Question

Select the most appropriate answer the alternatives given below and rewrite the Sentences.

Further capital introduced during the year is _______________ from closing capital in order to find-out the correct profit.
a) added
b) deducted
c) divided
d) ignored.

Answer 1

Further capital introduced during the year is deducted from closing capital in order to find out the correct profit.

Explanation: Under single-entry system, profit or loss is calculated by comparing capital at two dates, i.e. opening capital and closing capital (net worth method). The profit is calculated as closing capital less opening capital and also, the following adjustments are made:

a. Drawings: If drawings are made during the year, they should be added to the amount of closing capital.
b. Additional capital: If additional capital is introduced in the business during the year, it should be deducted from the amount of closing capital.
c. Interest on capital: If interest is provided on capital, it should be deducted from the amount of closing capital.