When there is no income statement, profit is the change in net assets, adjusted for what the owner took out and put in. The method uses the accounting equation and nothing else.
You will meet it in incomplete records questions that give two statements of affairs, and it connects with sole-trader statements.
How does the capital equation produce profit?
For a sole trader, closing capital equals opening capital plus profit plus capital introduced, less drawings. Capital also equals net assets, which is assets less liabilities.
So you can find both capital figures from the lists of assets and liabilities, then rearrange the equation for profit. Profit is the only term that cannot be seen directly, so it is the balancing figure.
Step by step
- Calculate opening net assets: opening assets less opening liabilities. This is opening capital.
- Calculate closing net assets in the same way.
- Write the equation: opening capital + profit + capital introduced − drawings = closing capital.
- Put in the known figures and leave profit as the unknown.
- Solve for profit: closing capital − opening capital − capital introduced + drawings.
- Check by running forward: put the profit back into the equation and see whether it reaches closing capital.
Worked example
Aiman runs a small laundry. His records show the following.
| Start of year (RM) | End of year (RM) | |
|---|---|---|
| Total assets | 31,000 | 42,500 |
| Total liabilities | 9,000 | 11,000 |
| Net assets (capital) | 22,000 | 31,500 |
During the year he took RM800 each month in cash for himself, and he paid RM3,000 of savings into the business.
Drawings: 800 × 12 = RM9,600.
Profit: 31,500 − 22,000 − 3,000 + 9,600 = RM16,100.
Check forward: 22,000 + 16,100 + 3,000 − 9,600 = 31,500. The equation balances.
The mistake to watch for
A student sees net assets rising from 22,000 to 31,500 and writes a profit of RM9,500.
Mistaken answer: profit = 31,500 − 22,000 = RM9,500
The student ignored drawings and new capital. Aiman took out RM9,600 and put in RM3,000, so the true profit is RM6,600 higher.
The correction is to ask two questions of every incomplete-records question: did the owner take anything out, and did the owner put anything in? The increase in net assets is only the starting point.
Check yourself
1. Net assets rose from RM15,000 to RM19,000. Drawings were RM6,000, with no new capital. Find profit.
Show answer
Profit = 19,000 − 15,000 + 6,000 = RM10,000.
2. Opening assets RM40,000 and liabilities RM12,000. Closing assets RM52,000 and liabilities RM14,500. Drawings RM8,400 and capital introduced RM5,000. Find profit.
Show answer
Opening capital 28,000; closing capital 37,500. Profit = 37,500 − 28,000 − 5,000 + 8,400 = RM12,900.
3. Net assets fell from RM20,000 to RM17,500 with drawings of RM4,000. What was the result for the year?
Show answer
Profit = 17,500 − 20,000 + 4,000 = RM1,500 profit. The fall in net assets came from drawings exceeding profit.
Where this leads next
Profit from this method is a total figure only, so the final lesson asks what such a figure can and cannot tell you: explain limits of reconstructed data. Try the cash versus profit bridge to see why cash movement and profit differ, and the percentage-base explorer for ratio checks.
Students who can run the equation but cannot explain why drawings are added back often gain from a teacher asking them to tell the story in words. We do this in online one-to-one Accounting tuition.