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CA Foundation · Accounting · Accounts from Incomplete Records

Ramesh keeps books on single entry. His opening capital was Rs 3,00,000, and at the year end his assets are Rs 6,50,000 and outside liabilities are Rs 2,00,000. During the year he introduced fresh capital of Rs 40,000 and withdrew Rs 90,000 for personal use. What is the profit for the year under the conversion (Statement of Affairs) method?

Profit is Rs 1,00,000. Closing capital is Rs 4,50,000, an increase of Rs 1,50,000 over opening capital. Adding back drawings of Rs 90,000 and deducting fresh capital of Rs 40,000 gives the profit earned by the business during the year.

  1. ARs 1,00,000Correct
  2. BRs 1,40,000
  3. CRs 60,000
  4. DRs 20,000

Explanation

Closing capital = 6,50,000 - 2,00,000 = Rs 4,50,000. Profit = closing capital - opening capital + drawings - capital introduced = 4,50,000 - 3,00,000 + 90,000 - 40,000 = Rs 1,00,000. Rs 1,40,000 results from ignoring the capital introduced, which is wrong because that increase in capital is not profit.

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