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CA Foundation · Accounting · Accounts from Incomplete Records

Under the Statement of Affairs method (net worth method), which of the following is the correct formula for profit or loss for the year?

Profit equals closing capital minus opening capital, plus drawings, minus fresh capital introduced. Drawings reduce capital and so must be added back, while capital introduced raises capital without being earned profit, so it is deducted from the increase in net worth.

  1. AClosing capital minus opening capital, adjusted for drawings added back, fresh capital introduced deductedCorrect
  2. BClosing capital plus opening capital, less drawings
  3. COpening capital minus closing capital, plus drawings
  4. DClosing capital minus opening capital, adjusted for drawings deducted and fresh capital added

Explanation

Profit = increase in capital + drawings - capital introduced. Drawings reduced capital during the year, so they are added back; fresh capital increased it without being profit, so it is deducted. Option D reverses these adjustments and is wrong.

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