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CS Executive · Corporate Accounting and Financial Management · Introduction to Accounting

Sundaram Traders had capital of Rs 5,00,000 at the start of the year. During the year the owner introduced Rs 50,000 additional capital and withdrew Rs 80,000 for personal use. Capital at the end of the year was Rs 6,20,000. Ignoring other adjustments, what profit did the business earn for the year?

Profit is Rs 1,50,000. Closing capital equals opening capital plus fresh capital minus drawings plus profit, so 6,20,000 equals 4,70,000 plus profit. Ignoring the capital introduced or drawings gives wrong figures, because only the change from operations counts as profit.

  1. ARs 1,50,000Correct
  2. BRs 1,20,000
  3. CRs 2,00,000
  4. DRs 90,000

Explanation

Closing capital = opening capital + additional capital - drawings + profit. So 6,20,000 = 5,00,000 + 50,000 - 80,000 + profit, giving profit = 6,20,000 - 4,70,000 = Rs 1,50,000. Rs 1,20,000 results from simply subtracting the opening capital and adding back drawings only, ignoring the additional capital introduced.

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