by The Statement of Affairs Method is a technique used to ascertain the profit or loss of a sole trader who does not maintain proper double-entry accounting records. This method is often employed when only incomplete records are available. The profit or loss is determined by comparing the net worth of the business at two different points in time, after considering any additional capital introduced or drawings made by the proprietor during the period.
Steps in Statement of Affairs Method
- Prepare Opening Statement of Affairs:
This statement lists all the assets and liabilities at the beginning of the period. The difference between total assets and total liabilities is the opening capital. - Prepare Closing Statement of Affairs:
Similar to the opening statement, this lists all assets and liabilities at the end of the period. The difference here gives the closing capital. - Calculate Adjusted Closing Capital:
The closing capital is adjusted by adding drawings and subtracting additional capital introduced during the period to find the adjusted closing capital. - Ascertain Profit or Loss:
- If the adjusted closing capital is greater than the opening capital, it indicates a profit.
- If the adjusted closing capital is less than the opening capital, it indicates a loss.
The formula can be expressed as:
Profit or Loss = Adjusted Closing Capital − Opening Capital
Example
Mr. X is a sole trader. His business assets and liabilities as of January 1, 2024, and December 31, 2024, are as follows:
| Particulars | Jan 1, 2024 | Dec 31, 2024 |
|---|---|---|
| Cash | ₹10,000 | ₹15,000 |
| Debtors | ₹50,000 | ₹60,000 |
| Inventory | ₹40,000 | ₹45,000 |
| Furniture | ₹30,000 | ₹28,000 |
| Creditors | ₹20,000 | ₹25,000 |
| Bank Loan | ₹10,000 | ₹5,000 |
During the year, Mr. X withdrew ₹20,000 for personal use and introduced additional capital of ₹10,000.
Step 1: Calculate Opening Capital
Opening Capital = Total Assets − Total Liabilities
Opening Assets (Jan 1, 2024) = Cash + Debtors + Inventory + Furniture = ₹10,000 + ₹50,000 + ₹40,000 + ₹30,000 = ₹1,30,000
Opening Liabilities (Jan 1, 2024) = Creditors + Bank Loan = ₹20,000 + ₹10,000 = ₹30,000
Opening Capital = ₹1,30,000 – ₹30,000 = ₹1,00,000
Step 2: Calculate Closing Capital
Closing Assets (Dec 31, 2024) = Cash + Debtors + Inventory + Furniture = ₹15,000 + ₹60,000 + ₹45,000 + ₹28,000 = ₹1,48,000
Closing Liabilities (Dec 31, 2024) = Creditors + Bank Loan = ₹25,000 + ₹5,000 = ₹30,000
Closing Capital = ₹1,48,000 – ₹30,000 = ₹1,18,000
Step 3: Adjust the Closing Capital
Adjusted Closing Capital = Closing Capital + Drawings – Additional Capital = ₹1,18,000 + ₹20,000 – ₹10,000 = ₹1,28,000
Step 4: Ascertain Profit or Loss
Profit or Loss = Adjusted Closing Capital – Opening Capital = ₹1,28,000 – ₹1,00,000 = ₹28,000 (Profit)
Summary Table
| Particulars | Amount (₹) |
|---|---|
| Opening Capital | 1,00,000 |
| Closing Capital | 1,18,000 |
| Drawings | 20,000 |
| Additional Capital Introduced | 10,000 |
| Adjusted Closing Capital | 1,28,000 |
| Profit for the Year | 28,000 |
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