1- Let’s have a look at a business where capital at the end of 2019 was $20,000. During 2020, there have been no drawings, and no contributions from the owner. At the end of 2020, the capital was $30,000.
Required: a. Determine net income (loss) for business for year 2020.
b. Determine net income (loss) for business for year 2020 if drawings had been $7,000.
a. To determine the net income (loss) for the business in 2020, we need to find the change in capital from the beginning to the end of the year.
Net Income (Loss) = Ending Capital - Beginning Capital
Net Income (Loss) = $30,000 - $20,000
Net Income (Loss) = $10,000
So, the net income for the business in 2020 is $10,000.
b. If drawings had been $7,000 in 2020, we would need to deduct this amount from the net income calculated in part a.
Net Income (Loss) = Net Income (Loss) - Drawings
Net Income (Loss) = $10,000 - $7,000
Net Income (Loss) = $3,000
So, if drawings were $7,000 in 2020, the net income for the business would be $3,000.