Section H Incomplete Records

1. What Are Incomplete Records?

Incomplete records questions test your ability to prepare accounting information when a
business does not have a complete double-entry accounting system.
Incomplete records may arise because:
• The proprietor does not maintain a full set of accounting records.
• Accounting records are accidentally lost or destroyed, for example, by fire, flood or
burglary.
• An essential accounting figure is unknown and must be calculated as a balancing figure.
The accountant's task is usually to prepare:
1. A Statement of Profit or Loss
2. A Statement of Financial Position
The main challenge is to reconstruct the missing accounting information.
Common requirements include:
• Establishing the cost of purchases and other expenses
• Establishing total sales
• Establishing trade receivables and trade payables
• Calculating accruals and prepayments
• Calculating missing inventory
• Calculating goods stolen or destroyed
• Calculating drawings
• Calculating profit or capital
The Golden Rule for Incomplete Records
Build up the missing double entry from the information available.
In most incomplete records questions, you will need to reconstruct:

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 • Trade receivables control account
• Trade payables control account
• Cash and bank account
• Trading account
• Capital account
2. Main Areas Tested

Area Typical Requirement

Opening statement of financial position Find missing proprietor's capital

Credit sales and receivables Use a receivables control account

Purchases and payables Use a payables control account

Purchases, inventory and cost of sales Use the trading account

Goods stolen or destroyed Calculate cost of goods lost

Cash and bank Reconstruct missing receipts and payments

Accruals and prepayments Calculate the expense incurred

Drawings Use the capital equation

3. Opening Statement of Financial Position

The opening statement of financial position may contain all the assets and liabilities but leave
the proprietor's capital unknown.
The capital is calculated using:
Formula
Capital = Total Assets – Total Liabilities
Worked Example 1: Opening Statement of Financial Position
Joe Han's business has the following assets and liabilities at 1 January 20X3:

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Item $

Fixtures and fittings at cost 7,000

Accumulated depreciation – fixtures and fittings (4,000)

Motor vehicles at cost 12,000

Accumulated depreciation – motor vehicles (6,800)

Inventory 4,500

Trade receivables 5,200

Cash 1,230

Prepayment 450

Trade payables 3,700

Accrued rent 2,000

Required
Calculate the proprietor's capital.
Solution
Step 1: Calculate total assets
Fixtures and fittings
7,000 − 4,000 = 3,000

Motor vehicles
12,000 − 6,800 = 5,200

Therefore:

Assets $

Fixtures and fittings 3,000

Motor vehicles 5,200

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Assets $

Inventory 4,500

Trade receivables 5,200

Prepayment 450

Cash 1,230

Total assets 19,580

Step 2: Calculate total liabilities

𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 + 𝐴𝑐𝑐𝑟𝑢𝑒𝑑 𝑟𝑒𝑛𝑡
= 3,700 + 2,000 = 5,700

Step 3: Calculate capital

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 19,580 − 5,700

Proprietor's Capital = $13,880

4. Finding Profit Using Opening and Closing Capital
Sometimes the business does not have complete income and expense records. However, we
may know the opening and closing capital.
The capital equation is:
Formula
Closing Capital = Opening Capital + Profit + Capital Introduced – Drawings
Therefore:
Profit Formula
Profit = Closing Capital – Opening Capital – Capital Introduced + Drawings
Example
Opening capital = $40,000
Closing capital = $52,000

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Drawings = $8,000
Capital introduced = $3,000
Solution
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑡𝑟𝑜𝑑𝑢𝑐𝑒𝑑 + 𝐷𝑟𝑎𝑤𝑖𝑛𝑔𝑠
= 52,000 − 40,000 − 3,000 + 8,000

Profit = $17,000
5. Credit Sales and Trade Receivables
If credit sales are not recorded, they can be calculated using:
• Opening trade receivables
• Closing trade receivables
• Cash received from customers
Formula
Credit Sales
𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑓𝑟𝑜𝑚 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

Worked Example 2: Calculating Credit Sales

Joe Han's business had:
• Opening trade receivables = $1,750
• Closing trade receivables = $3,140
• Cash received from customers = $28,490
• No irrecoverable debts
Solution
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
= 28,490 + 3,140 − 1,750

Credit Sales = $29,880

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Trade Receivables Control Account

Debit $ Credit $

Opening balance b/f 1,750 Cash received 28,490

Credit sales 29,880 Closing balance c/f 3,140

Total 31,630 Total 31,630

The credit sales are the balancing figure.

