Difference between Statement of Affairs and Balance Sheet
Both the Statement of Affairs and the Balance Sheet represent the assets and liabilities of a business entity as of a specific date. However, there are some significant differences between the two. Let’s find them out in the discussion below.
The main difference between the two (Statement of Affairs and Balance Sheet)
In contrast to a balance sheet, which is prepared from records maintained on the basis of a double entry system of book-keeping and where all assets and liabilities can be verified from the ledger accounts, a statement of affairs is prepared from incomplete records in which most assets are recorded on the basis of estimates. As a result, a balance sheet is more dependable than a statement of affairs.
The objective of making a statement of affairs is to determine the amount of capital account as of a specific date, whereas a balance sheet is made to determine the financial situation of the business as of that day. The amount of capital account in a statement of affairs is denoted by the difference between the two sides (balancing figure).
Further, in a statement of affairs, an item of assets or liabilities may be omitted and this omission may go unnoticed since the effect of the omission will get offset in the capital account balance and the total of both sides of the statement will match. In the case of a balance sheet, however, the probability of any item being omitted is unlikely since, in the event of an omission, the balance sheet will not agree and the accountant will track the missing item from accounting records.
Why is a Statement of Affairs prepared? Breaking down its need
It is well known that the double entry system of accounting is used by the majority of businesses. But sometimes small businesses and professions that cannot afford to hire qualified accountants typically use the single entry system of accounting. They just maintain a cash book and the personal accounts of customers and suppliers under this system. As a result, they keep only a partial and incomplete record of their transactions. This makes determining their company’s profit or loss and preparing proper final accounts difficult.
Due to the lack of maintenance of all accounts, it is not possible to prepare a Balance Sheet. As a replacement, a Statement of Affairs is usually prepared based on book values of some accounts that are maintained, estimates of capital, judgment from available records, and based on the proprietor’s memory.
The businesses adopting a single entry system usually follow the net worth method to determine profit. The net worth method believes that the profit or loss for a year can be determined by any increase or decrease in the net worth (capital) of a business. For instance, an individual starts his business with a capital of $10,000 on January 1, 2021. On December 31 2021 when he closes his books, he finds that his capital has increased to $18,000. This shall mean that he made a profit of $8,000. Conversely, had the capital been $6,000 on December 31, 2021, it would have signified a loss of $4,000. However, bear in mind that this estimated profit/loss might need to be adjusted for additional capital brought or drawings made by the owner.
Closing Capital – Opening Capital + Drawings – Additional capital introduced = Profit/Loss
The net worth (capital) is calculated by preparing two separate statements of assets and liabilities (called “Statement of Affairs”) at the beginning and at the end of the year. The opening and closing capital are usually the balancing figures in such statements. That is, in each of them, the difference between the totals of the two sides (assets side and liabilities side) is the capital (balancing figure). The opening Statement of Affairs will give the opening capital and the closing Statement of Affairs will give the closing capital. For this purpose, you may get some figures of assets and liabilities from the accounts that are maintained, and for the rest, you have to rely on vouchers, supporting documents, and physical assessment. Cash and bank balances will be shown from Cash Book.
Thus, when a company’s records are disorganized and incomplete, the statement of affairs is utilized to compute capital. Thereafter, any cash withdrawn from the business is added back to the difference between the closing and opening capital, and any extra capital introduced during the year is deducted to determine profit and loss for the period.
Format of Statement of Affairs
The design of the statement of affairs is similar to that of the balance sheet, as shown below:
Statement of Affairs as on………..
|Liabilities||Amount (Rs.)||Assets||Amount (Rs.)|
|Capital (Bal. Fig.)||XXXXX||Building||XXXXX|
|Loans, Bank overdraft||XXXXX||Machinery||XXXXX|
|Outstanding expenses||XXXXX||Sundry debtors||XXXXX|
|Loans and advances||XXXXX|
|Cash and bank||XXXXX|
Comparison table showing differences b/w Statement of Affairs and Balance Sheet
The following table shows the major points of difference between a Statement of Affairs and a Balance Sheet:
|Basis||Statement of Affairs||Balance Sheet|
|Reliability||It is based on transactions that have been partially recorded using double entry book-keeping and partly using single entry book-keeping. The majority of assets are recorded using estimates, assumptions, and information collected through memory rather than documents.||It is based on transactions that are strictly recorded using double entry book-keeping; each item in the balance sheet may be confirmed using the corresponding subsidiary books and ledger. As a result, the balance sheet is not only reliable but also dependable.|
|Capital||In this statement, capital is just a balancing figure representing the excess of assets over external liabilities. As a result, assets and liabilities do not have to be equal.||Because capital is determined from the capital account in the ledger, the total of the assets side would always equal the total of the liabilities side.|
|Omission||Because this statement is generated on the basis of insufficient records, locating assets and liabilities that have been omitted from the books is extremely difficult.||Because all assets and liabilities are accurately recorded, there is no possibility of an omission of any item. Furthermore, because the balance sheet shall not agree, it is simple to find the missing items.|
|Valuation method||Because asset valuation is typically done in an arbitrary manner, no technique of valuation is shown.||Assets are valued on a scientific basis, which is the original cost in the case of new assets and the depreciated value on the basis of cost minus depreciation to date for used assets. Any change in the valuation approach is adequately disclosed.|
|Purpose||The purpose of preparing this statement is to calculate capital figures at the beginning and end of the accounting period. This, in turn, helps to determine the profit or loss for the year.||The purpose of generating a balance sheet is to determine the true financial position of an entity on a specific date.|
|Usefulness||It helps an entity to determine its profit or loss when it is difficult to convert incomplete records into the double entry system.||A balance sheet depicts the financial health of a business and hence, is commonly used by stakeholders for making important decisions concerning the entity’s profitability and future growth potential.|
|Suitability||The preparation of a statement of affairs is suitable only for small and tiny businesses where the volume of transactions is less.||The preparation of a balance sheet is suitable for all types of businesses, whether small or big.|
The final accounts are not easy to produce in a single entry system. Only once the available information has been turned into double entry records and the missing values have been discovered can the Trading and Profit & Loss Account be prepared. Also, the figures for assets and liabilities derived from incomplete records are unreliable since they are based on estimations. As a result, the statement of assets and liabilities prepared at the end of the accounting period under this method is referred to as the “Statement of Affairs” rather than the “Balance Sheet.”
You might also like: