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.

Following steps have to be taken

• Opening Capital is calculated by preparing an Opening

Statement of Affairs.
• Cash Book is updated by adding all the missing information.
Opening and closing cash balance has to be ascertained.
• Total Debtors Account has to be prepared.

CLICK HERE TO DOWNLOAD FORMAT-TOTAL DEBTORS ACCOUNT

(pdf)

• Total Creditors Account has to be prepared.

CLICK HERE TO DOWNLOAD FORMAT-TOTAL CREDITORS ACCOUNT
(pdf)

• Final Accounts are prepared i.e. Trading and Profit & Loss
Account and Balance Sheet from the information collected in
Steps 1 to 4.

Finding Missing information using Accounting

Ratios
If Gross Profit is expressed as a percentage of the cost price. In
order words, Mark up is given.

Mark up = Gross Profit/Cost price

Example

Calculate the Gross profit if the Sales = $54,000, Mark up is 20%.

Goods costing $100 has been sold at $120.
If sales are $54000 then the Gross Profit = 20/120 * 54,000= $9000

If Gross Profit is expressed as a percentage of selling price i.e.

Gross profit margin.

Gross profit margin = Gross profit/ Selling price

If Stock turnover ratio is stated

Stock turnover is the rate at which the stock of goods is sold.
Stock turnover= Cost of goods sold/ Average stock

Example
Cost of goods sold= $3000
Opening Stock= $400
Closing Stock = $600

$400+ =
Average $600 $
Stock 5
= 2 0
0

Therefore, Stock turnover = $3000/$500 = 6 times per year or 2

months