Statement of Affairs

Definition: A Statement of Affairs is a financial statement that summarizes the position of assets and liabilities to ascertain the profit or loss for the financial year under the Single Entry System.

It is also known as the ‘Capital Comparison‘ or ‘Net Worth Method‘.

Moreover, this statement is used to calculate the Opening and Closing Capital. For this, we prepare the summary of assets and liabilities at the beginning and at the end. However, any addition or withdrawal of capital needs adjustment.

It is similar to the Balance Sheet prepared in the Double Entry System.

Like a balance sheet, it has two sides, i.e. Assets and Liabilities. In the statement, the assets appear on the right-hand side, whereas the liabilities appear on the left.

But, the accuracy level of the Statement of Affairs is less compared to the Balance Sheet. This is because it retrieves data from incomplete records and estimates.

Content: Statement of Affairs

1. Format
2. Steps for Computing Profit
3. Statement of Affairs in Liquidation
4. Difference between Statement of Affairs and Balance Sheet
5. Example
6. Final Words

Format

Steps for Computing Profit

Companies can follow the steps given below to compute profit using the Statement of Affairs:

Step 1: Determine opening capital for the year. For this, put the opening balance of assets and liabilities in the statement of affairs.

Step 2: Now, calculate the closing capital for the year. Therefore, use the closing balance of assets and liabilities in the statement.

Step 3: After that, prepare a Statement of Profit and find the adjusted closing capital using the formula given below:

Step 4: Lastly, subtract the opening capital from the adjusted closing capital to calculate the profit or loss at the years end.

A company is at profit when the adjusted closing capital is more than the opening capital. Whereas, it suffers loss when opening capital exceeds adjusted closing capital.

Statement of Affairs in Liquidation

Besides the single-entry system, the statement of affairs is also prepared during insolvency. Here, the purpose of preparing this statement is to learn the company’s financial position.

During liquidation, a liquidator prepares the statement of affairs. Also, the companies can appoint a professional for this purpose during proceedings.

It consists of eight lists as follows:

List A – Assets not specifically Pledged
List B – Assets specifically Pledged/ Secured Liabilities
List C – Preferential Liabilities
List D – Debenture Holders
List E – Unsecured Creditors
List F – Preference Shareholders
List G – Equity Shareholders
List H – Deficiency/Shareholders

Difference between Statement of Affairs and Balance Sheet

As discussed earlier, this statement is similar to the balance sheet prepared in the double entry system. Yet, it differs from the balance sheet as the data is taken from multiple places other than ledgers.

The chart below explains the difference between both the statements.

Basis	Statement of Affairs	Balance Sheet
Intent	Find out the profit or loss by calculating opening and closing capital for the accounting period	Ascertain the businesses position at the end of financial year
Accounting System	Single Entry System	Double Entry System
Accounting Information	It retrieves data from incomplete records	Whereas, it takes information from the ledger balances
Reliability	It is less reliable as compared to Balance Sheet because it is prepared from incomplete records	However, the Balance Sheet is reliable as it is based on the double entry system and can be verified
Fictitious Assets	Not recorded in the statement	Goodwill and Prepaid Expenses appear on the balance sheet
Assets Valuation	Depicts both book and the market value of assets	Here, the accountants only considers the book value of assets
Verification	Verification is difficult as it is not prepared from the trail balance	The information can be verified from the trail balance, ledgers, etc
Missing Items	Difficult to identify	Easily identified
Financial Position	Estimated financial position	Actual financial position of the business
Balance	The balance between the assets and liability side is capital	In this statement, assets are almost equal to liabilities; hence it doesn't show any balance
Profit Calculation	Profit is calculated using the statement of affairs	Profit and loss accounts compute the profit or loss for the year
Records	Incomplete records	Complete records

Example

Rio commenced his shirt manufacturing business in 1996 with a capital of ₹ 25000/-. He used to maintain his accounts as per the Single-Entry System.

He introduced additional capital of ₹ 7500/- and made a drawing of ₹ 5000/- during the year.

At the year’s end, the value of his assets and liabilities were:

• Creditors – ₹ 45000/-
• Debtors – ₹ 62800/-
• Stock – ₹ 12375/-
• Cash at bank –₹ 12490/-

Estimate the amount of profit or loss he earned during the year.

Solution:

Statement of Affairs

Statement of Profit

Final Words

To sum up, a Statement of Affairs is one of the methods for finding profit or loss using incomplete records. Also, it is a summary of assets and liabilities under a single-entry system. And the difference between both columns is the capital. Thus, it analyses the amount of change in the capital during the financial year.