Statement of Affairs Method:
1. Under this method, statements of assets and liabilities (called Statement of Affairs) as at the beginning and at the end of the relevant accounting period are prepared to ascertain the amount of change in the capital during the period.
2. The difference between the totals of the two sides (balancing figure) is the capital.
3. The amounts of items like fixed assets, outstanding expenses, bank balances, etc. are ascertained from the relevant documents and physical count.
4. A Statement of Profit and Loss is prepared to ascertain the exact amount of profit or loss made during the year. This is done by adjusting the difference in the capital at the beginning and at the end of the accounting period for drawings made or fresh capital introduced by the proprietor during the year.
Example 1: Mr. Virender runs a small printing firm. He was maintaining only some records, which he thought, were enough for running his business. On April 01, 2012 he had the following assets and liabilities: Printing Press Rs. 4,60,000, Buildings Rs. 2,50,000, Stock Rs. 80,000, Cash at bank Rs.10,600, Cash in hand Rs. 2,980, Dues from customers Rs. 40,350, Dues to creditors Rs. 70,340 and Outstanding wages Rs. 10,000. He withdrew Rs. 10,000 every month for meeting her personal expenses. He had also introduced Rs. 39,000 during the year as additional capital. On March 31, 2013 his position was as follows: Press Rs.5,00,000, Buildings Rs. 2,00,000, Stock Rs. 70,000, Cash at bank Rs. 40,380, Cash in hand Rs.15,340, Dues from customers Rs. 27,210, Dues to creditors Rs. 55,680. Calculate the profit made by Mr. Virender during the year using statement of affairs method.