This method of determining profit/loss is based on the assumption that capital grows by way of profits and reduces by losses made.
Accounting Equation: Assets – Liabilities = Capital Net Assets = Capital
Profits are determined using the opening and closing capital via the preparation of Statement of Affairs.
Statement of Affairs as at … Assets GHc GHc Non current assets xxx Current assets xxx xxx Liabilities Non current liabilities xxx Current liabilities xxx (xxx) Net Assets (capital) xxxx
Profit or Loss Determination In the determination of profit or loss using the net assets (capital) approach, consideration should be given to drawings and additional capital introduced
Drawings This has the tendency to reduce the closing capital and hence the profit. They are either added to “apparent profit” or subtracted from “apparent losses”
Capital Introduced This has the effect of increasing the closing capital and hence the profit. It is therefore subtracted from the ‘‘apparent profit” or added to the “apparent losses”
Format for Determination of Profit/Loss GHc GHc Closing Capital xxx Add: Drawings xxx xxxx Less: Opening Capital (xxx) Additional Capital (xxx) xxxx Profit /(Loss) xx/
Guidelines to Net Assets (Capital) Approach Determine the opening and closing capital at the beginning and end of the period via preparation of statement of affairs.
Trace all withdrawals made by owners for their personal use (drawings). Determine whether there have been any injection of additional capital
Based on the format of determination of profit/loss (see slide 13), determine the profit or loss.
- Spring '20
- Dr. ASRAVOR
- Balance Sheet, Generally Accepted Accounting Principles, net assets, Explain, Determine profit