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Net Worth Method or Statement of Affairs Method



To ascertain profit, according to Single Entry System, it is necessary to prepare a statement of affairs at the end of the year and also at the beginning of the year, if not already prepared. Like the Balance Sheet, the statement of affairs has two sides - the right hand side for assets and the left hand side for liabilities. To prepare the statement, information has to be collected from various sources. Information about assets will be available from the Cash book, the Personal Ledger etc. The value of the closing stock will be ascertained by preparing stock sheets and valuing the stock in hand, at lower of cost and market value. If the trader has any other assets, like furniture, machinery etc., the value will be ascertained and included among the assets. The business is likely to have full knowledge of the amounts owing to third parties. The difference between the total of assets and liabilities will be capital.

CAPITAL = TOTAL ASSETS - LIABILITIES

 

For ascertaining profit the capital in the beginning of the year must also be ascertained, if necessary, by preparing a statement of affairs as at the beginning of the year. If the capital at the end of the year exceeds that at the beginning, we can say that there has been a profit. If on the other hand, the capital in the beginning was more that that at the end, there must have been a loss. However, two adjustments must be borne in mind for ascertaining profit.
  1. Adjustments in capital introduced - If the proprietor brought in some additional capital during the year, it should be deducted from the capital at the end (since this increase is not due to profit but fresh introduction of capital); and
  2. Adjustments for Drawings - The drawings of the proprietor should be added to the capital at the end - had the drawings not been made, the capital at the end of the year would be higher.

FORMULA FOR DETERMINING PROFIT IS AS FOLLOWS


PROFIT = (CAPITAL AT THE END + DRAWINGS - ADDITIONAL CAPITAL INTRODUCED - CAPITAL AT THE BEGINNING).

The above formula may be shown as follows in the form of a Statement of Profit or Loss:

Particulars

Rs.

Capital at the end

Add: Drawings during the year

Less: Additional Capital introduced during the year

Adjusted capital at the end

Less: Capital in the beginning

Profit or Loss for the year

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

 

Summary of the above procedure-
  1. Prepare Statement of affairs at the beginning for calculating capital in the beginning. A statement of affairs is a statement of all assets and liabilities. The difference between the amounts of the two sides is taken as capital.
  2. Then, prepare statement of affairs at the end in order to calculate capital at the end.
  3. Adjust the capital at the end by adding drawings, and deducting there from capital introduced during the year.
  4. From the adjusted capital at the end deduct capital at the beginning. This difference is either a profit or loss.
Illustrations on Net worth Method

Illustration 1:
Sohan maintains books on single entry system. He gives you the following information-

 

Capital on April 1, 2007    Rs. 30400
Capital on April 1, 2008    Rs. 33800
Drawings made during the period   Rs. 9600
Capital introduced on August 1, 2007  Rs. 4000

You are required to calculate profit or loss made by Sohan.

Solution:
Statement of Profit or Loss
For the year ended March 31, 2008

 

Particulars

Rs.

Capital as on April 1, 2008
Add: Drawings made during the period

 

Less: Capital introduced on August 1, 2007
Adjusted Capital on April 1, 2008
Less: Capital on April 1, 2007
Profit made during the period

33, 800
9, 600
43,400
4, 000
39, 400
30, 400
9, 000
 


Illustration 2:
Mr. Prashad keeps his books on Single Entry. From the following information given by him, ascertain his profit or loss for the year ending 31st March 2008.

Plant and Machinery Rs. 30000, Stock Rs. 5,000, Cash in hand Rs. 100, Debtors Rs. 17, 000, loan from Anish Rs. 1000 at 4% interest, Bank Overdraft Rs. 1, 100 and Creditors Rs. 12, 120.

On 31st March 2008, he owed to his creditors Rs. 9, 170 and had paid to Mr. Anish Rs. 500 in lieu of his loan on 1st October 2007, but had paid no interest. He had bought additional Plant and Machinery which costed Rs. 13, 000. Debtors were Rs. 23, 000 out of which Rs. 900 he would not be able to collect. The Cash and Bank Balance was Rs. 4, 100. Stock at the end was valued at Rs. 4,500.

Mr. Prashad withdrew Rs. 8, 300 for domestic purposes. He introduced a further capital of Rs. 10,000 during the year.

Solution:

 

   Statement of Profit or Loss
For the year ended March 31 2008

Particulars Rs.

Capital at the end
Add: Drawings

 

Less: Capital introduced during the year
Adjusted capital at the end
Less: Capital in the beginning
Profit for the year

64,000
8,300          72,300
10,000        62,300
37,880       24,420       
 


Working Notes:
Statement of Affairs as at March 31, 2007

Liabilities

Rs.

Assets

Rs.

Loan from Mr. Anish
Bank Overdraft
Creditors
Capital (Balancing figure)

1,000
1,100
12,120
37,880     
52,100     

 

Plant and Machinery
Stock
Cash in Hand
Debtors

30,000
5,000
100
17,000       
52,100       

 

 

Statement of Affairs (After Adjustments) as at March 31, 2008

Liabilities

Rs.

Assets

Rs.

Loan from Mr. Anish(1000-500)Interest on loan
Creditors
Capital (Balancing figure)(Note2)

500
30
9,170
64,000

 

 
 

           
73,700

Plant and Machinery (30,000+13,000)
Stock
Cash in Hand and at Bank
Debtors                             - 23,000
Less: Bad Debts                 -      900
                                      -------------

43,000
4,500
4,100

 

22,100

 


           
73,700

       

Working Notes:

1. Interest on Loan:

 

On Rs. 1,000 for 6 months

Rs. 20

On Rs. 500 for 6 months

Rs. 10

Total

Rs. 30

 

1. Capital at the end
Opening Capital+ Capital Introduced during the year+ Net Profit -Drawings
Rs. 37,880 + Rs. 10,000 +Rs. 24, 420 - Rs. 8,300
= Rs. 64,000.




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