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Difficulty: MediumProfit and Loss Account and Net Profit Determination

Tayo Enterprises earned a gross profit of N150,000\text{N}150,000 for the year ended 31st December 2025. The books of the business revealed the following additional items at the end of the accounting period:

- Rent paid: N18,000\text{N}18,000 (includes N3,000\text{N}3,000 prepaid for the next accounting period)
- Discount received: N2,500\text{N}2,500
- Commission received: N4,000\text{N}4,000 (N1,000\text{N}1,000 is accrued and not yet received)
- Salaries paid: N35,000\text{N}35,000
- Reduction in provision for doubtful debts: N1,500\text{N}1,500

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

Answer: N109,000 / ��109,000 / 109,000 / N109000 / ₦109000 / 109000 / N 109,000 / ₦ 109,000

Answer

The net profit of Tayo Enterprises for the year is N109,000\text{N}109,000.
To determine the net profit, add all income earned during the period (Gross Profit N150,000\text{N}150,000 + Discount received N2,500\text{N}2,500 + Total Commission earned N5,000\text{N}5,000 + Decrease in provision for doubtful debts N1,500=N159,000\text{N}1,500 = \text{N}159,000) and subtract all operating expenses incurred (Adjusted Rent N15,000\text{N}15,000 + Salaries N35,000=N50,000\text{N}35,000 = \text{N}50,000). This gives N159,000−N50,000=N109,000\text{N}159,000 - \text{N}50,000 = \text{N}109,000.

Step-by-Step Solution

1
Calculate total income to be added to Gross Profit.
Discount received: N2,500\text{N}2,500; Commission earned: N4,000+N1,000=N5,000\text{N}4,000 + \text{N}1,000 = \text{N}5,000; Reduction in provision for doubtful debts: N1,500\text{N}1,500. Total additional income = N2,500+N5,000+N1,500=N9,000\text{N}2,500 + \text{N}5,000 + \text{N}1,500 = \text{N}9,000.
Accrued income is added to income received, and reductions in provision for doubtful debts represent gains credited to the Profit and Loss Account.
2
Calculate total adjusted operating expenses.
Adjusted Rent expense: N18,000−N3,000=N15,000\text{N}18,000 - \text{N}3,000 = \text{N}15,000; Salaries: N35,000\text{N}35,000. Total expenses = N15,000+N35,000=N50,000\text{N}15,000 + \text{N}35,000 = \text{N}50,000.
Prepaid expenses must be deducted from the total paid to reflect only the expense incurred for the current accounting period.
3
Calculate Net Profit.
Net Profit=Gross Profit(N150,000)+Total Additional Income(N9,000)−Total Expenses(N50,000)=N109,000\text{Net Profit} = \text{Gross Profit} (\text{N}150,000) + \text{Total Additional Income} (\text{N}9,000) - \text{Total Expenses} (\text{N}50,000) = \text{N}109,000.
Net profit is computed by adding non-operating/other revenue to gross profit and deducting total operating expenses for the period.

Key Concept

Determination of Net Profit in Profit and Loss Account with year-end adjustments
Estimated Time:2m 0s
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Topics

Profit and Loss Account and Net Profit Determination

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