Statement of Affairs is a statement of financial position prepared from incomplete records at a specific date. Purpose: Show assets and liabilities at year-end, Calculate capital (assets minus liabilities equals capital), Identify equity position, Provide basis for opening entries in reconstructed accounts. Preparation: List all known assets at fair value (cash, receivables, inventory, fixed assets, investments), List all known liabilities (payables, loans, expenses owed), Calculate Capital = Assets - Liabilities. Assets Classification: Fixed Assets (property, equipment at cost less depreciation), Current Assets (cash, receivables, inventory, prepayments), Intangible Assets (goodwill if determinable). Liabilities Classification: Current Liabilities (payables, accrued expenses, short-term loans), Long-term Liabilities (long-term loans, debentures). Equation Verification: Total Assets - Total Liabilities = Capital (Opening Capital at year-start). Two Statements of Affairs (Opening and Closing) needed to reconstruct accounts: Opening Statement (at year-start) provides opening capital, Closing Statement (at year-end) provides closing capital, Difference adjusted for drawings = Profit/Loss for the year. Use of Estimates: Assets valued at reasonable fair values, Depreciation calculated based on typical rates, Receivables reduced by estimated bad debts. Exam tip: Master the structure and equation of Statement of Affairs; practice identifying and classifying assets and liabilities; use two statements to calculate profit/loss; verify the equation always balances.