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CMA Intermediate · Financial Accounting · Financial Statements from Incomplete Records

Under the Statement of Affairs (net worth) method of preparing accounts from incomplete records, profit for the year is first obtained as the difference between closing capital and opening capital. Which further adjustment is needed to arrive at the actual profit for the year?

Profit equals closing capital minus opening capital, plus drawings, minus fresh capital introduced. Drawings reduced the capital during the year so they are added back, while fresh capital raised closing capital without being earned profit, so it is deducted to get the actual profit.

  1. AAdd drawings made by the proprietor and deduct any fresh capital introducedCorrect
  2. BAdd fresh capital introduced and deduct drawings
  3. CDeduct both drawings and fresh capital introduced
  4. DAdd both drawings and fresh capital introduced

Explanation

Increase in capital = closing capital - opening capital. Drawings reduced capital, so they are added back. Fresh capital increased capital without being profit, so it is deducted. Adding capital introduced (option 2) would overstate profit.

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