Accounting Fundamentals Certification (AFC) Practice Test

The correct way to calculate ending capital for a sole proprietorship involves taking into account the owner’s initial investment, the profits or losses generated by the business, and any withdrawals made by the owner.

Beginning capital represents the owner's equity at the start of the period. When the business earns profit, it increases the equity, which is represented by net income. Drawings, or withdrawals, made by the owner decrease the owner’s equity since these are amounts taken out of the business for personal use.

Thus, the formula for calculating ending capital is structured by adding the net income to the beginning capital and then subtracting the drawings taken by the owner. This correctly reflects the changes in equity over the accounting period.

The correct answer incorporates all these components accurately: it starts with the beginning capital, adds the net income generated during the period, and deducts any drawings made by the owner, leading to a comprehensive view of the ending capital for the sole proprietorship.