Statement of Affairs Method 🕵️♂️
Also known as: Net Worth Method or Capital Comparison Method.
Logic: If you started the year with ₹1 Lakh (Opening Capital) and ended with ₹1.5 Lakhs (Closing Capital), and you didn't add any new money, then the extra ₹50,000 must be Profit.
Formula:
Profit = Closing Capital - Opening Capital
(Adjusted for Drawings and Additional Capital).
Step 1: Prepare Statement of Affairs 📝
It looks EXACTLY like a Balance Sheet.
- Right Side: Assets (Cash, Stock, Debtors, Furniture).
- Left Side: Liabilities (Creditors, Loans).
- Balancing Figure: Capital.
We prepare TWO statements:
- Opening Statement of Affairs (at start of year) -> To find Opening Capital.
- Closing Statement of Affairs (at end of year) -> To find Closing Capital.
Step 2: Statement of Profit & Loss 📊
| Particulars | Amount (₹) |
|---|---|
| Closing Capital (End of year) | 1,50,000 |
| Add: Drawings (Money taken for personal use) | 20,000 |
| Less: Additional Capital (Money introduced) | (10,000) |
| Adjusted Closing Capital | 1,60,000 |
| Less: Opening Capital (Start of year) | (1,00,000) |
| Gross Profit (Before adjustments) | 60,000 |
| Less: Expenses/Depreciation/Bad Debts | (5,000) |
| Net Profit | 55,000 |
Drawings reduce your Closing Capital. To find the true profit generated by the business, we must add back the money you took out. Imagine Profit as water in a bucket. Drawings is a leak. To measure total water poured in, we measure current water + leaked water.
Quiz Time! 🎯
Test Your Knowledge
Question 1 of 5
1. Statement of Affairs is prepared to find out:
💡 Final Wisdom: "It's a reverse calculation. We look at where we ended up (Wealth) to figure out how well we ran (Profit)." 🏃♂️💰
Next up: Conversion Method - The Detective Work! 🕵️♂️