Though the records are incomplete, the trader has to ascertain the profit or loss of his business and the position regarding assets and liabilities. Two methods are adopted for ascertainment of profit or loss.
They are:
1. Ascertainment of profit or loss by statement of affair method.
2. Preparation of profit and loss account and balance sheet under conversion method.
1. Statement of Affair Method:
Under this method, profit or loss can be ascertained by comparing the capital at the beginning and at the end of the financial period. For this purpose, two statements are prepared.
a. Statement of Affairs:
It is a statement prepared by presenting the assets on one side and liabilities on the other side as in the case of a balance sheet. The difference between the totals of the two sides is known as “owners equity or capital”.
Owner equity or capital = Asset – Liabilities
b. Statement of profit or loss:
The statement prepared to ascertain the profit or loss by comparing the opening capital with closing capital is called statement of profit or loss. If the capital at the end of the year exceeds the capital in the beginning of the year, the difference will be treated as “profit.” On the other hand, If the capital in the beginning of the year is more than that at the end of the year, there is “loss.”
2. Conversion Method:
Under single entry system, nominal accounts and real accounts (other than cash) are not maintained. Hence it is not possible to prepare the profit and loss account and balance sheet under the system. In such a situation, financial statements are to be prepared by converting accounts under single entry to that under double entry. This method of preparing financial statements is called conversion method.
