Accounting · Accounts from Incomplete Records

Statement of Affairs and Ascertainment of Profit (Net Worth Method)

Updated 1 October 2026 · Fact-checked

A statement of affairs lists a business's assets and liabilities at a date when full records are missing. Capital is the balancing figure. To find profit by the net worth method, compare closing and opening capital, then adjust for drawings, fresh capital introduced and any interest on capital already credited to capital.

Understand Statement of Affairs and Ascertainment of Profit

Some small traders do not keep double entry books. They may note down only cash receipts, or nothing at all. At year end they still need to know their profit. This is where incomplete records (single entry) come in.

A statement of affairs is a list of assets and liabilities on a given date. It looks like a balance sheet, but it is not prepared from a ledger or trial balance. You build it from memory, documents, bank statements and physical checks. So it may contain estimates, and it is not a proof of accuracy.

Because the books are incomplete, capital is a balancing figure: Capital = Total assets − Total outside liabilities. In a balance sheet, capital comes from the books and the two sides are expected to agree. Here, you find capital from the difference.

The net worth method (also called the capital comparison method or the statement of affairs method) finds profit without a trading account. You prepare a statement of affairs at the start and at the end of the year. The rise in capital shows the profit, after you remove the effect of owner's dealings: drawings taken out and new capital put in.

Do not confuse it with the conversion method. That is a separate method, in which single entry records are converted into double entry by preparing the ledger accounts and a trial balance.

The result is shown in a statement of profit or loss. It gives only a total figure. It does not show gross profit or individual expenses. For that you need the other methods (total accounts and final accounts from incomplete records).

Key rules to remember

Capital from statement of affairs: Capital = Total assets − Total outside liabilities; Use it for both opening and closing statements. Capital is the balancing figure.
Increase in capital: Increase (or decrease) in capital = Closing capital − Opening capital; This is not yet the profit. Adjust it as shown in the next formula.
Profit by net worth method: Profit = (Closing capital − Opening capital) + Drawings − Fresh capital introduced; If the answer is negative, it is a loss. Drawings include cash and goods taken for personal use.
Adjusted profit with interest: Profit before appropriation = (Closing capital − Opening capital) + Drawings + Interest on drawings debited to capital − Fresh capital introduced − Interest on capital credited to capital; Use only if the question asks for interest. Interest on capital is an appropriation, not an expense, so it is not deducted from profit before appropriation. If it was already credited to capital, it is inside closing capital, so subtract it to get profit before appropriation. If it was not credited to capital, make no adjustment. If interest on drawings was debited to capital, add it back along with drawings. Use the rate and period given.
Statement of Profit or Loss (format): Closing capital − Opening capital = Increase; + Drawings; + Interest on drawings (if debited to capital); − Capital introduced; − Interest on capital (only if already credited to capital); = Profit before appropriation; Present it in this order so the examiner can follow your steps. Show a nil where an item does not apply.

How to solve Statement of Affairs and Ascertainment of Profit questions

Use this method for any net worth question. Write each stage clearly. The examiner gives marks for the format and the working.

1Read the question and mark what is given for the opening date and what is given for the closing date. Note drawings, fresh capital and adjustments.
2Prepare the opening statement of affairs. List assets on one side and liabilities on the other. Opening capital = assets − liabilities. If opening capital is given, still show it.
3Make adjustments to the closing figures. Examples: depreciation on assets, bad debts, a provision for doubtful debts, outstanding expenses, prepaid expenses, and stock valued at cost or market value, whichever is lower.
4Prepare the closing statement of affairs with the adjusted values. Find closing capital as the balancing figure.
5Prepare the statement of profit or loss: closing capital − opening capital, then add drawings, then subtract fresh capital introduced.
6Make any further adjustments the question mentions. Examples: interest on drawings debited to capital (add back), manager's commission, or a correction of an earlier error. Treat interest on capital as an appropriation: if it was already credited to capital, subtract it to get profit before appropriation; if it was not credited, make no adjustment.
7State the final profit or loss clearly, and show your working notes for any figure that needed calculation.

Quickest way: Four-line capital comparison

When to use it: Use when the question gives full asset and liability lists for both dates and wants only the profit. It saves time because you do not draw full two-sided statements.

For each date, write assets total and liabilities total in one line each, then capital as the difference.
Check that you included every item, such as cash in hand, bank overdraft, outstanding expenses and accrued income.
Write the profit line directly: increase in capital + drawings − fresh capital.
If the question asks for the statements of affairs themselves, do not use this shortcut. Draw them in full, because the format carries marks.

