Computation Of Profit/(Loss) From Incomplete Records ( Method 1: Comparison Method)

August 20th, 2006 Comments off
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Basically, there are two (2) methods of finding the operating results for an accounting period from incomplete records.

This article deals with the first method by using the Comparison Method with the basic accounting equation:

Method 1: The Comparison Method

(A) This method is to compare the OPENING capital with that of the CLOSING capital.

Opening Capital + Profit –Drawings = Closing Capital

Illustration:

ABC keeps a set of incomplete record. The details are as follows:

At the beginning of the period the capital =$200,000

At the end of the accounting period = $500,000

His personal drawing during the period =$100,000

Question: Compute the profits earned?

Solution:

Opening Capital + Profit -Drawings = Closing Capital

= $200,000+X-$100,000=$500,000

=Profit X =$500,000-$200,000+$100,000=$100,000

(B)  Draw up a Statement of Affairs as end of Accounting Period with the help of the  Basic Accounting Equation:-

At end of accounting period:

Assets = Liabilities + Shareholders Equity

Assets=Liabilities + (Opening Capital +Profits-Drawings)

Illustration:

Mr. A started business on 1 st January 2005 with a capital of $30,000.During the year, his personal drawing is $20,000

He has the following assets and liabilities:

Current Assets =$30,000

Fixed Assets = $40,000

Liabilities =$30,000

Question: Compute his profit for the accounting period ending 31 st December 2005

Solution:

Draft his Statement of Affairs as at 31 st December 2005

Total Assets:

Current Assets  $30,000

Fixed Assets     $40,000

Total Assets     $70,000

Minus:

Total Liabilities $30,000

Using the basic accounting equation, we can compute his profit for the period ending 31 st December 2005:

Assets = Liabilities + Shareholders Equity

Assets=Liabilities + [Opening Capital +Profits-Drawings]

$70,000=$30,000+[$20,000+X-$30,000]

His profit X = $50,000

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Financial Accounting

 
 

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