Profit of Seri Wangi Grocery

Incomplete Records

Skill: Apply

Stimulus

Question

(a) Calculate the opening capital and closing capital of Puan Halimah's business.

(b) Using the Comparison Method, determine the net profit or loss for the year ended 31 December 2024.

(c) Explain how the personal motorcycle and the goods taken should be treated in your calculation, and why this treatment is essential to arrive at an accurate net profit.

Thinking steps

1. Compute opening capital using the accounting equation: Capital = Assets - Liabilities. Opening capital = (20,000 + 8,000 + 3,000 + 5,000) - 4,000 = RM32,000.
2. Compute closing capital the same way: Closing capital = (18,000 + 10,000 + 4,500 + 9,500) - 3,000 = RM39,000.
3. Identify the non-cash items: the RM5,000 motorcycle is additional capital (personal property brought into the business), while goods RM2,500 + cash RM3,500 = RM6,000 is total drawings.
4. Apply the Comparison Method formula: Net profit = Closing capital - Opening capital + Drawings - Additional capital.
5. Substitute the values: 39,000 - 32,000 + 6,000 - 5,000 = RM8,000 net profit.
6. Check the logic: drawings are added back because they reduced closing capital without being a business loss; additional capital is deducted because it raised closing capital but did not arise from business operations.

Model answer

(a) Opening capital = (Equipment 20,000 + Inventory 8,000 + Receivables 3,000 + Bank 5,000) - Payables 4,000 = RM32,000. Closing capital = (18,000 + 10,000 + 4,500 + 9,500) - 3,000 = RM39,000.

(b) Comparison Method: Net profit = Closing capital - Opening capital + Drawings - Additional capital = 39,000 - 32,000 + 6,000 - 5,000 = RM8,000 (net profit).

(c) The personal motorcycle of RM5,000 is treated as ADDITIONAL CAPITAL because the owner's personal asset was brought into the business; it raised closing capital but did not come from operations, so it is deducted in the calculation to prevent profit from being overstated. The goods RM2,500 and cash RM3,500 (total drawings RM6,000) are treated as DRAWINGS because the owner withdrew business resources for personal use; drawings reduce closing capital without being a business expense, so they are added back to show the true profit. If both items were ignored, the RM7,000 rise in capital would be misread as profit, giving a wrong answer. Correct treatment ensures that only the change in capital arising from business operations is counted as the net profit of RM8,000.