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Difficulty: MediumProfit and Loss Account and Net Profit Determination

In the accounting period ended 31 May 2026, Okafor Enterprise reported a Gross Profit of N185,000\text{N}185,000 and discounts received of N12,000\text{N}12,000. Operating expenses paid were: salaries N55,000\text{N}55,000, carriage outwards N7,000\text{N}7,000, rent N24,000\text{N}24,000, and insurance N18,000\text{N}18,000. At year-end, rent of N4,000\text{N}4,000 was accrued while insurance of N3,000\text{N}3,000 was prepaid. What is the Net Profit of Okafor Enterprise for the period?

Answer: N92,000 / 92,000 / 92000 / N92000 / N 92,000 / 92,000 Naira

Answer

The Net Profit of Okafor Enterprise for the period is N92,000\text{N}92,000.
Total revenue income is N185,000+N12,000=N197,000\text{N}185,000 + \text{N}12,000 = \text{N}197,000. Total operating expenses incurred are: Salaries (N55,000\text{N}55,000) + Carriage Outwards (N7,000\text{N}7,000) + Rent (N24,000+N4,000=N28,000\text{N}24,000 + \text{N}4,000 = \text{N}28,000) + Insurance (N18,000−N3,000=N15,000\text{N}18,000 - \text{N}3,000 = \text{N}15,000) = N105,000\text{N}105,000. Deducting total expenses from total income yields a Net Profit of N92,000\text{N}92,000.

Step-by-Step Solution

1
Calculate total gross income
Total Income = Gross Profit (N185,000\text{N}185,000) + Discounts Received (N12,000\text{N}12,000) = N197,000\text{N}197,000
Discounts received are added to gross profit as an item of income in the profit and loss account.
2
Adjust individual expense accounts for accruals and prepayments
Adjusted Rent = N24,000+N4,000=N28,000\text{N}24,000 + \text{N}4,000 = \text{N}28,000; Adjusted Insurance = N18,000−N3,000=N15,000\text{N}18,000 - \text{N}3,000 = \text{N}15,000
Accrued expenses must be added to expenses paid because they relate to the current period, while prepaid expenses must be deducted because they relate to the future period.
3
Calculate total operating expenses
Total Expenses = Salaries (N55,000\text{N}55,000) + Carriage Outwards (N7,000\text{N}7,000) + Adjusted Rent (N28,000\text{N}28,000) + Adjusted Insurance (N15,000\text{N}15,000) = N105,000\text{N}105,000
Sum all adjusted operating expenses incurred during the accounting period.
4
Deduct total operating expenses from total gross income to determine Net Profit
Net Profit = N197,000−N105,000=N92,000\text{N}197,000 - \text{N}105,000 = \text{N}92,000
Net profit is the excess of total revenues and gains over total expenses for the period.

Key Concept

Determination of Net Profit by adjusting operating income and expenses for accruals and prepayments.
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Topics

Profit and Loss Account and Net Profit Determination

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