When companies keep detailed financial records with a single entry system, the final records are an incomplete accounting. When this occurs, the statement of affairs method can be used to determine profit and loss. In order to complete the statement of affairs method, a statement of affairs for the beginning of the period and a statement of affairs for the end of the period are required.
Statement of Affairs Distinctions
A statement of affairs is used when accounts are maintained with a single entry accounting system. They are generally considered to be unreliable and are not usable documentation for loan purposes because of the liabilities associated with single entry systems. Statements of affairs are educated estimates of business standing and therefore yield an educated guess as to the profit or loss a company experiences.
Opening Statement of Affairs
An opening statement of affairs should be compiled at the beginning of the accounting period. The standard format of a statement of affairs is similar to a balance sheet. Liabilities and assets are calculated and listed. It should ascertain opening capital using the differences between assets and liabilities of the business at that time. It is essential that the opening statement of affairs be as accurate as possible.
Closing Statement of Affairs
The closing statement of affairs should be calculated at the end of the set accounting period. In order to accurately ascertain the closing capital, the closing statement of affairs should consider all adjustments, such as depreciation, interest and provisions.
The closing capital will now be adjusted for calculation. Add all drawings of the period to the closing capital. Deduct any additional capital that was added during the accounting period. This provides an adjusted closing capital.
Statement of Affairs Method
Now that both statements of affairs have been compiled, they can be used to ascertain profit and loss. The calculation is performed using the adjusted closing capital and the opening capital. Subtract the open capital from the adjusted closing capital. If the amount is positive, it represents a profit for the period. If a negative amount is calculated, it represents the company's loss for the period.