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The following transactions relate to Max’s business:
1 May Purchase of goods for resale on credit $300
2 May Max injects long term capital into the business $1,400
3 May Payment of rent made $750
5 May Max withdraws cash from the business $400
7 May Goods which had cost $600 were sold on credit $1,200
At the start of the week, the assets of the business were $15,700 and liabilities amounted to
At the end of the week, what was the amount of Max’s capital?
Answer is $5350
I was getting 4950 because i was following this journal entry for 5th May’s adjustment;-
Dr. Drawings $400
Cr. Cash $400
I was reducing assets by 400 and then after calculating net assets was also subtracting 400 as drawings from net assets. Isn’t it supposed to be that way? Please help me clear this confusion in my concept. I have completed videos till Chapter 4 Accruals and prepayments and came across this question in the exam kit for the chapter of STATEMENT OF FINANCIAL POSITION AND STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
The capital at the end of the week is equal to the net assets at the end of the week.
Taking cash from the business as drawings does certainly reduce the cash (and therefore the net assets) buy $400.
However you are wrong to then subtract another $400. It is the capital injected into the company, plus the profit for the week, less the drawings for the week which would then be equal to the net assets at the end of the week.