ACCA Applied Knowledge · Financial Accounting · Incomplete records
Which of the following is the main reason a business with incomplete records must use the accounting equation to calculate profit?
Profit is found from the change in net assets, adjusted for drawings and capital introduced, because complete income and expense records are not available to compile a statement of profit or loss directly.
- AProfit is derived from the change in net assets because no full income and expense records existCorrect
- BProfit equals closing cash less opening cash
- CProfit must always equal drawings plus capital introduced
- DTax authorities require profit to be based on net assets
Explanation
Without full records of income and expenses, profit is found as the change in net assets adjusted for drawings and capital introduced. Cash movement alone ignores other assets and liabilities, so option 2 is wrong.
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