Financial Accounting · Financial Statements from Incomplete Records

Statement of Affairs and Ascertainment of Profit by the Net Worth Method

Updated 10 October 2026 · Fact-checked

A statement of affairs lists a trader's assets and liabilities on one date, and the balancing figure is capital. In the net worth method, you prepare it at the start and end of the year. Closing capital minus opening capital, adjusted for drawings, capital introduced and interest on drawings, gives profit or loss.

Understand Statement of Affairs and Ascertainment of Profit

Some small traders do not keep full double-entry books. They may record only cash, or only a few personal notes. You cannot prepare a trial balance from such records. But the owner still needs to know whether the business made a profit.

The statement of affairs solves this. It is a list of assets and liabilities on a particular date, with the balancing figure shown as capital. Because the figures often come from memory, estimates and physical checks, it is not a ledger-based statement. That is the main difference from a balance sheet: a balance sheet is drawn from a trial balance of double-entry books, while a statement of affairs is built from information gathered about assets and liabilities, so capital is the balancing figure, not a ledger balance.

The logic of the net worth method (also called the capital comparison method) is simple. If the owner's capital grew during the year, the business earned a profit. But capital can also change for reasons that are not profit. The owner may take money out (drawings) or put new money in (capital introduced). So you remove those effects to find the true profit.

This method gives only the net profit or loss, and it is the profit before appropriations. Interest on capital is not an expense, so it does not reduce this profit. It is deducted only if you are asked to show the profit available after appropriation. Interest on drawings charged to the owner is added to the profit for the year.

The method does not give gross profit, expenses or a trading account. For those you need the conversion method from the later topics of this chapter. Examiners often ask for the profit by this method first, and then ask for further steps.

Key rules to remember

Statement of affairs: Capital = Total assets − Total outside liabilities; Capital is the balancing figure. Do the same at the opening and the closing date.
Increase or decrease in capital: Change in capital = Closing capital − Opening capital; A positive figure is an increase, a negative figure is a decrease. This is not yet the profit.
Net profit (net worth method): Net profit = Closing capital − Opening capital + Drawings − Additional capital introduced; If the result is negative, it is a net loss. This is profit before appropriations and before interest on drawings.
Profit with interest on drawings, and profit after interest on capital: Profit for the year = Net profit above + Interest on drawings charged. Profit after allowing interest on capital = Profit for the year − Interest on capital; Use only if the question gives interest. Interest on capital is an appropriation, so it is deducted only to show profit available after appropriation.
Capital reconciliation (check equation): Opening capital + Net profit + Capital introduced − Drawings = Closing capital; Use this equation to check your answer, or to find any one missing item.

How to solve Statement of Affairs and Ascertainment of Profit questions

Use this method for any question on the statement of affairs or profit by the net worth method.

1Read the question for the two dates. Identify what is given for the opening date and what for the closing date.
2Prepare the opening statement of affairs. List assets on one side and outside liabilities on the other. The balancing figure is opening capital.
3Prepare the closing statement of affairs the same way. Apply any adjustments given, such as depreciation, bad debts, provision for doubtful debts, outstanding and prepaid items. These change asset and liability values before capital is found.
4Find closing capital as total assets minus total outside liabilities. Do not treat a given capital figure as a liability.
5Compute the increase or decrease in capital: closing capital minus opening capital.
6Add drawings (cash and goods taken) and subtract any fresh capital introduced. Show this as a Statement of Profit or Loss with clear labels.
7Make the further adjustments asked for. Add interest on drawings charged to the owner to get the profit for the year. Deduct interest on capital only if asked for the profit after appropriation. Then state the final figure with a clear label.
8Cross-check using: opening capital + profit + capital introduced − drawings = closing capital.

Quickest way: Capital bridge in four lines

When to use it: Use when you already have clear opening and closing capital, or when only a short answer is needed and time is limited.

Write closing capital minus opening capital on the first line.
Add all drawings, including goods and personal expenses paid by the business.
Subtract all capital introduced, including any amount from sale of private assets put into the business.
Add interest on drawings if the question gives it. Deduct interest on capital only if asked for profit after appropriation. Then write the result as profit or loss.

Common mistakes in Statement of Affairs and Ascertainment of Profit

Treating the increase in capital as the profit without adjusting for drawings and capital introduced.
Students remember that profit equals the change in capital and stop there.
Fix: Always write the full bridge: change in capital + drawings − capital introduced. Check that each of the two items has been looked for in the question.
Adding capital introduced instead of subtracting it.
Capital introduced increases capital, so students feel it should be added to profit.
Fix: Remember that it raised closing capital but is not earned. So it must be removed from the increase in capital.
Showing capital as a liability on the statement of affairs.
Students copy the balance sheet layout, where capital appears on the liabilities side.
Fix: List only outside liabilities. Then find capital as the balancing figure, either as a separate line or as the difference.
Forgetting to make adjustments (depreciation, bad debts, provisions, outstanding expenses) in the closing statement.
Students use the values as given and miss later notes in the question.
Fix: Read all notes before starting. Tick off each note after using it. Adjustments to assets and liabilities flow into closing capital.
Deducting interest on capital from the profit and calling the result the profit.
Both interest items carry the word interest, so students apply both to the capital change without asking what each one is.
Fix: The net worth method gives profit before appropriations. Interest on capital is not an expense, so do not deduct it to find profit. Deduct it only to show profit after appropriation. Interest on drawings is charged to the owner and is added to the profit for the year.
Writing a statement of affairs and calling it a balance sheet, or the reverse.
Both show assets and liabilities, so the difference seems small.
Fix: Use the title the question gives. Remember the statement of affairs is not from a trial balance and capital is only a balancing figure.

