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Question

Difficulty: MediumBalance Sheet Classification of Assets and Liabilities

Bisi Trading Stores compiled the following year-end balances from its ledger:

Account TitleAmount (₦\text{₦})
Capital (Opening)1,200,0001,200,000
Net Profit450,000450,000
Drawings150,000150,000
3-Year Bank Loan500,000500,000
Trade Creditors200,000200,000

What is the net owner's equity (closing capital balance) to be reported on the statement of financial position at year-end?

  1. ₦1,500,000\text{₦}1,500,000Answer
  2. B
    ₦1,800,000\text{₦}1,800,000
  3. C
    ₦2,000,000\text{₦}2,000,000
  4. D
    ₦1,300,000\text{₦}1,300,000

Answer

The net owner's equity to be reported on the statement of financial position is ₦1,500,000\text{₦}1,500,000.
The closing capital (net owner's equity) is calculated by adding Net Profit to Opening Capital and subtracting Drawings: ₦1,200,000+₦450,000−₦150,000=₦1,500,000\text{₦}1,200,000 + \text{₦}450,000 - \text{₦}150,000 = \text{₦}1,500,000. External liabilities like bank loans and trade creditors are presented separately under liabilities.

Step-by-Step Solution

1
Identify the relevant components of Owner's Equity in the Balance Sheet
Opening Capital = ₦1,200,000\text{₦}1,200,000, Net Profit = ₦450,000\text{₦}450,000, Drawings = ₦150,000\text{₦}150,000.
Owner's equity represents the net claim of the owner on the business assets.
2
Apply the equity structure formula: Closing Capital = Opening Capital + Net Profit - Drawings
Closing Capital = ₦1,200,000+₦450,000−₦150,000=₦1,500,000\text{₦}1,200,000 + \text{₦}450,000 - \text{₦}150,000 = \text{₦}1,500,000.
Net profit increases equity, whereas drawings reduce the owner's stake in the entity.
3
Exclude non-equity items
3-Year Bank Loan (₦500,000\text{₦}500,000) is classified under Non-current Liabilities, and Trade Creditors (₦200,000\text{₦}200,000) under Current Liabilities.
Liabilities represent external debts owed to third parties, not owner's capital.

Key Concept

Balance Sheet Classification of Equity and Capital Adjustments
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Topics

Balance Sheet Classification of Assets and Liabilities