Content Standard 11.2

Comparison Method

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Explanation

The Comparison Method is one of the main techniques used to solve incomplete records problems, that is, situations where a business does not keep a complete double-entry bookkeeping system, so an ordinary trading and profit and loss account cannot be prepared directly. In this method, we do not compute profit or loss through revenue minus expenses; instead, we compare the capital at the beginning of the year with the capital at the end of the year. The underlying idea rests on the Accounting Equation, namely Capital = Assets - Liabilities. When capital increases during the accounting period (after accounting for drawings and additional capital), the increase indicates that the business earned a profit; conversely, if capital decreases, the business suffered a loss.

Before any calculation is done, students must identify the required information, that is, a list of all assets and liabilities at the beginning of the year and at the end of the year. This information is usually obtained from bank balances, bank statements, a simple cash book, lists of debtors and creditors, the value of inventory counted physically, and the value of non-current assets such as premises, vehicles and fittings after depreciation. In addition, two crucial extra pieces of information are the total drawings (goods or money taken by the owner for personal use) and additional capital (fresh capital injected by the owner into the business during the year). Without these two items, the profit or loss computed will be wrong.

The next step is to analyse the opening and closing assets and liabilities by preparing a Statement to Calculate Capital. The Statement to Calculate Opening Capital is prepared by totalling all assets at the beginning of the year, then subtracting all liabilities at the beginning of the year to obtain the Opening Capital. The same approach is used for the Statement to Calculate Closing Capital, that is, total closing assets minus total closing liabilities to obtain Closing Capital. These statements are important because they form the basis of the comparison. Students must classify each item correctly as an asset or a liability, and use values after any adjustment such as depreciation or bad debts.

Once the Opening Capital and Closing Capital are obtained, profit or loss is calculated using the formula: Net Profit = (Closing Capital + Drawings) - (Opening Capital + Additional Capital). Drawings are added back to Closing Capital because drawings reduce capital even though they are not a business expense; if they are not added back, profit would be understated. Conversely, additional capital is subtracted because that increase in capital does not arise from business activity but from the owner's injection, so it cannot be counted as profit. If the result of the calculation is positive, it is a net profit; if negative, it is a net loss.

The Comparison Method is appropriate when the available information is sufficient only to determine the position of assets and liabilities at two dates, and there is not enough detail to prepare a full Income Statement. Its weakness is that it only gives the total profit or loss without detailing revenue, cost of sales or expenses. Therefore, students need to understand that this method answers the question of 'how much profit' and not 'where the profit came from'. A correct answer depends on classifying assets and liabilities accurately and adjusting correctly for drawings and additional capital.

Worked examples

Example 1: Preparing the Statement to Calculate Opening Capital

Seri Maju Grocery does not keep a complete double-entry system. On 1 January 2024, the business had the following assets: Premises RM50,000, Fittings RM8,000, Inventory RM6,000, Debtors RM3,000, Bank balance RM4,000 and Cash RM500. Its liabilities were Creditors RM5,000 and Bank Loan RM10,000.

The Statement to Calculate Opening Capital is prepared as follows: Total Assets = 50,000 + 8,000 + 6,000 + 3,000 + 4,000 + 500 = RM71,500. Total Liabilities = 5,000 + 10,000 = RM15,000. Therefore Opening Capital = Assets - Liabilities = 71,500 - 15,000 = RM56,500.

Note that this statement is not a double entry; it only sets out assets minus liabilities to obtain capital. It serves as the starting point of the comparison.

Example 2: Preparing the Statement to Calculate Closing Capital

On 31 December 2024, the position of Seri Maju Grocery was: Premises RM50,000, Fittings RM7,200 (after depreciation of RM800), Inventory RM8,500, Debtors RM4,500, Bank balance RM9,000 and Cash RM800. Liabilities were Creditors RM6,000 and Bank Loan RM8,000.

The Statement to Calculate Closing Capital: Total Assets = 50,000 + 7,200 + 8,500 + 4,500 + 9,000 + 800 = RM80,000. Total Liabilities = 6,000 + 8,000 = RM14,000. Therefore Closing Capital = 80,000 - 14,000 = RM66,000.

Make sure the fittings value used is the value after depreciation (RM7,200), not the original cost (RM8,000), because Closing Capital must reflect the current book value of the asset.

Example 3: Calculating Net Profit/Loss

During 2024, the owner of Seri Maju Grocery made drawings totalling RM12,000 and injected additional capital of RM5,000. Using Opening Capital of RM56,500 and Closing Capital of RM66,000, net profit is calculated as follows.

Net Profit = (Closing Capital + Drawings) - (Opening Capital + Additional Capital) = (66,000 + 12,000) - (56,500 + 5,000) = 78,000 - 61,500 = RM16,500.

Since the answer is positive, the business earned a Net Profit of RM16,500 for the year ended 31 December 2024. If the drawings were not added back, profit would be only 66,000 - 61,500 = RM4,500, showing how important the drawings adjustment is.

Practice

Cahaya Enterprise does not keep complete records. On 1 January 2023, its assets were Vehicle RM20,000, Inventory RM4,000, Debtors RM2,500 and Bank RM3,500, while its liability was Creditors RM4,000. Calculate the Opening Capital by preparing the Statement to Calculate Opening Capital.

Answer: Statement to Calculate Opening Capital: Total Assets = 20,000 + 4,000 + 2,500 + 3,500 = RM30,000. Total Liabilities = RM4,000. Opening Capital = Assets - Liabilities = 30,000 - 4,000 = RM26,000.

On 31 December 2023, Cahaya Enterprise had assets: Vehicle RM18,000 (after depreciation), Inventory RM5,500, Debtors RM3,000, Bank RM6,000 and Cash RM500; its liability was Creditors RM3,500. Prepare the Statement to Calculate Closing Capital and determine the Closing Capital.

Answer: Statement to Calculate Closing Capital: Total Assets = 18,000 + 5,500 + 3,000 + 6,000 + 500 = RM33,000. Total Liabilities = RM3,500. Closing Capital = 33,000 - 3,500 = RM29,500.

Based on the two questions above, during 2023 the owner of Cahaya Enterprise made drawings of RM8,000 and no additional capital was injected. Calculate the net profit or loss using the Comparison Method.

Answer: Net Profit = (Closing Capital + Drawings) - (Opening Capital + Additional Capital) = (29,500 + 8,000) - (26,000 + 0) = 37,500 - 26,000 = RM11,500. The business earned a Net Profit of RM11,500.

Damai Trading has an Opening Capital of RM40,000 and a Closing Capital of RM35,000. During the year, the owner made drawings of RM6,000 and injected additional capital of RM10,000. Did the business make a profit or a loss? Show your working.

Answer: Profit/Loss = (Closing Capital + Drawings) - (Opening Capital + Additional Capital) = (35,000 + 6,000) - (40,000 + 10,000) = 41,000 - 50,000 = -RM9,000. Since the answer is negative, the business suffered a Net Loss of RM9,000.

Exam tips

Key terms

Incomplete Records: An accounting system that does not keep full double-entry records, so an ordinary profit and loss account cannot be prepared directly.
Statement to Calculate Capital: A statement arranging total assets minus total liabilities at a given date to obtain the capital value (opening or closing).
Drawings: Goods or money taken by the owner from the business for personal use; it reduces capital.
Additional Capital: Fresh capital injected by the owner into the business during the accounting period; it increases capital but is not profit.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 5

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