Computation of Profits From Two Balance Sheets Showing The Opening And Closing Capital - SS2 Accounting Lesson Note

To compute profits from two balance sheets showing the opening and closing capital, we need to follow a simple formula:

Profit = Closing Capital - Opening Capital - Additional Investments + Drawings

Question:

Suppose we have the following balance sheets for a business at the beginning and end of a financial year:

Opening Balance Sheet (1st January, Year 1)

Capital: ₦100,000

Assets: ₦150,000

Liabilities: ₦50,000

Closing Balance Sheet (31st December, Year 1)

Capital: ₦120,000

Assets: ₦200,000

Liabilities: ₦80,000

Answer:

In this case, we can calculate the profit for the year as follows:

Profit = Closing Capital - Opening Capital - Additional Investments + Drawings

Profit = ₦120,000 - ₦100,000 - 0 + 0

Profit = ₦20,000

So the profit for the year is ₦20,000.

Here, we have not considered any additional investments made by the owner or any drawings made during the year. If there were any additional investments or drawings, they would need to be added or subtracted from the profit accordingly.

It is important to note that the profit calculated using this method is the accounting profit and not the cash profit. To calculate the cash profit, we need to consider the cash inflows and outflows during the year.