Ascertainment of Profit or Loss

Every firm wishes to know the results of its operations, so as to judge its efficiency and its

successes and failures. This creates the need to prepare financial statements that disclose:

• (a) the profit made or loss sustained during a given period; and
• (b) the amount of assets and liabilities as at the closing date of the accounting period.

The problem, then, is how to use the information available in incomplete records to work out the

profit or loss for the year and the financial position at the year end. This can be done in two ways:

1. Statement of Affairs method (net worth method). Prepare a statement of affairs at the beginning and at the end of the accounting period, and find the change in capital. …