by Statement of Affairs is a financial statement that lists the assets and liabilities of a business to determine its net worth at a specific point in time. It is used when proper double-entry bookkeeping records are not maintained, especially by small businesses and sole traders. The difference between total assets and total liabilities represents the capital or net worth of the business.
Two statements are prepared:
- Opening Statement of Affairs: To find the capital at the beginning of the period.
- Closing Statement of Affairs: To find the capital at the end of the period.
Purpose of Opening and Closing Statement of Affairs
- Opening Statement of Affairs:
This statement helps determine the initial capital or net worth of the business at the start of the accounting period. It forms the basis for comparing financial performance at the end of the period.
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Closing Statement of Affairs:
The closing statement shows the financial position of the business at the end of the period. Comparing the opening and closing capital after considering drawings and additional capital helps ascertain profit or loss.
Steps to Prepare Statement of Affairs
- List the Assets:
Include all assets such as cash, debtors, inventory, furniture, equipment, and any other resources owned by the business.
- List the Liabilities:
Include all liabilities such as creditors, loans, and outstanding expenses.
- Calculate Capital:
The difference between total assets and total liabilities is the capital or net worth of the business.
Capital = Total Assets − Total Liabilities
Example
Let’s take an example of a sole trader, Mr. Y, who started his business on January 1, 2024. His financial details on January 1, 2024 and December 31, 2024 are as follows:
Details on January 1, 2024 (Opening Statement of Affairs)
| Particulars | Amount (₹) |
|---|---|
| Cash | 20,000 |
| Debtors | 50,000 |
| Inventory | 30,000 |
| Furniture | 40,000 |
| Creditors | 25,000 |
| Loan | 10,000 |
Details on December 31, 2024 (Closing Statement of Affairs)
| Particulars | Amount (₹) |
|---|---|
| Cash | 15,000 |
| Debtors | 60,000 |
| Inventory | 35,000 |
| Furniture | 38,000 |
| Creditors | 20,000 |
| Loan | 5,000 |
Step 1: Prepare Opening Statement of Affairs
| Particulars | Amount (₹) |
|---|---|
| Assets: | |
| Cash | 20,000 |
| Debtors | 50,000 |
| Inventory | 30,000 |
| Furniture | 40,000 |
| Total Assets | 1,40,000 |
| Liabilities: | |
| Creditors | 25,000 |
| Loan | 10,000 |
| Total Liabilities | 35,000 |
| Opening Capital | 1,05,000 |
Step 2: Prepare Closing Statement of Affairs
| Particulars | Amount (₹) |
|---|---|
| Assets: | |
| Cash | 15,000 |
| Debtors | 60,000 |
| Inventory | 35,000 |
| Furniture | 38,000 |
| Total Assets | 1,48,000 |
| Liabilities: | |
| Creditors | 20,000 |
| Loan | 5,000 |
| Total Liabilities | 25,000 |
| Closing Capital | 1,23,000 |
Step 3: Calculate Profit or Loss
To determine profit or loss, the closing capital is adjusted by adding drawings and subtracting additional capital introduced during the year. In this case, assume Mr. Y withdrew ₹15,000 as drawings and introduced additional capital of ₹8,000 during the year.
Adjusted Closing Capital = Closing Capital + Drawings − Additional Capital = 1,23,000 + 15,000 − 8,000 = 1,30,000
Profit or Loss is calculated as:
Profit or Loss = Adjusted Closing Capital − Opening Capital = 1,30,000 − 1,05,000 = 25,000 (Profit)
Summary of Statements
| Particulars | Amount (₹) |
|---|---|
| Opening Capital | 1,05,000 |
| Closing Capital | 1,23,000 |
| Drawings | 15,000 |
| Additional Capital Introduced | 8,000 |
| Adjusted Closing Capital | 1,30,000 |
| Profit for the Year | 25,000 |
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