Incomplete Records
Incomplete Record is related to preparation of financial statements using incomplete
set of records.
1. Concept of mark-up and margin
Both mark up and margin leads towards calculation of gross profit.
The only difference is mark-up is applied of cost of sales and margin is
applied on sales revenue
Gross Profit
Gross profit mark up = ----------------------------------*100
Cost of Sales
Gross Profit
Gross profit margin = ----------------------------------*100
Sales Revenue
Mark - up
2. Converting mark-up into margin = -----------------------
100 + Mark-up
Margin
Converting margin into mark-up = ---------------------
100 – Margin
3. If Mark-up (Gross Profit) = 25%, then cost of sales = 100, sales revenue = 125
4. If Margin (Gross Profit) = 25%, then Sales revenue = 100; Cost of sales = 75
5. According to prudence concept, assets and profits should not be overstated;
Losses and liabilities should not be understated.
Goods are bought at a price called cost price, but later stage if they are
damaged they need to get repaired before sale, then net realizable value has
to be calculated.
According to prudence concept inventory should not be overvalued therefore
one should compare cost and net realizable value, whichever is lower that
should be taken
Cost is the price at which inventory is bought
Net realizable value (NRV) = sales price - selling expense
6. According to realization concept, sales is not part of revenue until invoiced to
the customers. Same is the case of profit, it is not recognized until goods are
sold.
Goods bought /sold on Sale or return basis, if bought, not part of purchases or
inventory; if sold then part of inventory but not sales/revenue
7. Drawings by goods should be accounted for at cost, not at sales price.
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15.13
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15.14
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15.15 Calculation of inventory at 30 September
$
Inventory valued at 8 October 24600
(vi) Goods bought on sale or return basis (240) this is not part of the ownership
(vii) Inventory overstated (8415-8145) (270)
(viii) Value of inventory lost (110-40=70) (130)
(200-70)
(ix) Inventory bought but not included 380
(i) sales at cost [4400*100/125) 3520
(ii) Sales return/Return Inwards (184)
[230*100/125]
(iii) Purchases (3200*90%) (2880)
(iv) Purchase return (220*90%) 198
(v) Drawings by goods 250
---------------
Inventory at 30 Sept. 25244
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15.16
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Depreciation: It is the decreased value of non-current asset. It is a non-cash expense.
It is a cost for the benefit taken from the use of an asset. It is debited to the statement of
profit or loss.
Causes of depreciation (non-financial) Reasons of depreciation (financial)
wear and tear
technological advancement
Recession in economy
Climatic effect - dust/rust/color fade
Time lapse
Methods of depreciation
1. straight line method (a) cost method (b) formula method
E.g. Abdullah bought a laptop at a price of $1000. He plans to use the laptop for 5 years
and after that he will dispose off the laptop at a price of $200.
Calculate the annual depreciation of laptop.
cost
disposal value/scrap value/residual value
life of asset
cost - scrap value/residual value/disposal value
formula for annual depreciation = ----------------------------------------------------------------
useful life
1000 - 200
------------------=$160
5
straight line depreciation will keep every year the same
E.g. rate of depreciation = 16%
Annual depreciation = 1000*16% = $160
Reducing balance method/written down value method/diminishing balance method
Cost of laptop = 1000 Year 1 1000*40% = 400
rate of depreciation = 40% Year 2 1000-400=600*40%=240
Net book value is value of asset Year 3 1000-400-240=360*40%=144
after provision for depreciation Year 4 1000-784=216*40%=86
provision for depreciation is the total depreciation of
the asset
Revaluation method loose tools, e.g. screw driver, hammer, pliers
opening balance + purchase - disposed - closing balance = Depreciation
200 + 1000 - 150 - 800 = 250
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