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Difficulty: HardProfit and Loss Account and Net Profit Determination

The following financial information was extracted from the ledger of a sole trader at the end of the accounting year:

Account TitleAmount (₦\text{₦})
Gross Profit85,00085,000
Rent paid12,00012,000
Salaries paid25,00025,000
Discount received1,8001,800
Discount allowed1,2001,200
Trade Debtors40,00040,000
Provision for doubtful debts (opening)1,5001,500

Additional Information:
1. Rent prepaid at year-end amounted to ₦2,000\text{₦}2,000.
2. Salaries owing at year-end amounted to ₦3,000\text{₦}3,000.
3. Provision for doubtful debts is to be adjusted to 5%5\% of trade debtors.

What is the net profit of the sole trader for the year?

Answer: ₦47,100 / 47,100 / 47100 / N47,100 / N47100 / 47,100 naira / 47100 naira / Naira 47,100 / Naira 47100

Answer

The net profit for the year is ₦47,100\text{₦}47,100.
Net profit is calculated by taking Gross Profit (₦85,000\text{₦}85,000) plus Discount Received (₦1,800\text{₦}1,800), giving a total income of ₦86,800\text{₦}86,800. From this, total operating expenses of ₦39,700\text{₦}39,700 are deducted: Rent (₦12,000−₦2,000=₦10,000\text{₦}12,000 - \text{₦}2,000 = \text{₦}10,000), Salaries (₦25,000+₦3,000=₦28,000\text{₦}25,000 + \text{₦}3,000 = \text{₦}28,000), Discount Allowed (₦1,200\text{₦}1,200), and Increase in Provision for Doubtful Debts (₦2,000−₦1,500=₦500\text{₦}2,000 - \text{₦}1,500 = \text{₦}500). This results in a Net Profit of ₦47,100\text{₦}47,100.

Step-by-Step Solution

1
Calculate total gross income by adding other income (discount received) to gross profit.
Total Income = ₦85,000+₦1,800=₦86,800\text{₦}85,000 + \text{₦}1,800 = \text{₦}86,800.
Discount received represents income and is credited to the Profit and Loss Account.
2
Adjust operating expenses for accruals, prepayments, and provision changes.
Adjusted Rent = ₦12,000−₦2,000=₦10,000\text{₦}12,000 - \text{₦}2,000 = \text{₦}10,000; Adjusted Salaries = ���25,000+₦3,000=₦28,000\text{���}25,000 + \text{₦}3,000 = \text{₦}28,000; New Provision required = 5%×₦40,000=₦2,0005\% \times \text{₦}40,000 = \text{₦}2,000; Increase in Provision = ₦2,000−₦1,500=₦500\text{₦}2,000 - \text{₦}1,500 = \text{₦}500.
Prepayments are deducted from expenses paid, accruals are added to expenses paid, and only the increase in provision for doubtful debts is charged as an expense.
3
Sum all adjusted operating expenses and discount allowed.
Total Expenses = ₦10,000+₦28,000+₦1,200+₦500=₦39,700\text{₦}10,000 + \text{₦}28,000 + \text{₦}1,200 + \text{₦}500 = \text{₦}39,700.
Discount allowed is an operating expense debited to the Profit and Loss Account.
4
Deduct total expenses from total income to determine Net Profit.
Net Profit = ₦86,800−₦39,700=₦47,100\text{₦}86,800 - \text{₦}39,700 = \text{₦}47,100.
Net Profit is the excess of total revenues over total operating expenses.

Key Concept

Net Profit Determination with Year-End Adjustments
Estimated Time:2m 30s
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Topics

Profit and Loss Account and Net Profit Determination

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