Q.No. 3 :- Distinguish between statement of affairs and Balance
Sheet.
Statement of Affairs
Under the single entry system of bookkeeping, accounts maintained by the business are
incomplete. The businessman maintains the records as per his needs and convenience,
generally, cash book and personal accounts of debtors and creditors are maintained. Some
of the transactions are recorded fully with both credit and debit sides, some are partially
recorded, and some are not recorded at all. Thus, it is not possible to prepare a Trial Balance
and Balance Sheet to ascertain the financial position of the firm. So, under such
conditions, Statement of Affairs is prepared to know the value of assets and liabilities at the
end of an accounting period. Thus, a Statement of Affair is a statement of assets and
liabilities at the beginning and at the end of the relevant accounting period prepared to
ascertain the value of change in the capital during that period. It is similar to a balance sheet,
but the information provided in the statement of affairs is incomplete and derived from
physical vouchers and documents rather than from ledger accounts.
Once the statement of Affairs is prepared, the Statement of profit and loss is prepared to
calculate the amount of profit or loss made during that accounting period.
Profit or Loss = Capital at the End- Capital at the Beginning+ Drawings during the Year
– Capital introduced during the Year.
Balance Sheet
A statement of position, commonly known as a Balance Sheet is a statement of assets and
liabilities prepared at the end of the accounting year to ascertain the financial position of a
business unit. The balance sheet helps the stakeholders of the company to judge the liquidity
and solvency position of the company. A balance sheet of any company is prepared based
on complete records, balances of the ledger and final accounts, hence it is prepared under
the double-entry system of bookkeeping. This means that Capital+ Liability is always equal to
the Assets of the company. Any omission or wrong recording of assets and liabilities can be
easily detected from the accounting records, as accounts are maintained by the rules of the
dual bookkeeping system. A statement of position is more reliable in comparison to a
statement of affairs, as it is based on complete records. It is generally prepared after the
Financial statement and is a summary of all the accounts. The Balance Sheet can be
prepared by any type of business unit, whether a Sole Proprietorship, a Partnership firm, a
Corporation, or a Non- profit Organization.
Assets = Capital + Liabilities
Difference between the Statement of Affair and the Balance
Sheet:
BASIS
STATEMENT OF AFFAIRS
BALANCE SHEET
Objective
The objective of preparing a
Statement of Affair is to ascertain
the balance of capital on a particular
date.
The objective of preparing a Balance
sheet is to evaluate the accurate
financial position of a business unit
on a particular date.
Source
of
Information
A Statement of Affair is prepared
on the basis of estimates and
information provided by the owner.
A Balance sheet is prepared on the
basis of a Trial Balance, a Ledger and
a Financial Statement.
BASIS
STATEMENT OF AFFAIRS
BALANCE SHEET
Method
of Bookkeeping
A Statement of Affair is prepared
when the accounts are maintained
under a single entry system of
bookkeeping.
A Balance sheet is prepared under a
system of double-entry bookkeeping.
Situation
A Statement of Affair is prepared
under a situation where either the
accounts are incomplete or
destroyed.
A Balance Sheet is prepared when the
accounts are complete and fully
maintained as per the Accounting
Standards.
Reliability
A Statement of Affair is based on
incomplete records, hence it is not
reliable.
A Balance Sheet shows a clear picture
of the financial position of any
business unit and is more reliable.
Suitability
Suitable only for small enterprises.
Suitable for all types of business
units, whether a sole Proprietorship, a
partnership firm, a corporation, or a
non- profit organization.
Omission
It is not possible to detect the
entries that have been missed or not
recorded.
The omission of transactions can be
easily discovered and restored from
accounting records.
A Statement of Affair does not
tally, hence the arithmetic accuracy
cannot be judged.
Both sides of a balance sheet are
always equal, ensuring an arithmetic
accuracy of the financial records.
Tally
Detection