CMA Intermediate · Financial Accounting · Financial Statements from Incomplete Records
A trader does not maintain double-entry books. To find the profit for the year, which statement is correct under the statement of affairs (net worth) method?
Under the net worth method, profit equals the change in capital (closing less opening) plus drawings, less any fresh capital introduced. Drawings reduced capital so they are added back, while fresh capital increased it without being earned, so it is deducted.
- AProfit equals closing capital minus opening capital, plus drawings, minus fresh capital introducedCorrect
- BProfit equals closing capital minus opening capital, minus drawings, plus fresh capital introduced
- CProfit equals opening capital minus closing capital plus drawings
- DProfit equals closing capital plus opening capital less drawings
Explanation
Increase in capital over the year is partly due to profit and partly due to fresh capital. Drawings reduce capital, so they are added back. Profit = (Closing capital - Opening capital) + Drawings - Capital introduced. Option B reverses the signs of both adjustments.
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