When a full set of accounting records is maintained the owner of the business has all the information about the assets, liabilities, revenue and expenditure. This makes the preparation of the financial statements relatively easy. Sometimes small businesses do not maintain a full set of accounting records and therefore a trial balance cannot be drawn. Therefore, it becomes difficult to prepare the financial statement.

If the only records available are the assets and liabilities of the business then it Is impossible to prepare the income statement to show profit / loss. These assets and liabilities are listed in a statement of affairs to show capital at start and capital at end. The change in the capital during the accounting period is either profit or loss. Capital increases when a profit is made and decreases when there is a loss.

In general, the following statement can be prepared to show profit / loss:

 Statement of profit and loss \$ Capital at end *** Less capital at start (***) Less additional capital (***) Add drawings *** Profit / (Loss) ***

Note: Capital at end and capital at start is calculated using statement of affairs.

Worked Example

The following information is available from the books of an inexperience businessman:

 1st Jan 2015 31st December 2015 \$ \$ Non-current assets 44 000 44 000 Provision for depreciation on NCA 11 000 ? Current assets 12 500 13 500 Current liabilities 11 200 12 100 Non-current liabilities - 5 600

1. Non-current assets are depreciated at 25% using the reducing balance method.
2. Additional capital brought in by the owner during the year amounted to \$ 1 600
3. Drawings by proprietor during 2015 amounted to \$ 13 000.

Required

1. Statement of affairs as at 1st January 2015 and as at 31st December 2015.
2. Statement of profit or loss as at 31st December 2015.

Solution

Step 1 – Calculate capital at start

 Statement of affairs as at 1st January 2015 \$ \$ Assets: Non current assets (44 000 – 11 000) 33 000 Current Assets 12 500 45 500 Less Liabilities Current Liabilities 11 200 Non current liabilities - (11 200) Capital at start 34 300

Step 2 – Calculate capital at end

Depreciation   =          25 / 100 * (44 000 – 11 000) =          8 250

Acc. Depn.       =          11 000 + 8 250                        =          19 250

 Statement of affairs as at 31st December 2015 \$ \$ Assets: Non current assets (44 000 – 19 250) 24 750 Current Assets 13 500 38 250 Less Liabilities Current Liabilities 12 100 Non current liabilities 5 600 (17 700) Capital at end 20 550

Step 3 – Calculate profit / loss

 Statement of profit and loss \$ Capital at end 20 550 Less capital at start (34 300) Less additional capital (1 600) Add drawings 13 000 Loss for the year (2 350)

1. The following information is available from the books of an inexperience businessman:

 1st Jan 2015 31st December 2015 \$ \$ Non current assets 50 000 50 000 Provision for depreciation on NCA 10 000 ? Current assets 13 500 9 500 Current liabilities 8 200 5 100 Non current liabilities - 7 500

1. Non current assets are depreciated at 20% using the reducing balance method.
2. Additional capital brought in by the owner during the year amounted to \$ 2 000
3. Drawings by proprietor during 2015 amounted to \$ 11 000.

Required

1. Statement of affairs as at 1st January 2015 and as at 31st December 2015.
2. Statement of profit or loss as at 31st December 2015.

2. The following information is available from the books of an inexperience businessman:

 1st Jan 2015 31st December 2015 \$ \$ Non current assets 60 000 60 000 Provision for depreciation on NCA 14 000 ? Current assets 5 500 8 500 Current liabilities 1 200 2 100 Non current liabilities - 3 600

1. Non current assets are depreciated at 10% using the reducing balance method.
2. Additional capital brought in by the owner during the year amounted to \$ 600
3. Drawings by proprietor during 2015 amounted to \$ 7 000.

Required

1. Statement of affairs as at 1st January 2015 and as at 31st December 2015.
2. Statement of profit or loss as at 31st December 2015.

3. The following information is available from the books of an inexperience businessman:

 1st Jan 2015 31st December 2015 \$ \$ Non current assets 20 000 20 000 Provision for depreciation on NCA 8 000 ? Current assets 1 500 18500 Current liabilities 1 700 1 100 Non current liabilities - 500