Other Possible Items in a Receivables Control Account
Debit Side
• Opening debit balance
• Credit sales
• Dishonoured cheques
• Cash paid to clear credit balances
• Irrecoverable debts recovered
Credit Side
• Opening credit balances
• Cash received
• Discounts allowed
• Credit notes
• Irrecoverable debts written off
• Cash from irrecoverable debts recovered
• Contra entries
• Closing debit balances

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Numerical Practice 1
A receivables control account contains the following:

Item $

Opening balance 42,800

Bank receipts 204,000

Trade discounts allowed 16,250

Credit sales 240,200

Assuming there are no other entries, calculate the closing balance.

Solution
𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 − 𝐵𝑎𝑛𝑘 − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑠 𝑎𝑙𝑙𝑜𝑤𝑒𝑑
= 42,800 + 240,200 − 204,000 − 16,250
Closing Balance = $62,750
6. Purchases and Trade Payables
Purchases can be calculated from:
• Cash paid to suppliers
• Opening trade payables
• Closing trade payables
Formula
Credit Purchases
𝐶𝑎𝑠ℎ 𝑝𝑎𝑖𝑑 𝑡𝑜 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑟𝑠 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
Worked Example 3: Calculating Credit Purchases
Information:
• Opening payables = $3,728
• Closing payables = $2,645
• Payments to suppliers = $31,479

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Solution
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 31,479 + 2,645 − 3,728

Credit Purchases = $30,396

Trade Payables Control Account

Debit $ Credit $

Cash paid 31,479 Opening balance b/f 3,728

Closing balance c/f 2,645 Credit purchases 30,396

Total 34,124 Total 34,124

If Cash Purchases Are Also Made

Formula
Total Purchases = Credit Purchases + Cash Purchases
Worked Example 4: Total Purchases
Information:
• Cash purchases = $5,850
• Cash paid to credit suppliers = $41,775
• Opening payables = $1,455
• Closing payables = $1,080
Step 1: Calculate credit purchases
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 41,775 + 1,080 − 1,455
= 41,400

Step 2: Calculate total purchases

𝑇𝑜𝑡𝑎𝑙 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 41,400 + 5,850

Total Purchases = $47,250

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7. Purchases, Inventory and Cost of Sales
The basic trading account relationship is:
Formula
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

Therefore:
Purchases
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Mark-up and Gross Profit Margin

These two terms must not be confused.
Mark-up
Mark-up is the gross profit as a percentage of cost.
For example:
A mark-up of 40% means that for every $100 cost, gross profit is $40.
Therefore:
• Cost = 100%
• Gross profit = 40%
• Sales = 140%
Cost of Sales from Sales
100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 = × 𝑆𝑎𝑙𝑒𝑠
100 + 𝑀𝑎𝑟𝑘 − 𝑢𝑝

Gross Profit Margin

Gross profit margin is gross profit as a percentage of sales.
For example:
A gross profit margin of 25% means gross profit is 25% of sales.
Therefore:
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 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 = 75% 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

Worked Example 5: Purchases Using Mark-up

Information:
• Sales = $80,000
• Mark-up = 33⅓% on cost
• Opening inventory = $8,400
• Closing inventory = $9,350
Step 1: Calculate cost of sales
A mark-up of 33⅓% means:
• Cost = 100%
• Gross profit = 33⅓%
• Sales = 133⅓%
100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 = × 80,000
133⅓

Cost of Sales = $60,000

Step 2: Calculate purchases
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
= 60,000 + 9,350 − 8,400

Purchases = $60,950
Worked Example 6: Purchases When Inventory Falls
Information:
• Budgeted sales = $175,000
• Mark-up = 40% on cost
• Inventory is expected to fall by $13,000

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Step 1: Calculate cost of sales
Sales = 140% of cost.
100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 = × 175,000
140
= 125,000

Step 2: Adjust for inventory reduction

If inventory falls, purchases are less than cost of sales.
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 125,000 − 13,000

Purchases = $112,000
8. Goods Stolen, Destroyed or Otherwise Lost
When goods are stolen or destroyed, the cost of goods lost must be calculated separately.
Formula
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
= 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 + 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑙𝑜𝑠𝑡

