Which information is especially necessary when using the capital comparison method to determine profit?
Correct answer: A. Opening and closing net capital
- A. Opening and closing net capital
- B. Only the closing cash balance
- C. Only the year’s credit purchases
- D. Only the owner’s personal expenses
Explanation
The capital comparison method begins with opening capital and compares it with closing capital after adjusting for drawings and additional capital. Cash balances or purchases alone cannot show the total change in the owner’s net investment. Personal expenses matter only when they represent drawings from the business.
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About Incomplete Records
Incomplete records require profit and financial position to be reconstructed when a complete double-entry system is unavailable. Methods include statements of affairs, capital comparisons, control accounts, cash summaries and margin calculations to find missing sales, purchases, expenses, assets, liabilities and drawings, while distinguishing business profit from changes in capital.
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