Estimate profit or loss for the period from incomplete records

This method compares the capital at the beginning and end of a period to determine profit or loss.

The Formula

$Net\ Profit = Closing\ Capital + Drawings - Opening\ Capital - Additional\ Capital$

If the result is positive, the business made a profit. If negative, it made a loss.

Steps to Follow

1. Prepare a statement of affairs at the beginning of the period to find opening capital
2. Prepare a statement of affairs at the end of the period to find closing capital
3. Identify any additional capital introduced during the period
4. Identify any drawings (money taken out for personal use)
5. Apply the formula to calculate profit or loss

Mwanajuma operates a small shop in Mwanza and keeps incomplete records. She provides the following information:

At 1 January 2022 (Opening):

• Cash: Tsh 50,000
• Stock: Tsh 200,000
• Debtors: Tsh 80,000
• Creditors: Tsh 100,000

At 31 December 2022 (Closing):

• Cash: Tsh 75,000
• Stock: Tsh 250,000
• Debtors: Tsh 120,000
• Creditors: Tsh 90,000

Additional information:

• Mwanajuma withdrew Tsh 30,000 for personal use during the year
• She did not introduce any additional capital

Required: Calculate profit or loss for the year 2022.

Solution

Step 1: Calculate Opening Capital

$Opening\ Capital = Total\ Assets - Total\ Liabilities$ $= (50,000 + 200,000 + 80,000) - 100,000$ $= 330,000 - 100,000$ $= Tsh\ 230,000$

Step 2: Calculate Closing Capital

$Closing\ Capital = (75,000 + 250,000 + 120,000) - 90,000$ $= 445,000 - 90,000$ $= Tsh\ 355,000$

Step 3: Apply the formula

$Net\ Profit = Closing\ Capital + Drawings - Opening\ Capital - Additional\ Capital$ $= 355,000 + 30,000 - 230,000 - 0$ $= 385,000 - 230,000$ $= Tsh\ 155,000$

Result: Mwanajuma's shop made a profit of Tsh 155,000 for the year 2022.

Hamis runs a hardware store in Arusha. He keeps his books under the single entry system. The following information is available:

Statement of Affairs at 1 January 2022:

• Buildings: Tsh 500,000
• Debtors: Tsh 150,000
• Stock: Tsh 300,000
• Cash: Tsh 50,000
• Creditors: Tsh 200,000

Statement of Affairs at 31 December 2022:

• Buildings: Tsh 480,000 (depreciation of Tsh 20,000)
• Debtors: Tsh 180,000
• Stock: Tsh 350,000
• Cash: Tsh 70,000
• Creditors: Tsh 150,000

Additional information:

• Hamis introduced additional capital of Tsh 100,000 during the year
• He withdrew Tsh 60,000 for personal use

Required: Calculate profit or loss for the year ended 31 December 2022.

Solution

Opening Capital (1 January 2022):

Closing Capital (31 December 2022):

Calculate profit:

$Net\ Profit = Closing\ Capital + Drawings - Opening\ Capital - Additional\ Capital$ $= 930,000 + 60,000 - 800,000 - 100,000$ $= 990,000 - 900,000$ $= Tsh\ 90,000$

Result: Hamis made a profit of Tsh 90,000 for the year.

• The statement of affairs method works by comparing capital at two different dates
• Always account for depreciation when calculating asset values
• Drawings are added back because they reduce capital but are not expenses
• Additional capital introduced during the period must be subtracted when calculating profit
• The formula works because: $Capital\ at\ end = Capital\ at\ start + Additional\ Capital + Profit - Drawings$

In Tanzania, many small traders in markets like Mwanza's Busisi, Dar es Salaam's Kariakoo, or Arusha's central market keep only basic records of cash received and paid. By using the statement of affairs method, a shop owner can still determine whether their business made a profit or loss during the year, even without maintaining full double-entry accounting records. This helps them make decisions about whether to expand their business or reduce costs.