Therefore:
Cost of Goods Lost
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

Worked Example 7: Goods Destroyed by Fire

Orlean Flames has:
• Opening inventory = $7,345
• Purchases = $106,420
• Sales = $154,000
• Mark-up = 40% on cost
• Undamaged inventory = $350

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Step 1: Calculate cost of sales
Sales = 140% of cost.
100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 = × 154,000
140

Cost of Sales = $110,000

Step 2: Calculate goods available for sale after the fire
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
= 7,345 + 106,420 − 350
= 113,415

Step 3: Calculate cost of goods destroyed

𝐺𝑜𝑜𝑑𝑠 𝑑𝑒𝑠𝑡𝑟𝑜𝑦𝑒𝑑 = 113,415 − 110,000

Cost of Goods Destroyed = $3,415

Worked Example 8: Goods Stolen
Beau Guitard has the following information:
• Opening inventory = $4,700
• Opening payables = $3,950
• Sales = $42,000
• Gross profit margin = 33⅓% of sales
• Cash paid to suppliers = $28,400
• Closing payables = $5,550
• All inventory was stolen.
Step 1: Calculate purchases
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 𝐶𝑎𝑠ℎ 𝑝𝑎𝑖𝑑 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
= 28,400 + 5,550 − 3,950

Purchases = $30,000

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Step 2: Calculate gross profit
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 = 33⅓% × 42,000

Gross Profit = $14,000

Step 3: Calculate cost of sales
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 = 𝑆𝑎𝑙𝑒𝑠 − 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
= 42,000 − 14,000

Cost of Sales = $28,000

Step 4: Calculate goods stolen
Closing inventory = $0 because all inventory was stolen.
𝐺𝑜𝑜𝑑𝑠 𝑠𝑡𝑜𝑙𝑒𝑛 = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
= 4,700 + 30,000 − 0 − 28,000
Goods Stolen = $6,700
Trading Account

Item $

Revenue 42,000

Opening inventory 4,700

Purchases 30,000

Less: inventory stolen (6,700)

Cost of sales (28,000)

Gross profit 14,000

9. Accounting Treatment of Inventory Lost

The cost of stolen or destroyed goods is treated separately from normal cost of sales.
If Goods Are Uninsured
The business bears the loss.

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Entry:
Debit: Loss on stolen/destroyed inventory
Credit: Inventory/trading account
The loss appears as an expense in profit or loss.
If Goods Are Insured
The business expects to recover the cost from the insurance company.
Entry:
Debit: Insurance claim receivable
Credit: Profit or loss/trading account
When the insurance claim is received:
Debit: Cash
Credit: Insurance claim receivable
10. Reconstructing Cash and Bank
A cash or bank account can be reconstructed using:
Formula
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑐𝑎𝑠ℎ + 𝑅𝑒𝑐𝑒𝑖𝑝𝑡𝑠 − 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 = 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑐𝑎𝑠ℎ
Therefore:
Missing Receipts
𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑐𝑎𝑠ℎ + 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑐𝑎𝑠ℎ

Missing Payments
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑐𝑎𝑠ℎ + 𝑅𝑒𝑐𝑒𝑖𝑝𝑡𝑠 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑐𝑎𝑠ℎ

Worked Example 9: Missing Cash Receipts

Information:
• Opening bank balance = $8,000
• Payments = $52,000

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 • Closing bank balance = $14,500
Solution
𝑅𝑒𝑐𝑒𝑖𝑝𝑡𝑠 = 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 + 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒
= 14,500 + 52,000 − 8,000

Receipts = $58,500
11. Accruals and Prepayments
Cash paid during the year is not always equal to the expense for the year.
This is because:
• Some amounts may relate to the previous year.
• Some amounts may relate to the next year.
Formula
𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 𝐶𝑎𝑠ℎ 𝑝𝑎𝑖𝑑 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑎𝑐𝑐𝑟𝑢𝑎𝑙 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑎𝑐𝑐𝑟𝑢𝑎𝑙 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡
+ 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑝𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡
Worked Example 10: Expense with Accruals and Prepayments
Information:
• Cash paid for rent = $24,000
• Opening accrual = $2,000
• Closing accrual = $2,500
• Opening prepayment = $1,000
• Closing prepayment = $800
Solution
𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 24,000 + 2,500 − 2,000 − 800 + 1,000