Worked examples

Example 1

Rakesh Gupta keeps no proper books. On 1 April 2025 his assets were: cash ₹15,000, stock ₹1,20,000, debtors ₹80,000, furniture ₹60,000. His creditors were ₹55,000. On 31 March 2026 his assets were: cash ₹22,000, stock ₹1,40,000, debtors ₹95,000, furniture ₹54,000. His creditors were ₹60,000 and bank loan ₹30,000. During the year he withdrew ₹1,80,000 and introduced ₹25,000 as fresh capital. Find his profit for the year.

Show the solution

Opening assets = 15,000 + 1,20,000 + 80,000 + 60,000 = ₹2,75,000.
Opening outside liabilities = ₹55,000. Opening capital = 2,75,000 − 55,000 = ₹2,20,000.
Closing assets = 22,000 + 1,40,000 + 95,000 + 54,000 = ₹3,11,000.
Closing outside liabilities = 60,000 + 30,000 = ₹90,000. Closing capital = 3,11,000 − 90,000 = ₹2,21,000.
Increase in capital = 2,21,000 − 2,20,000 = ₹1,000.
Add drawings: 1,000 + 1,80,000 = ₹1,81,000.
Subtract capital introduced: 1,81,000 − 25,000 = ₹1,56,000.

Answer: Net profit for the year is ₹1,56,000.

Example 2

Meena Traders had capital of ₹3,50,000 on 1 April 2025. On 31 March 2026 the assets were: stock ₹2,10,000, debtors ₹1,90,000 (before adjustments), furniture ₹80,000 and cash ₹30,000. Liabilities were: creditors ₹1,10,000 and outstanding rent ₹10,000. Adjustments not yet made: bad debts of ₹10,000 are to be written off, and a provision for doubtful debts of 5% is to be made on the remaining debtors. Meena withdrew ₹1,20,000 and introduced ₹40,000 during the year. Interest on capital is allowed at 10% per annum on opening capital, and interest on drawings is charged at ₹4,000. Find the profit for the year and the profit after allowing interest on capital.

Show the solution

Debtors after bad debts = 1,90,000 − 10,000 = ₹1,80,000.
Provision at 5% = 9,000. Net debtors = 1,80,000 − 9,000 = ₹1,71,000.
Closing assets = 2,10,000 + 1,71,000 + 80,000 + 30,000 = ₹4,91,000.
Outside liabilities = 1,10,000 + 10,000 = ₹1,20,000.
Closing capital = 4,91,000 − 1,20,000 = ₹3,71,000.
Increase in capital = 3,71,000 − 3,50,000 = ₹21,000.
Add drawings: 21,000 + 1,20,000 = 1,41,000. Subtract capital introduced: 1,41,000 − 40,000 = ₹1,01,000.
Interest on drawings charged to Meena = ₹4,000. Add it to get the profit for the year: 1,01,000 + 4,000 = ₹1,05,000.
Interest on capital = 10% of 3,50,000 = ₹35,000. It is an appropriation, so deduct it only to show profit after appropriation: 1,05,000 − 35,000 = ₹70,000.

Answer: Profit for the year is ₹1,05,000 (₹1,01,000 from the capital bridge plus ₹4,000 interest on drawings). After allowing interest on capital of ₹35,000 as an appropriation, the profit remaining is ₹70,000.

Exam tips

In the MCQs, the usual trap is whether capital introduced is added or subtracted, and whether drawings are added back. Run the bridge formula slowly before choosing an option.
In the written answer, draw the opening and closing statements of affairs separately, with headings and dates. Step marks are given for each statement and for the capital figure.
Show a separate Statement of Profit or Loss with each adjustment on its own line. Do not do it as one mental calculation.
Read the question for the words goods withdrawn, salary paid from business, or sale of private assets. These are hidden drawings or hidden capital introduced.
When a missing capital figure is asked, use the check equation: opening capital + profit + introduced − drawings = closing capital.

Practice questions from Financial Statements from Incomplete Records

Statement of Affairs and Ascertainment of Profit in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

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 the trial balance of double-entry books, so it is a ledger-based statement. A statement of affairs is prepared from records, memory and estimates when books are incomplete, and capital is only the balancing figure. Its values may therefore be less exact.

How do I calculate profit from opening and closing capital?

Subtract opening capital from closing capital. Add drawings, because they reduced capital without being a loss. Subtract any capital introduced, because it raised capital without being profit. The result is the net profit, or a net loss if negative.

Does the net worth method give gross profit?

No. It gives only the net profit or loss for the year. To find gross profit and expenses, you need to prepare trading and profit and loss accounts using the conversion method.

Is capital shown as a liability in a statement of affairs?

Capital is not an outside liability. You find it as total assets minus outside liabilities. In an exam, show it as the balancing figure, usually on the liabilities side with the heading clear.