The statement of affairs method finds profit without a full set of books. You work out capital at the start and the end of the year from assets and liabilities, then use the change in capital to find profit.
This lesson opens incomplete records. It draws on the accounting equation, which says capital equals assets minus liabilities.
How do you find capital from assets and liabilities?
List every asset, total it, list every liability, total it, and subtract. The answer is the owner’s capital on that date.
Do this twice, once for the first day of the year and once for the last day. Each list is called a statement of affairs.
Worked example: Puan Rosnah’s tailoring stall
This is a worked example. Records were lost in a flood, but the owner remembers her balances.
| Item | 1 January (RM) | 31 December (RM) |
|---|---|---|
| Equipment | 18 000 | 16 500 |
| Inventory | 7 000 | 8 000 |
| Receivables | 3 500 | 4 200 |
| Cash | 1 500 | 2 300 |
| Payables | 4 000 | 3 200 |
Step 1: opening capital. Assets are 18 000 + 7 000 + 3 500 + 1 500 = RM30 000. Liabilities are RM4 000. Capital is RM26 000.
Step 2: closing capital. Assets are 16 500 + 8 000 + 4 200 + 2 300 = RM31 000. Liabilities are RM3 200. Capital is RM27 800.
Step 3: change in capital. 27 800 − 26 000 = RM1 800 increase.
Step 4: add back drawings. She took RM9 000 out for household use. Profit is 1 800 + 9 000 = RM10 800.
The business grew only slightly on paper, yet earned RM10 800, because most of the profit was taken out.
The mistake that hides profit
A student stops at the change in capital and calls RM1 800 the profit. The working looks finished and every earlier figure is right.
| Line | Wrong | Right |
|---|---|---|
| Change in capital | RM1 800 | RM1 800 |
| Drawings added back | not done | RM9 000 |
| Profit | RM1 800 | RM10 800 |
The fix is a habit: before writing “profit”, ask two questions. Did the owner take anything out? Did the owner put anything in? Drawings are added back, capital introduced is deducted.
Check yourself
Opening capital is RM15 000 and closing capital is RM18 500. During the year the owner withdrew RM7 200 and put in RM2 000 of personal savings. Find the profit.
Answer
Change in capital: 18 500 − 15 000 = RM3 500.
Add back drawings: 3 500 + 7 200 = RM10 700.
Deduct capital introduced, because it raised capital without being earned: 10 700 − 2 000 = RM8 700.
What to study next
Profit is half the story. The next lesson, reconstructing sales and purchases from control information, shows how to rebuild the trading figures themselves.
For the adjustments to capital in more detail, see calculating profit after capital adjustments. If you want a teacher to go through your own questions, see online one-to-one Accounting tuition.