A sole trader's net assets were $120,000 at the beginning of the year and $145,000 at the end of the year. During the year, the trader introduced $10,000 of new capital and took drawings of $25,000. What was the net profit or loss for the year?

Answer options:

Net profit of $10,000

Net profit of $40,000

Net loss of $10,000

Net profit of $60,000

How to approach this question

Use the accounting equation: Closing Net Assets = Opening Net Assets + Capital Introduced + Profit - Drawings. Rearrange to solve for Profit.

Full Answer

B.Net profit of $40,000✓ Correct

The relationship between opening and closing net assets is: Closing Net Assets = Opening Net Assets + Capital Introduced + Net Profit - Drawings. $145,000 = $120,000 + $10,000 + Net Profit - $25,000. $145,000 = $105,000 + Net Profit. Net Profit = $145,000 - $105,000 = $40,000.

Common mistakes

Deducting drawings from the difference instead of adding them back.

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