Question
Lee opened his new business on 1 January 2016. On that
date, the only asset was a bank balance of $10,000. During the year, Lee’d drawings from the business totalled $35,000. On 31 December 2016, the assets and liabilities of the business were as follows: · Computers and furniture $60,000, · inventory of raw materials $16,500, · finished goods, at cost $7,400, · bank overdraft $11,600, · trade payables, $5,500, · prepayments $1,500, · trade receivables $4,500, · the provision for bad debts $2,000, · bank loan $39,000, · interest payable $500, · accrued expenses, $2,600. What is the profit of the business in the year ended 31 December 2016?Solution
Total assets on 31 Dec = Computers and furniture +inventory of raw material + finished goods + prepayments + trade receivables = 60,000+ 16,500 + 7,400 + 1,500 + 4,500 = 89,900 Total liabilities on 31 dec = bank overdraft + trades payable + provision for bad debts + bank loan + interest payable + accrued expenses = 11,600 + 5,500+2000+39,000+500+2600 = 61,200 As per accounting equation, Equity or Capital = Assets – liabilities = 89,900 – 61,200 = 28,700 As such, the closing Capital on 31st Dec is 28,700. Closing Capital = Opening capital + Profit for the year – Drawings 28,700 = 10,000 +profit – 35,000 Or Profit = 53,700
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