Dear Experts ,
I've a doubt in the chapter single entry system - why we add drawing and subtract additional capital in statement of profit and loss, usually we subtract drawings????
can you please clear my doubt as fast as possible .
Dear Student,
To ascertain the profit/loss for the year, we compare the closing capital with the opening capital.
If ,
Closing Capital > Opening Capital (Profit)
Closing Capital < Opening Capital (Loss)
But, before we compare the closing capital with the opening capital, we have to work out the adjusted closing capital. For this, we add the drawings made during the year and deduct the additional capital introduced.
The amount so withdrawn as drawings is added back because if the drawings had not been made then the closing capital would have been more by this amount. On the other hand, if additional capital was not introduced; then capital would have been less. Accordingly, any amount introduced in the business as additional capital is deducted from the closing capital.
Also, remember that drawings are subtracted from the opening capital but in case of closing capital, the amount of drawings is added. In case of single entry system, we begin from the closing capital, therefore we add drawings and subtract additional capital.
Hope this clarifies your doubt.
To ascertain the profit/loss for the year, we compare the closing capital with the opening capital.
If ,
Closing Capital > Opening Capital (Profit)
Closing Capital < Opening Capital (Loss)
But, before we compare the closing capital with the opening capital, we have to work out the adjusted closing capital. For this, we add the drawings made during the year and deduct the additional capital introduced.
The amount so withdrawn as drawings is added back because if the drawings had not been made then the closing capital would have been more by this amount. On the other hand, if additional capital was not introduced; then capital would have been less. Accordingly, any amount introduced in the business as additional capital is deducted from the closing capital.
Also, remember that drawings are subtracted from the opening capital but in case of closing capital, the amount of drawings is added. In case of single entry system, we begin from the closing capital, therefore we add drawings and subtract additional capital.
Hope this clarifies your doubt.