The Basic Idea of the Comparison Method
The comparison method finds profit by comparing closing capital with opening capital. The rise in capital (after adjusting for drawings and additional capital) is the profit for the period.
Key idea
Profit = Closing capital − Opening capital + Drawings − Additional capital
Capital = Assets − Liabilities (at each date).
Steps in the Calculation
- Find opening capital = opening assets − opening liabilities.
- Find closing capital = closing assets − closing liabilities.
- Add back drawings (they reduce capital but are not an expense).
- Subtract additional capital put in by the owner (it raises capital but is not profit).
A Worked Example
Example
Start of year: assets RM50,000, liabilities RM20,000 → opening capital = RM30,000.
End of year: assets RM70,000, liabilities RM25,000 → closing capital = RM45,000.
Drawings during the year RM8,000; additional capital RM5,000.
Profit = 45,000 − 30,000 + 8,000 − 5,000 = RM18,000.
Preparing a Statement of Affairs
The first step is usually to list all assets and liabilities at the start and end of the period in a statement of affairs to obtain the opening and closing capital. Assets include cash, bank, inventory, debtors and non-current assets; liabilities include creditors and loans. If the owner takes goods (not cash) for personal use, the cost of those goods is also treated as drawings and added back in the formula.
Example
Mrs Lim starts the year with capital of RM20,000. At year end her assets total RM48,000 and her liabilities RM10,000, so closing capital = RM38,000. During the year she withdrew RM7,000 for personal use and put in no additional capital. Profit = 38,000 − 20,000 + 7,000 − 0 = RM25,000.
Accuracy in listing assets and liabilities is vital because any item left out will distort the capital figure and therefore the profit calculated.
Remember
Drawings are added back; additional capital is subtracted. This method gives only the total profit — it does not show the details of revenue and expenses.