Start with something you already know. You keep a rough note of what you own and what you owe. Your phone is worth ₹40,000, your bike ₹80,000, you have ₹15,000 in the bank, but you owe a friend ₹25,000. What are you actually worth? Add up what you own — ₹1,35,000 — subtract what you owe — ₹25,000 — and you are worth ₹1,10,000. That single number, your net worth, is the whole idea behind a Statement of Affairs.
Now put that in a business setting. A trader who keeps full double-entry books can find his capital by simply looking at the capital account — every transaction has been posted, so the balance is sitting there. But a trader who keeps only single entry (incomplete records) has no capital account at all. He records cash, he records debtors and creditors, but he never maintained a full ledger. So how does he find his capital? He does exactly what you did with the phone and the bike: he lists everything the business owns and everything it owes, and the difference is capital.
That listing is the Statement of Affairs. It is a statement prepared on a particular date showing the estimated values of assets and liabilities, where the excess of assets over liabilities is taken as the capital of the business.
The logic is one line of the accounting equation rearranged:
Capital = Assets − Liabilities
A Balance Sheet also shows assets and liabilities, so what is the difference? A Balance Sheet is drawn from a complete double-entry system and its figures are the actual ledger balances; it is a statement of position built on recorded facts. A Statement of Affairs is drawn from incomplete records, its figures are often estimates (you value the stock, you estimate the debtors), and it is prepared precisely because there is no reliable capital account to fall back on. Same shape, different reliability and different purpose.
Why does this matter for you in Class 12? Because the entire chapter on incomplete records — finding profit or loss when books are incomplete — rests on this statement. You cannot compute profit without knowing opening capital and closing capital, and the only way to get those is to prepare a Statement of Affairs at the start of the year and again at the end. It is the foundation stone.
Here is the proforma. Notice the two sides balance because capital is the balancing figure.
| Statement of Affairs as on ……… | | | |
|---|
| Liabilities | ₹ | Assets | ₹ |
| Creditors | xxx | Cash in hand | xxx |
| Bills payable | xxx | Cash at bank | xxx |
| Bank overdraft | xxx | Sundry debtors | xxx |
| Outstanding expenses | xxx | Bills receivable | xxx |
| Loans | xxx | Stock | xxx |
| Capital (balancing figure) | xxx | Furniture | xxx |
| | Machinery | xxx |
| | Land and building | xxx |
| | Prepaid expenses | xxx |
| Total | xxx | Total | xxx |
The capital figure is not given to you — you derive it. Write the total of the assets side, subtract the total of the known liabilities, and whatever remains is capital. That is why it is called the balancing figure.
Capital = Total Assets − Total Liabilities (excluding capital). This is the single result the whole statement exists to produce.
Now the accounting treatment, which is where students lose marks. A Statement of Affairs is not a ledger account, so strictly nothing is "debited" or "credited" in it — it is a statement, and capital is simply the difference. But the moment you use it to find profit, you do pass a journal entry, and that entry is the heart of the chapter.
To find profit or loss for the year, you compare closing capital with opening capital after adjusting for two things: additional capital introduced during the year (which increases capital but is not profit) and drawings (which decrease capital but are not a loss). The formula:
Profit (or Loss) = Closing Capital + Drawings − Additional Capital − Opening Capital
If the result is positive it is profit; if negative, it is loss. The journal entry to close the books and record the profit is:
| Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|
| Capital A/c | | Dr. | xxx |
| To Drawings A/c | | | xxx |
| (Drawings transferred to capital) | | | |
and then, for the profit:
| Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|
| Capital A/c | | Dr. | xxx |
| To Profit and Loss A/c | | | xxx |
| (Profit transferred to capital) | | | |
Read the direction carefully. Profit increases capital, so capital is credited — but in the closing entry above we are transferring the drawings out of capital, which is why Capital is debited there. Do not memorise the Dr/Cr blindly; ask which way capital is moving. Drawings reduce capital, so capital is debited. Profit increases capital, so capital is credited. That reasoning will never fail you.
The most common error is forgetting to add back drawings or subtract fresh capital before comparing the two capitals. If the owner withdrew ₹50,000 during the year, closing capital is understated by that amount — add it back. If he brought in ₹1,00,000 of new capital, that is not profit — subtract it. Skip either adjustment and your profit figure is wrong.
One more place the Statement of Affairs appears: when a partnership firm keeps incomplete records and you must find each partner's opening capital, you prepare a Statement of Affairs for the firm and then split the capital in the profit-sharing ratio, unless a separate capital figure is given for each partner.
Treat the Statement of Affairs as a Balance Sheet with one twist — capital is the missing number you calculate, not a figure you are handed. Once you internalise "assets minus liabilities equals capital," the whole incomplete-records chapter becomes a matter of comparing two such statements across two dates.
A quick worked shape, with no invented data, just to fix the method: suppose opening capital works out to ₹2,00,000 and closing capital to ₹2,60,000, drawings were ₹40,000 and no fresh capital was introduced. Then profit = 2,60,000 + 40,000 − 0 − 2,00,000 = ₹1,00,000. The ₹40,000 of drawings is added back because that money left the business but was not a loss — it was the owner taking his own money out.
That is the Statement of Affairs: a net-worth statement for a business that never kept proper books, and the tool that lets you manufacture a profit figure out of two snapshots of assets and liabilities.