Book-Keeping and Accountancy · Ch 10 — Single Entry System
Adjustments in Ascertaining Profit under the Net Worth Method
Adjustments in Ascertaining Profit under the Net Worth Method
The basic formula in Section 4 gives only a rough, unadjusted profit figure. In practice, MSBSHSE numericals almost always add further information that has to be worked into the computation before the true, final profit is arrived at. The commonly tested adjustments are:
| Adjustment | Effect on the profit figure |
|---|---|
| Additional Capital introduced during the year | Already deducted directly in the basic formula (Section 4) |
| Drawings during the year, in cash and in kind (goods withdrawn for personal use) | Already added back directly in the basic formula (Section 4) |
| Interest on Capital (allowed to the proprietor, charged as a business expense) | Deduct from the profit before further adjustments |
| Interest on Drawings (a notional amount charged to the proprietor, treated as income of the business) | Add to the profit before further adjustments |
| Further depreciation on a fixed asset not already reflected in the closing Statement of Affairs | Deduct from the profit before further adjustments |
| A fresh Provision for Doubtful Debts on closing debtors, not already reflected | Deduct from the profit before further adjustments |
| An outstanding expense genuinely payable but omitted from the closing Statement of Affairs, discovered later | Deduct from the profit before further adjustments (a real liability was understated) |
| A prepaid expense genuinely paid in advance but omitted from the closing Statement of Affairs, discovered later | Add to the profit before further adjustments (a real asset was understated) |
Putting the whole computation together, the standard working is best set out as a small statement rather than a single formula, since it keeps every adjustment traceable — this is exactly the format MSBSHSE examiners expect a Std XI answer to show:
Statement of Profit for the year ended [date] (Net Worth Method)
| Particulars | Amount (₹) |
|---|---|
| Capital at the end of the year (per closing Statement of Affairs) | xx |
| Add: Drawings during the year (cash and in kind) | xx |
| Less: Additional Capital introduced during the year | (xx) |
| Less: Capital at the beginning of the year (per opening Statement of Affairs) | (xx) |
| = Profit before further adjustments | xx |
| Less: Interest on Capital | (xx) |
| Less: Further depreciation / fresh Provision for Doubtful Debts, if not already provided for | (xx) |
| Less: Outstanding expense omitted from the closing Statement of Affairs | (xx) |
| Add: Interest on Drawings | xx |
| Add: Prepaid expense omitted from the closing Statement of Affairs | xx |
| = Net Profit for the year | xx |
A notional amount charged to the proprietor for money or goods withdrawn during the year, treated as income of the business and therefore ADDED to the profit before further adjustm …
An amount allowed to the proprietor on the capital invested, treated as a business expense and therefore DEDUCTED from the profit before further adjustments …