Profit equals closing capital minus opening capital, plus all drawings, minus any capital introduced. Every adjustment undoes something that changed capital without being earned or lost through trading.
This lesson extends using the statement of affairs method within incomplete records. The difference between owner’s actions and trading results is also the heart of distinguishing gross and net profit.
Which items change capital without being profit?
Two things push capital up or down without any trading: the owner putting more in, and the owner taking something out. Cash withdrawals and goods taken for own use both count as taking out.
Think of a water tank. Rain fills it, like sales. The owner can also pour in a bucket of water or scoop some out. Those two moves are not rain, so they are not profit.
Worked example: Ah Meng’s car accessories shop
This is an original example. The statements of affairs give opening capital RM20 000 and closing capital RM26 500. During the year:
- the owner withdrew RM8 000 cash
- the owner took goods for own use, bought for RM600
- the owner brought in RM3 000 from personal savings
Step 1: total drawings. Cash 8 000 plus goods 600 is RM8 600.
Step 2: change in capital. 26 500 − 20 000 = RM6 500.
Step 3: add drawings. 6 500 + 8 600 = RM15 100.
Step 4: deduct capital introduced. 15 100 − 3 000 = RM12 100 profit.
Step 5: check. Opening 20 000 plus profit 12 100 plus capital introduced 3 000 minus drawings 8 600 equals 26 500. It matches the closing capital.
The mistake that raises profit
A student sees the word “capital” and adds the RM3 000, because more capital sounds like good news. But the owner’s own money is not profit, so adding it makes profit too high.
| Line | Wrong | Right |
|---|---|---|
| Capital introduced | added | deducted |
| Goods for own use | left out | added to drawings |
| Profit | RM17 500 | RM12 100 |
The wrong working is 6 500 + 8 000 + 3 000, which gives RM17 500. That is RM5 400 too high: the sign error on capital introduced adds RM6 000, and forgetting the goods takes away RM600. The check in Step 5 would catch this, because the rebuilt closing capital would not match. Always run the check.
Check yourself
Opening capital is RM14 000 and closing capital is RM19 000. The owner withdrew RM6 000 cash and took goods bought for RM500 for own use. The owner also introduced RM1 500. Find the profit.
Answer
Total drawings: 6 000 + 500 = RM6 500.
Change in capital: 19 000 − 14 000 = RM5 000.
Add drawings: 5 000 + 6 500 = RM11 500. Deduct capital introduced: 11 500 − 1 500 = RM10 000.
Check: 14 000 + 10 000 + 1 500 − 6 500 = 19 000.
What to study next
Test every method in the chapter together in the incomplete records practice set. If you need to refresh how profit sits in the final statements, see preparing a profit and loss statement.
If you want a teacher to go through the adjustments with your own questions, see online one-to-one Accounting tuition.