Single Entry System - Net-worth Method - Definition - Meaning
U nder net worth method or increased worth method, we make comparison between opening capital and closing capital in order to find out the P rofit or Loss made by the business during the year. All the activities taken by proprietor or sole owner would be resulted in the increased of net worth (Closing Capital - Opening Capital) of the business for the accounting period and as a result, the business earns profit, otherwise business suffers a loss i.e., when closing capital is less than opening capital. In other words, if there is a decrease in the net worth of the business, then there is a loss suffered by the business during the period. During the period, the sole trader may withdraw cash or goods for his own personal use, so we add back to it in the profitable activities of the business if it was not withdrawn from the business it would be utilized or still remained the part of profits of the business. Also, any additional or further capital introduced is als...