NET WORTH METHOD
According to this method, the profit or loss made by the business is computed by comparing the net worth (or capital) of the business on two different dates. For example, ifthe capital of the business on 1.1.1990 was P.s 80,000 and it is Rs 90,000 on 31st December, 1999, it can be said that the business has made profit of P.s 10,000 during the period.
Adjustments. Following adjustments are required for determination ofthe profit in case of this method.
(i) Adj ustment for drawings. The proprietor may withdraw money from the business for his personal use. In the absence of any such withdrawal, the capital at the end of accounting period would have been more by the amount ofmoney withdrawn by him. Thus, the amount of drawings should be added back to the capital at the end of the accounting period to find out his true capital on that date.
(ii) Adjustment for capital introduced. The proprietor may introduce further capital in the business during the course of the accounting year. This will increase the capital of the proprietor at the end of the accounting year. It is, therefore, necessary to reduce the amount of capital by the amount of capital introduced by the proprietor during the year in order to ascertain the real increase in the capital of the proprietor on account of profit earned by him during the course of the accounting year.