A' does not keep proper accounting records of his business. He gives the following information, what will be profit or loss for the year ?
Opening Capital ₹ 2,00,000; Closing Capital ₹ 2,50,000; Drawings made during the year ₹ 60,000; Capital added during the year ₹ 75,000.

Question

A' does not keep proper accounting records of his business. He gives the following information, what will be profit or loss for the year ? 
Opening Capital ₹ 2,00,000; Closing Capital ₹ 2,50,000; Drawings made during the year ₹ 60,000; Capital added during the year ₹ 75,000.

Accepted Answer

The correct option is 3:

The correct answer is ₹ 35,000, which is calculated by applying the Statement of Profit or Loss method for incomplete records (Single Entry System). This method works on the principle that the difference between the adjusted closing capital and the opening capital represents the net profit or loss for the year. To find the *Adjusted Closing Capital*, we must first add back the Drawings (₹ 60,000) to the Closing Capital (₹ 2,50,000), as drawings are personal withdrawals that reduce the capital but are not part of the year's profit. This gives us ₹ 3,10,000. Next, any additional capital introduced during the year (₹ 75,000) must be deducted because this amount is an external contribution, not an earned profit, which brings the adjusted capital to ₹ 2,35,000. Finally, subtracting the Opening Capital (₹ 2,00,000) from this adjusted figure (₹ 2,35,000) reveals a positive difference of ₹ 35,000, which is the Net Profit.

The incorrect option is 1:

The amount of ₹ 85,000 is incorrect because it suggests a conceptual mistake in how Drawings and Capital Added are treated in the calculation. This figure is commonly reached if one incorrectly adds the Capital Added (₹ 75,000) to the Opening Capital (₹ 2,00,000) to get a base of ₹ 2,75,000, and then incorrectly subtracts the Drawings (₹ 60,000) from the Closing Capital (₹ 2,50,000) to get ₹ 1,90,000, or by some other erroneous manipulation of the capital figures. The fundamental error here is failing to correctly adjust the closing capital for both drawings (which increase the closing capital for profit calculation) and fresh capital (which decrease it). The true profit is substantially lower, meaning ₹ 85,000 overstates the company's performance for the period.

The incorrect option is 2:

The result of ₹ 1,85,000 is a significant overstatement of the actual profit. This figure is derived from an error where the student adds all capital-related changes (Drawings and Capital Added) to the Closing Capital and then subtracts the Opening Capital. The faulty calculation is (Closing Capital + Drawings + Capital Added) - Opening Capital, which equates to (₹ 2,50,000 + ₹ 60,000 + ₹ 75,000) - ₹ 2,00,000 = ₹ 1,85,000. Remember, the rule of the Statement of Affairs method dictates that Capital Added is an external inflow and must be *deducted* from the closing balance to isolate the profit element, not added to it. This option violates the core accounting principle of profit determination.

The incorrect option is 4:

A profit or loss figure of ₹ 3,15,000 is grossly inaccurate and suggests a fundamental misunderstanding of the Statement of Affairs formula. This high amount is likely a result of adding all given figures together, or incorrectly manipulating the capital amounts in a manner that includes the opening capital in the profit calculation itself. Profit is the incremental growth in capital due to business operations. The final adjusted capital is only ₹ 2,35,000, which means the profit can only be the difference between that and the opening capital of ₹ 2,00,000. Therefore, ₹ 3,15,000 is conceptually impossible as a profit figure given the provided capital balances.