Withdrawn

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