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Sir I am feeling difficulties in calculating net assets or capital. Can you help me? I have listed few questions to give you a picture that what type of questions I am unable to understand.
Question One:
Bill sets up his own computer consultancy from home. He buys a laptop for $2,000 and puts $1,000 into a business bank account. During the first month he invoices a client for $1,500 and pays $600 to a freelance programmer. The client has not yet paid.
What is Bill’s capital balance at the end of the month?
(A) $1,900
(B) $2,400
(C) $3,900
(D) $4,500
ANSWER : CQuestion Two:
Nancy’s business has net assets of $13,200 as at 1 January 20X1. During January she purchases new equipment for $1.200, makes sales on credit of $7.500, receives payments from customers of $3,750 and receives bills from suppliers of $2,250. These are not payable until February. What are the net assets at the end of January 20X1?
(A) $15,750
(B) $18,450
(C) $18.150
(D) $20.700
Answer: BI am unable to understand what method should I use. I tried accounting equation but my answer came “zero” at the end.
Please guide me method.Q1: Capital introduced = 2,000 + 1,000 = 3,000
Sales = 1,500 [= capital increase]; Programmer = 600 [=expense/capital decrease] …or profit = 1,500- 600 = 900.Capital at end = 3,000 + 900 = 3,900. Whether the customer has yet paid or the programmer has been paid is not relevant under the accruals system: these amounts are income and expense for the period.
Q2: Purchase of equipment has no effect on capital. If bought for cash the business is simply swapping the equipment for cash and both are assets. Profit for the period = 7,500 – 2250 = 5,250. (whether the sales or the expenses have been paid is not relevant under the accruals basis: sales have been earned and expenses have been incurred.
Capital at the end = 13,200 + 5,250 = 18,450.
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