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?
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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