Question

Assume equity at the beginning of the accounting period was $120,000 and at the end of the period it was $175,000. Drawings by the owner during the period were $30,000. How much profit was earned during the period based on this information?

Answer 1

Answer: $85,000

Explanation:

Drawings are debited/deducted from the Equity account to reflect that the owner's holdings in the business has reduced.

Profit is added to the Equity account in the form of Retained Earnings.

The closing Balance on Equity is;

Closing Balance = Opening Balance + Profit - Drawings

Profit = Closing Balance - Opening Balance + Drawings

Profit = 175,000 - 120,000 + 30,000

Profit = $85,000