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.

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.

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:

and then, for the profit: