Accountancy · Ch 10 — Accounts from Incomplete Records (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 3 gives only a rough, unadjusted profit figure. In practice, examiners almost always add further information that must be worked into the computation before the final, correct 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 3) |
| Drawings during the year, in cash and in kind (goods withdrawn for personal use) | Already added back directly in the basic formula (Section 3) |
| Interest on Capital (charged as a business expense before arriving at profit) | Deduct from the profit before adjustments |
| Interest on Drawings (a notional charge recovered from the proprietor, treated as income of the business) | Add to the profit before adjustments |
| Further Depreciation on fixed assets not already reflected in the closing Statement of Affairs | Deduct from the profit before adjustments |
| A fresh Provision for Doubtful Debts, or bad debts written off, not already reflected in the closing figures | Deduct from the profit before adjustments |
| Undervaluation of closing stock or another asset, discovered after the closing Statement of Affairs was drawn up | Add to the profit before adjustments |
| Outstanding expenses omitted from the closing Statement of Affairs | Deduct from the profit before adjustments (a genuine liability was understated) |
| Prepaid expenses omitted from the closing Statement of Affairs | Add to the profit before adjustments (a genuine 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 makes every adjustment traceable:
Statement of Profit or Loss 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 adjustments | xx |
| Less: Interest on Capital | (xx) |
| Less: Further depreciation / fresh Provision for Doubtful Debts, if not already accounted for | (xx) |
| Less: Outstanding expenses omitted from the closing Statement of Affairs | (xx) |
| Add: Interest on Drawings | 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 adjustme …
An amount allowed to the proprietor on the capital invested, treated as a business expense and therefore DEDUCTED from the profit before adjustments …