HEXCO · Polytechnic · NC Accountancy

Business Accounting 2: Incomplete Records

Learning Outcome 4 of 6

Free HEXCO NC Accountancy notes on Incomplete Records, learning outcome 4 of 6 in Business Accounting 2. Correction of errors, control accounts, partnerships, incomplete records, manufacturing accounts and ratio analysis. Semester 2, module 310/22/M06.

Here we learn what incomplete records and single entry are, how to find profit by comparing capital, how to calculate missing figures such as sales, purchases and expenses, and how to prepare full financial statements of a sole trader from incomplete records.

Many small traders do not keep full double-entry books, so the accountant must rebuild the year's figures from bank statements, invoices and lists of assets and liabilities.

4.1 The Nature of Incomplete Records

Incomplete records are accounting records that do not follow the full double-entry system, so some transactions are recorded only once or not at all.

The most common form is single entry, where the trader keeps only a cash book and perhaps lists of debtors and creditors.

Why Records Are Incomplete

Records may be incomplete because the trader lacks bookkeeping knowledge, cannot afford a bookkeeper, runs a small cash business and sees no need, or because records were lost, stolen or destroyed by fire or flood. In each case, the accountant must use whatever evidence exists, such as bank statements, cheque counterfoils, invoices and the trader's knowledge, to work out the missing figures.

Statement of Affairs

A statement of affairs is a list of a trader's assets and liabilities at a particular date, used to find the capital at that date, because capital = assets - liabilities. It looks like a statement of financial position, but the capital is the balancing figure.

Profit by Comparing Capital

When there is very little information, profit is found from the change in capital, because capital increases with profit and capital introduced, and decreases with drawings. So profit = closing capital - opening capital + drawings - capital introduced. A loss gives a negative answer.

Here you are finding the profit when the trader has no proper books, by looking at how much the capital grew. Find the opening and closing capital (assets minus liabilities) if they are not given. Take the change in capital, add back drawings because they reduced capital, and subtract any new capital paid in because it is not profit. Below, we show you how it is done, step by step.

Rumbi's capital rose from $16,000 to $17,800. During the year she drew $6,000 and introduced $2,000 of new capital. Find the profit.

Increase in capital = 17,800 − 16,000 = $1,800
Add back drawings, which reduced capital: 1,800 + 6,000 = $7,800
Deduct capital introduced, which was not profit: 7,800 − 2,000 = $5,800

Answer: Profit for the year = $5,800

Opening capital was $25,000 and closing capital $22,000. Drawings were $9,000 and no new capital was introduced. Find the profit.

Change in capital = 22,000 − 25,000 = −$3,000 (capital fell)
Add back drawings: −3,000 + 9,000 = $6,000
No capital introduced to subtract

Answer: Profit = $6,000

At the start, assets were $18,000 and liabilities $3,000. At the end, assets were $21,500 and liabilities $4,500. Drawings were $7,200 and the owner paid in an inheritance of $5,000. Find the profit.

Opening capital = 18,000 − 3,000 = $15,000
Closing capital = 21,500 − 4,500 = $17,000
Profit = 17,000 − 15,000 + 7,200 − 5,000
Profit = 2,000 + 7,200 − 5,000 = $4,200

Answer: Profit = $4,200

4.2 Calculating Missing Figures

To prepare full financial statements, the missing figures, such as sales, purchases and expenses, must be calculated.

This is done with total accounts and summaries that use the same layout as ledger accounts, with the missing figure as the balancing item.

Summary of the Bank Account

Rumbi's bank statements show: receipts from credit customers $30,400, cash sales banked $6,000, capital introduced $2,000; payments to suppliers $20,000, and drawings $6,000. Expenses paid by cheque were wages $7,200, rent $2,400 and electricity $1,200. The bank summary confirms the closing balance of $4,100.

Finding Credit Sales and Purchases

Credit sales are the missing figure in a total debtors account, and credit purchases the missing figure in a total creditors account. Debtors: opening 3,000 + credit sales = receipts 30,400 + closing 3,600, so credit sales = 34,000 - 3,000 = $31,000, and total sales = 31,000 + 6,000 cash sales = $37,000. Creditors: payments 20,000 + closing 2,100 = opening 1,500 + purchases, so purchases = 22,100 - 1,500 = $20,600.

Expenses with Accruals and Prepayments

The expense for the year is not always the amount paid. Expense = amount paid + closing accrual - opening accrual - closing prepayment + opening prepayment. For example, if $2,400 rent was paid, $200 was owing at the start and $400 owing at the end, the rent expense is 2,400 - 200 + 400 = $2,600. In this example, there were no accruals or prepayments, so the amounts paid are the expenses.

Using Mark-up and Margin

When sales or purchases cannot be found from the records, they can be worked out from the mark-up (profit as a percentage of cost) or margin (profit as a percentage of selling price). For example, if cost of sales is $19,600 and goods are sold at a mark-up of 50%, sales = 19,600 × 150% = $29,400. This method is also used to estimate inventory lost in a fire or theft.

4.3 Preparing Financial Statements from Incomplete Records

Once the missing figures are found, the statement of profit or loss and statement of financial position are prepared in the usual way.

The profit should agree with the profit found by comparing capital, which is a useful check.

Statement of Profit or Loss

Equipment is depreciated by $800 for the year (8,000 - 7,200). The statement brings together the figures calculated above.

Statement of Financial Position

The profit of $5,800 agrees with the profit found by comparing capital, which confirms the working. The statement of financial position is shown below.