Question

Drawings made during the year decreases the profit under single entry system. (State True or False)

Answer 1

True
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Answer 2

Answer: True

Explanation:

Under the Single Entry System, profit is derived after calculating the difference in capital between the beginning and the end of the trading period .

Let us take an example to clear this concept.

Suppose Ram capital stands at 1,20,000 as on 31st March 2012 whereas on 1st April 2011 it stood at 80,000 . In this case Ram is said to have made a profit of Rs 30,000 as there is an increment of capital at the end of the financial year.

However the increase of capital can also be because of fresh infusion of capital. For example if Ram introduces fresh capital to the extent of Rs 12,000 during the year, then the profit would be  Rs 18,000 and not Rs 30,000 because the increase amount includes the amount of fresh capital that is 12000.

Similarly if Ram in the above example withdraws a portion of his capital during the year it leads to a fall in the profit to that extent. Suppose in continuation of the above example, Ram withdraws Rs 5,000 in the said year then his profits for the year 2011-2012 would be Rs 18,000 + Rs 5,000 or Rs 23,000.

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