Statement of affairs and balance sheet differ in many ways. We can differentiate balance sheet and statement of affairs on the basis of single or double entry, basis of preparation and more. But if we talk about main difference between statement of affairs and balance sheet then we can say that statement of affairs is a well structured statement of assets and liabilities which is prepared under single entry system or incomplete records where as balance sheet tells the financial position and also tells the net worth. So this is one of the important difference between balance sheet and statement of affairs. Now we will discuss in detail about balance sheet and statement of affairs.
At first let’s see some more detail about statement of affairs and balance sheet.
Statement of affairs.
As above mentioned that statement of affairs is a well structured statements of liabilities and assets. Statement of affairs also tells us that how much money is in stock to pay back to the creditors.
There are some of the methods to find out statement of affairs and those methods are as follows:-
• Step 1- Ascertain opening capital
• Step 2- Ascertain closing capital
• Step 3- Add the amount of drawing to the closing capital
• Step 4 –deduct the amount of additional capital introduced from the above to get adjusted capital
• Step 5- ascertain profit or loss by deducting opening capital from the adjusted closing capital
So these are the five steps to find out profit or loss . now after finding opening and closing capital now we need to prepare the statement of profit or loss.
Now statement of profit or loss:-
And as we know closing capital is the capital which we get at the end of the month.
Add- Drawings which means any amount or withdrawn from the business for personal use called drawings.
Loss- If any additional capital introduced during the end of the year that will be subtracted. Ad then we will get adjusted closing capital.
Loss- And finally subtracting closing capital. Then we will get net profit of at the whole duration of that year.
Now format of statement of affairs.
• Sunday creditors
• Bills payable
• Outstanding employees
• Bank overdraft
• Cash in hand
• Cash at bank
• Sunday detectors
• Bill receivable
• Stock in trade
• Prepaid expenses
• Fixed assets
Limitations of statement of affairs.
As Statement of affairs shows structured statements of financial statements, so there has chance of lack accuracy. Because sometimes statement of affairs shows wrong statement of profit or loss and due to which company face difficulties regarding his stocks, money invested, money borrowed. So it has lack of accuracy.
Balance sheet is a financial statement which apparently show the company’s position in the market. In other word we can say balance sheet shows financial statement of the company that shows assets, liabilities and shareholders at a specific time.
If we summarise balance sheet then:-
• It shows the company’s financial position at the present time.
• It is a financial statement of company’s assets, liabilities and shareholders at a specific time.
• Balance sheet uses a financial analyst with other financial statements to calculate the financial ratios.
Formula of balance sheet:-
Balance sheet uses the equation as assets is equal to the sum of liabilities and shareholders equity.
• Assets= Liabilities+ Shareholders
This equation or formula indicates as the company buys goods and has to pay for these goods will be represented as assets and that borrowing with money represents liabilities and if the company will take money from the investors then it will represent as shareholders.
Let’s take one example to understand balance sheet in more detail. So there is a company who wants to buy goods to increase his import and export Business. Company buys goods of ₹ 10000 from a supplier he has not much balance to buy these goods so he took money from investors. Let he takes ₹ 4000 from investors. Now if we identify assets, liabilities and shareholders then here assets is company buys and has to pay for it will be assets and he is borrowing with money so here borrowing with money will be liabilities and he has not much balance so he took money from investors, so here investors are shareholders. So this was a simple example in which we identified assets liabilities and shareholders.
In simple word assets are those for which we have to pay , liabilities are those money from which we are buying something and shareholders are Thom investors from which we take money.
What represents Balance sheet:-
Balance sheet represents the company financial position at a moment of time. As it represents the financial position at a moment of time so it can’t be represent by taking of previous periods. It can be compared with the previous period but can’t be prepare with the previous period.
Now let’s discuss Assets, Liabilities and shareholders in detail to make more clear concept of balance sheet.
As we above discussed that assets is like money paid for goods represents assets. In assets accounts are listed from top to bottom. It can be converted in to cash in one year or less because if company pays bill for goods then it may take one or less than one year to recover it back.
As above mentioned about liabilities that the borrowing with money represents the liabilities. So the bill which company has to pay to his supplier for borrowing with money considered as liabilities. Liabilities simply means borrowing with money to pay goods.
As above mentioned that company borrowed money from investors to pay for his goods considered as shareholders. So mainly investors which give money to company for buying goods considered as shareholders.
Limitations of balance sheet:-
As it shows only current situation by using financial statements of a company so we can’t see the previous financial statement of the company which sometime do investor’s loss. As we above studied that we prepare financial statements with current situation we don’t prepare financial statement with previous records. So this becomes sometime harmful for investors to invest in that company. Because we don’t have any idea about its previous records, may be it’ll have done a business of loss and now in current situation this company dealing with profit. Anything is possible. So if company maintaining their consistency of profit then it’s good for investors but it doesn’t then it can be dangerous to invest in that company.
• Statement of affairs is well structured statement of assets, liabilities and capital entity whereas balance sheet is a financial statement of showing assets, liabilities and shareholders.
• In Balance sheet accuracy percentage is high whereas in statement of affairs accuracy percentage is low.
• Statement of affairs is not a part of financial statements whereas balance sheet is a part of financial statements.
• Main objective of statement of affairs is to find out opening and closing capital whereas main objective of balance sheet is to find out financial position of company.
• Statement of affairs has estimation of values whereas balance sheet has no estimation of values.
These are the main comparison which concluded from the above discussion about statement of affairs and balance sheet.
If we saw then from the above discussion we can conclude that the main difference between statement of affairs and balance sheet which we can easily observe from the above discussion then that is statement of affairs shows a well structured statement of assets, liabilities and entity whereas balance shows the financial statement of assets liabilities and shareholders. It means balance sheet shows the current situation of company at a moment of time. As we have seen there is equation of balance sheet that assets is the sum of liabilities and shareholders.