Statement of Affairs and Deficiency Account are prepared under the following circumstances:

1. Insolvency: When a person or a company is not able to pay off its debts, it is considered to be insolvent. In such a situation, the Statement of Affairs and Deficiency Account are prepared to determine the extent of the company's debt and its ability to repay the same.

2. Dissolution: When a company is dissolved, it is required to prepare a Statement of Affairs and Deficiency Account to determine the amount of money that will be available for distribution among its creditors.

3. Reconstruction: When a company is reconstructed or amalgamated with another company, a Statement of Affairs and Deficiency Account is prepared to determine the value of the assets and liabilities of the company before and after the reconstruction.

Specimen of Statement of Affairs and Deficiency Account:

Statement of Affairs as on 31st December 2021

Liabilities Amount (Rs.) Assets Amount (Rs.)
Creditors 2,50,000 Cash in hand 20,000
Bank overdraft 1,50,000 Debtors 1,00,000
Bills payable 1,00,000 Stock-in-trade 1,50,000
Outstanding expenses 50,000 Furniture 50,000
Capital 2,00,000 Machinery 3,00,000
Total 7,50,000 Total 7,50,000

Deficiency Account

Particulars Amount (Rs.)
Total liabilities 5,50,000
Less: Total assets 4,20,000
Deficiency 1,30,000

Explanation:

1. Statement of Affairs: The Statement of Affairs shows the liabilities and assets of the company as on a particular date. In the given specimen, the liabilities of the company are Rs. 6,50,000 and the assets are Rs. 7,50,000. The excess of assets over liabilities is Rs. 1,00,000.

2. Deficiency Account: The Deficiency Account shows the amount of deficiency or shortfall in the assets of the company as compared to its liabilities. In the given specimen, the total liabilities are Rs. 5,50,000 and the total assets are Rs. 4,20,000. Hence, the deficiency is Rs. 1,30,000.

Conclusion:

Statement of Affairs and Deficiency Account are important financial statements that help in determining the financial position of a company. These statements are prepared in situations such as insolvency, dissolution, and reconstruction. The given specimen shows how these statements are prepared with imaginary figures.