Accountancy · Ch 1 — Accounts from Incomplete Records
Statement of Affairs Method — Ascertaining Profit through Capital Comparison
Statement of Affairs Method — Ascertaining Profit through Capital Comparison
When a trader keeps incomplete records but still wants to know roughly how much profit the business made in a year, the simplest technique available is to compare the trader's capital at the start of the year with the capital at the end of the year. Since capital increases through profit and additional capital introduced, and decreases through drawings and losses, the change in capital over the year — after adjusting for drawings and fresh capital brought in — reveals the profit or loss for the year. This is called the Net Worth Method, the Capital Comparison Method, or simply the Statement of Affairs Method.
What is a Statement of Affairs? It is a statement listing all the assets and liabilities of a business as on a particular date, in a format that looks exactly like a Balance Sheet — assets on one side, liabilities and capital on the other, with capital as the balancing figure (Capital = Assets − Liabilities). But a Statement of Affairs is not a Balance Sheet, and the difference is important:
| Point of Difference | Statement of Affairs | Balance Sheet |
|---|---|---|
| Source of figures | Prepared from incomplete records — many figures are estimated, physically verified, or taken from memory | Prepared from a complete, balanced set of ledger accounts under Double Entry |
| Reliability of the capital figure | The "capital" shown is only a residual estimate — its accuracy depends entirely on how accurately assets and liabilities have been estimated | The capital figure is accurate because it is derived from actual ledger balances |
| Effect of an omitted asset/liability | Silently understates or overstates capital, since nothing forces the statement to be internally checked | Any omission would normally be caught, because the double entry system is self-balancing |
| Purpose | Used only as a tool to estimate profit or loss under incomplete records | Used as the formal, authoritative statement of financial position |
The Capital Comparison formula. Once an Opening Statement of Affairs (at the start of the year) and a Closing Statement of Affairs (at the end of the year) are prepared, profit is found as:
Profit (or Loss) = Closing Capital + Drawings during the year − Additional Capital introduced during the year − Opening Capital
Each term matters:
- Closing Capital — the capital shown by the Closing Statement of Affairs.
- Add back Drawings — drawings reduce capital but are a withdrawal of profit already earned, not a business loss, so they must be added back to see what capital would have been without them.
- Deduct Additional Capital introduced — fresh capital brought in during the year increases capital for a reason unrelated to trading profit, so it must be removed before comparing.
- Opening Capital — the capital shown by the Opening Statement of Affairs.
Worked mini-example. Suppose a trader's Opening Statement of Affairs shows capital of ₹60,000. During the year the trader introduced ₹5,000 of additional capital and withdrew ₹15,000 as drawings. The Closing Statement of Affairs shows capital of ₹80,000. Profit is found as:
| Particulars | Amount (₹) |
|---|---|
| Closing Capital | 80,000 |
| Add: Drawings during the year | 15,000 |
A list of estimated assets and liabilities of a business on a given date, in Balance Sheet format, used under incomplete records to find capital by the residual formula C …
A technique to estimate a year's profit or loss by comparing opening and closing capital, adjusted for drawings (added back) and additional capi …