The statement of affairs method resembles your company's balance sheet in that it shows the company's net worth at a point in time. The statement of affairs method compares transactions at the beginning period to transactions at the ending period to calculate profit and loss. If assets exceed liabilities, this represents a positive capital position for the company, which is a profit. A loss has occurred if liabilities surpass assets when comparing the beginning and ending affairs of the business.

A fresh infusion of capital throws off the calculation of profit and loss using the statement of affairs method. In such a case, subtract the capital injection from the company's assets to obtain an accurate reading of the company's profits. Likewise, drawings from capital distort the profit and loss under the statement of affairs method. Add back the capital withdrawal amount for an accurate reading of the company's profit or loss. Therefore, the formula for determining profit and loss under the statement of affairs method is capital at the end of the period plus drawings minus new capital contributions less beginning capital.

A company had a beginning capital balance of $12,000 at the beginning of the year. The company's capital increased to $26,000 at the end of the year. During the year, the company received a capital infusion of $9,000 and the owner withdrew $4,000 for personal expenses. Because the owner withdrew capital from the company, add this amount back to the ending capital balance of $26,000 bringing ending capital to $30,000 ($26,000 plus $4,000). Since the company received outside capital of $9,000, subtract this from total capital of $30,000, bringing the total capital to $21,000 ($30,000 minus $9,000). Subtract the beginning capital of $12,000 from $21,000; the company earned a profit of $9,000 for the year.

The key advantage of the statement of affairs method is its simplicity. Ascertaining profit and loss is easy and you do not have to understand principles of bookkeeping to maintain your accounts. In addition, the statement of affairs method is less expensive to implement than a double-entry bookkeeping system.

The biggest disadvantage of using the statement of affairs method is lack of accuracy of profit and losses. This is because there is a lack of detailed information on business expenses. In addition, unlike a double-entry system, the statement of affairs method uses no trial balance, which is a bookkeeping system that uses debits and credits to balance all ledgers. The trial balance ensures that entries under the company's bookkeeping system are correct.