Finding Profit or Loss from Incomplete Records
Two methods to find out the Profit or loss from incomplete records
- Statement of Affairs methods
- Conversion into Double entry method
FIRST METHOD-Statement of Affairs method
In this method the capital of the business in the beginning of the period is compared with its capital at the end of the period. The difference represents profit or loss during the period.
- If the closing capital is more than opening capital, it shows a profit for the business.
- If the closing capital is less than opening capital, the business had a loss.
Opening balance of capital can be ascertained by preparing an ‘Opening Statement of Affairs’. Statement of Affairs is quite similar to a Balance Sheet (NOT exactly).
Click here to download FORMAT-STATEMENT OF AFFAIRS (pdf)
The difference between the assets and liabilities of the business is the OPENING CAPITAL of the business.
Capital = Assets – Liabilities
Similarly, prepare a ‘Closing Statement of Affairs’ to get the CLOSING CAPITAL of the business.
Adjustments in the Closing Capital
- Drawings are added to the Closing Capital.
- Additional Capital is deducted from the Closing Capital
Once the Closing Capital is calculated, the Opening Capital is deducted from it.
- If Closing Capital is MORE than Opening Capital, it is a PROFIT.
- If Closing Capital is LESS than Opening Capital, it is a LOSS.
Net Formula
Profit = Closing Capital + Drawings – Additional Capital – Opening Capital
Some Adjustment
The profit achieved from this method is not the final net profit.
Adjustments which result in increase in expenses or losses must be deducted from the Profit figure to get the accurate net profit. These are
- Depreciation
- Outstanding expenses
- Interest on Capital
- Interest on Loans
- Provisions for Doubtful debts
Adjustments which result in increase in incomes and gains must be added to the Profit figure. These are
- Prepaid expenses
- Interest on investments
At the end a final Statement of Affairs is prepared after these adjustments are done.
Note: When the Opening Capital is more than the Closing Capital, it shows a LOSS.
In this case, the adjustments which result in an increase in expense are added to the loss amount and the adjustments which result in increase income are deducted.