Common mistakes in Statement of Affairs and Ascertainment of Profit

Forgetting to add back drawings
Students stop once they find the increase in capital. They treat it as profit.
Fix: Drawings reduced capital, so add them back. Remember: profit = change in capital + drawings − fresh capital.
Subtracting capital introduced the wrong way round
Students mix up the signs for drawings and new capital.
Fix: Fresh capital raised closing capital without being profit, so subtract it. Check by asking: did this item change capital without being earned?
Treating capital as a given figure instead of a balancing figure
Students are used to balance sheets where capital is read from the books.
Fix: Always compute capital as assets − liabilities, unless the question gives it directly.
Not adjusting closing figures for depreciation, bad debts and provisions
Students copy the values given and miss the later notes in the question.
Fix: Read all the notes first. Apply each adjustment to the closing statement before finding closing capital.
Including personal assets or liabilities of the owner
The question lists all things the person owns, including a private house.
Fix: Under the business entity concept, include only business items. Leave out private assets and private liabilities.
Calling the result gross profit or showing it as a trading account figure
Students confuse this method with the trading account approach.
Fix: Label the result as profit or loss for the year. The net worth method does not give gross profit.

Worked examples

Example 1

On 1 April 2023 Ravi's assets were: cash ₹10,000, stock ₹60,000, debtors ₹40,000, furniture ₹30,000. His liabilities were creditors ₹25,000. On 31 March 2024 his assets were: cash ₹15,000, stock ₹70,000, debtors ₹55,000, furniture ₹27,000, and creditors were ₹30,000. During the year Ravi withdrew ₹24,000 and brought in additional capital of ₹20,000. Find his profit for the year.

Show the solution

Opening assets = 10,000 + 60,000 + 40,000 + 30,000 = ₹1,40,000.
Opening capital = 1,40,000 − 25,000 = ₹1,15,000.
Closing assets = 15,000 + 70,000 + 55,000 + 27,000 = ₹1,67,000.
Closing capital = 1,67,000 − 30,000 = ₹1,37,000.
Increase in capital = 1,37,000 − 1,15,000 = ₹22,000.
Add drawings: 22,000 + 24,000 = ₹46,000.
Subtract capital introduced: 46,000 − 20,000 = ₹26,000.

Answer: Profit for the year = ₹26,000.

Example 2

Meena's capital on 1 April 2023 was ₹2,00,000. On 31 March 2024 her assets were: cash ₹8,000, stock ₹90,000, debtors ₹1,00,000 (before writing off bad debts of ₹5,000) and plant ₹1,20,000 (before depreciation). Her liabilities were creditors ₹60,000 and outstanding rent ₹4,000. She took ₹30,000 drawings during the year. Before finalising, adjust: write off bad debts ₹5,000 and charge depreciation of ₹12,000 on plant. Find the profit or loss.

Show the solution

Adjust debtors: 1,00,000 − 5,000 = ₹95,000.
Adjust plant: 1,20,000 − 12,000 = ₹1,08,000.
Closing assets = 8,000 + 90,000 + 95,000 + 1,08,000 = ₹3,01,000.
Outside liabilities = 60,000 + 4,000 = ₹64,000.
Closing capital = 3,01,000 − 64,000 = ₹2,37,000.
Increase in capital = 2,37,000 − 2,00,000 = ₹37,000.
Add drawings: 37,000 + 30,000 = ₹67,000. No fresh capital was introduced, so nothing to subtract.

Answer: Profit for the year = ₹67,000.

Exam tips

Show both statements of affairs in full when asked. Marks are given for each item and for the capital figure.
Read every note at the bottom of the question before starting. Adjustments for depreciation, bad debts and provisions are where most marks are lost.
Write the profit statement in a fixed order: closing capital, opening capital, drawings, fresh capital. Never skip a line, even if the amount is nil.
If interest on capital or drawings is asked, calculate it in a separate working note and show the rate and period. Interest on capital is an appropriation: subtract it only if it was already credited to capital; if it was not credited, make no adjustment.
Check the answer: if capital rose but drawings were large, profit should be higher than the rise. If capital was introduced, profit should be lower.

Practice questions from Accounts from Incomplete Records

Statement of Affairs and Ascertainment of Profit: frequently asked questions

What is the difference between a statement of affairs and a balance sheet?

A balance sheet is prepared from double entry books and a trial balance. A statement of affairs is prepared from incomplete records, memory and documents, and capital is the balancing figure. Because of this, it may contain estimates and does not prove accuracy.

What is the net worth method?

It finds profit by comparing capital at the start and end of the year. You then adjust for drawings and new capital. It is also called the capital comparison or statement of affairs method. It is different from the conversion method, which converts single entry into double entry.

Why do we add drawings to find profit?

Drawings reduce the owner's capital but are not business expenses. To see what the business actually earned, you add them back to the change in capital.

Does the net worth method give gross profit?

No. It gives only the overall profit or loss for the period. For gross profit and expense details you need a trading account and a profit and loss account prepared from the available data.