How to prepare a statement of affairs

Step by step

1. List all the assets. Record every asset at its value: non-current assets, inventory, receivables and cash.
2. List all the liabilities. Record amounts owed, such as payables and loans.
3. Find capital as the difference. Capital equals total assets less total liabilities at that date.
4. Do this at the start and end. Prepare a statement of affairs at both the beginning and the end of the period.
5. Adjust for drawings and capital introduced. Profit = closing capital + drawings − capital introduced − opening capital.

Worked example

Assets RM50,000 less liabilities RM12,000 give capital of RM38,000. Comparing the start and end of the year, adjusted for drawings, gives the profit.

Understanding the method

Some traders keep no full double-entry records, so there is no ledger to take a capital figure from. The accounting equation still holds: what the business owns, less what it owes, belongs to the owner. That is capital.

A statement of affairs applies this equation to incomplete records. It looks like a statement of financial position, but its main purpose is to find a capital figure that was never recorded.

You need it at two dates. If you know capital at the start and end of the year, the change must be explained by what the owner put in, took out and earned.

Extra capital raises closing capital without being profit. Drawings lower it without being a loss.

So profit = closing capital + drawings − capital introduced − opening capital.

Exam information is scattered. You may piece assets and liabilities together from a bank summary, a list of unpaid suppliers, an inventory count and amounts owed by customers.

Some assets have to be worked out first. Sort every piece of information into asset, liability, drawings or capital introduced before you start.

Here is an example. Mrs Chan's assets at the start of the year were fixtures RM20,000, inventory RM8,000, trade receivables RM5,000 and bank RM3,000, a total of RM36,000. She owed suppliers RM6,000.

Opening capital is 36,000 − 6,000 = RM30,000.

At the year end her assets are fixtures RM18,000 (after depreciation), inventory RM10,000, receivables RM7,000 and bank RM4,000, a total of RM39,000. She owes suppliers RM5,000, so closing capital is RM34,000. During the year she took RM12,000 in drawings and put in RM3,000 of new capital.

Profit = 34,000 + 12,000 − 3,000 − 30,000 = RM13,000. Her stake grew by RM4,000. But she took out RM12,000 and put in only RM3,000, so the business must have earned RM13,000.

To check, work backwards: opening capital 30,000 + profit 13,000 + capital introduced 3,000 − drawings 12,000 = RM34,000, which is the closing capital. If the owner drew a lot and capital still rose, a negative profit signals an error.

Common mistakes: mixing up capital introduced and drawings, and putting drawings into the list of assets or liabilities (they belong only in the profit working). Others are valuing fixtures at cost when depreciation applies, treating a loan from the owner as capital instead of a liability, and swapping opening and closing capital. Label each statement with its date.

If incomplete records questions feel like a pile of loose figures, we can help. One of our teachers can show you how to sort them into a statement of affairs and then check your profit with you. Book a trial class

Related skills

• How to prepare accounts from incomplete records
• How to prepare a statement of financial position
• How to calculate mark-up and margin

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.