calculate profit or loss for the year from changes in capital over time

What are Incomplete Records? 🤔

In many businesses, we don’t always keep a full list of every transaction. Instead, we track the capital (the owner’s investment) at the start and end of the year, and any drawings (money taken out by the owner). From these three figures we can deduce the profit or loss.

The Formula 🔍

The basic relationship is:

$P = C_{\text{end}} - C_{\text{start}} - D$

Where:

• $C_{\text{start}}$ = Capital at the beginning of the year
• $C_{\text{end}}$ = Capital at the end of the year
• $D$ = Total drawings during the year
• $P$ = Profit (if positive) or Loss (if negative)

Step‑by‑Step Example 📈

1. Record the capital at the start of the year: $C_{\text{start}} = \$5,000$
2. Record the capital at the end of the year: $C_{\text{end}} = \$7,200$
3. Sum all drawings made by the owner: $D = \$1,000$
4. Apply the formula: $P = 7,200 - 5,000 - 1,000 = \$1,200$
5. Interpret the result: The business made a profit of \$1,200 during the year.

Illustrative Table of Capital Changes

Analogy: The Garden of Capital 🌱

Think of your capital as a garden plot:

• Initial capital = the seed you plant at the start.
• Drawings = the water you pour out for yourself.
• Ending capital = the harvest you have left at the end.

If the harvest is larger than the seed plus the water you poured out, you’ve grown profit. If it’s smaller, you’ve lost ground.

Exam Tips for 5.6 📚

• Always identify the three key figures: capital start, capital end, drawings.
• Check the sign of the result: positive = profit, negative = loss.
• Remember to subtract drawings before adding the ending capital.
• Use the formula as a quick mental check: Profit = Ending Capital – (Starting Capital + Drawings).
• Show all steps in your answer; examiners like to see the logic.

Quick Quiz 🎯

Given the following:

• Capital at start: $4,500$
• Drawings: $800$
• Capital at end: $5,200$

What is the profit or loss for the year? Show your calculation.