Expense = $24,700
12. Drawings
Drawings are amounts taken from the business by the proprietor for personal use.
Drawings may include:
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 • Cash withdrawals
• Goods taken for personal use
• Business payments made for personal expenses
Formula
𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑡𝑟𝑜𝑑𝑢𝑐𝑒𝑑 − 𝐷𝑟𝑎𝑤𝑖𝑛𝑔𝑠

Therefore:
Drawings
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑡𝑟𝑜𝑑𝑢𝑐𝑒𝑑 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
Worked Example 11: Calculating Drawings
Information:
• Opening capital = $50,000
• Profit = $18,000
• Capital introduced = $5,000
• Closing capital = $60,000
Solution
𝐷𝑟𝑎𝑤𝑖𝑛𝑔𝑠 = 50,000 + 18,000 + 5,000 − 60,000

Drawings = $13,000
13. Step-by-Step Method for Solving an Incomplete Records Question
When answering a complete incomplete records question, follow this sequence:
Step 1
Read the question carefully and list all opening and closing balances.
Step 2
Prepare the opening statement of financial position if opening capital is unknown.
Step 3
Prepare the trade receivables control account.

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This may give you:
• Credit sales
• Cash received
• Closing receivables
Step 4
Prepare the trade payables control account.
This may give you:
• Credit purchases
• Cash paid
• Closing payables
Step 5
Add cash purchases to credit purchases.
𝑇𝑜𝑡𝑎𝑙 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 + 𝐶𝑎𝑠ℎ 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

Step 6
Use the gross profit information to calculate cost of sales.
Step 7
Use the trading equation to calculate:
• Closing inventory
• Purchases
• Cost of sales
• Goods stolen or destroyed
Step 8
Reconstruct the cash or bank account if required.
Step 9
Adjust expenses for accruals and prepayments.
Step 10
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Use the capital equation to calculate:
• Profit
• Drawings
• Capital introduced
Step 11
Prepare the Statement of Profit or Loss.
Step 12
Prepare the Statement of Financial Position.
Finally, check:
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

14. Comprehensive Numerical Practice

A trader does not maintain complete accounting records.
The following information is available for the year ended 31 December 20X6:

Information Amount

Opening inventory $12,000

Closing inventory $15,000

Opening trade receivables $8,000

Closing trade receivables $11,500

Cash received from customers $96,000

Opening trade payables $7,000

Closing trade payables $9,000

Cash paid to suppliers $72,000

Cash purchases $4,000

Gross profit margin 25% of sales

Required
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Calculate:
1. Credit sales
2. Credit purchases
3. Total purchases
4. Cost of sales
5. Gross profit
Solution
1. Credit Sales
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
= 96,000 + 11,500 − 8,000

Credit Sales = $99,500

2. Credit Purchases
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 𝐶𝑎𝑠ℎ 𝑝𝑎𝑖𝑑 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
= 72,000 + 9,000 − 7,000

Credit Purchases = $74,000

3. Total Purchases
𝑇𝑜𝑡𝑎𝑙 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 74,000 + 4,000

Total Purchases = $78,000

4. Cost of Sales
Gross profit margin = 25%.
Therefore:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 = 75% × 𝑆𝑎𝑙𝑒𝑠
= 75% × 99,500

Cost of Sales = $74,625

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5. Gross Profit
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 = 25% × 99,500

Gross Profit = $24,875

15. Exam Tips and Common Mistakes
1. Do not confuse mark-up and margin
A 40% mark-up does not mean a 40% gross profit margin.
2. Remember the receivables formula
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
3. Remember the payables formula
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 𝐶𝑎𝑠ℎ 𝑝𝑎𝑖𝑑 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 − 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
4. Add cash purchases
If both cash purchases and credit purchases are given:
𝑇𝑜𝑡𝑎𝑙 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 𝐶𝑎𝑠ℎ 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 + 𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
5. Do not automatically include stolen goods in cost of sales
The cost of goods stolen or destroyed is calculated separately.
6. Cash paid is not always the expense
Accruals and prepayments must be taken into account.
7. Use closing balances in the closing statement of financial position
Do not accidentally use opening balances.
8. Always check the accounting equation
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

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