Accountancy · Ch 10 — Accounts from Incomplete Records (Single Entry System)
Statement of Affairs Method — Ascertaining Profit
Statement of Affairs Method — Ascertaining Profit
Since a trader keeping incomplete records has no full ledger, the profit for a period cannot be worked out directly from a Trading and Profit and Loss Account the way it would be under double entry bookkeeping. Instead, the Statement of Affairs Method — also called the Net Worth Method — infers profit indirectly, by comparing how much the trader's OWN net worth (capital) has genuinely grown or shrunk over the period, after allowing for whatever capital the trader put in or took out along the way.
A Statement of Affairs is a list of a trader's estimated assets and estimated outside liabilities as on a given date, laid out exactly like a Balance Sheet, with the balancing figure representing the trader's own Capital (Net Worth) rather than any liability owed to an outsider:
Statement of Affairs as on [date]
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Creditors | xx | Cash in hand | xx |
| Bills Payable | xx | Cash at Bank | xx |
| Bank Overdraft | xx | Stock in trade | xx |
| Outstanding Expenses | xx | Debtors | xx |
| Bills Receivable | xx | ||
| Furniture / Machinery | xx | ||
| Prepaid Expenses | xx | ||
| Capital (Net Worth) — balancing figure | xx | ||
| Total | xx | Total | xx |
Capital (Net Worth) = Total Assets − Total Outside Liabilities
Two such statements are prepared — one as at the START of the accounting period and one as at its END — and profit is then inferred by comparing the two capital figures, adjusted for any capital the trader introduced or withdrew during the period:
Profit (before adjustments) = Capital at the end − Capital at the beginning − Additional Capital introduced during the year + Drawings during the year (cash and in kind)
Additional capital introduced during the year is DEDUCTED, because it increases the closing capital for a reason that has nothing to do with genuine trading profit; drawings during the year are ADDED BACK, because they reduce the closing capital for a reason that also has nothing to do with trading performance — the trader simply took resources out for personal use.
The statement of affairs method taught under the AP Intermediate second-year Accountancy course follows exactly this net-worth logic used in every mainstream Indian accounting curriculum, and it recurs frequently in BIEAP board examination papers because it blends a clear conceptual explanation with a fully worked numerical. …
A list of a trader's estimated assets and estimated outside liabilities as on a given date, laid out like a Balance Sheet, whose balancing figure represents the trader's own Capital (Net Worth) rather t …
Another name for the Statement of Affairs Method — profit is inferred from the genuine increase or decrease in the trader's own net worth (capital) between two Statements of Affairs, adjusted for capital intro …