INCOMPLETE RECORDS
The Nature of incomplete records
An incomplete record situation is whereby; the accounting system falls short of the double entry.
This may be due to:
Lack of records at all; or
Insufficient records that will facilitate the preparation of final accounts.
Reasons for incomplete records:
a) Managers or owners may not have the skills or expertise in preparing and maintaining an
accounting system (records and procedures).
b) It may not be economical for the business to maintain accounting records due to the
volume or/and nature of transactions (small scale businesses)
c) Records are destroyed (e.g. through fire), stolen or misplaced.
Approaches to final Accounts
There are 4 main approaches in preparing final accounts where there are insufficient records.
a) Estimating income from the net assets
b) Estimating income from the use of ratios
c) Use of a simple cashbook and bank statement
d) Use of control accounts
N/B: approach number c and d are normally used together.
(a) Estimating Income from the Net Assets
Where the available records are so deficient (i.e. it is impossible to compile a reasonable
complete cash summary, the only method of estimating the profits or loss for the period, is to
prepare statement of affairs showing the net worth of the business at the beginning and at the
end of the period.
The profit/loss is estimated by use of the following formulas:
Profit or loss = Closing – Opening + Drawings – Additional
Capital Capital Capital
Or where there are no noncurrent liabilities then this optional formula can be used
Profit or loss = Closing - Opening + Drawings - Additional
Net Asset Net Asset Capital
Example 1
A sole trader’s capital position is as follows:
31 December
2020 2021
000 000
Motor vehicles
Cost 7,500 7,500
Depreciation 3,000 4,500
4,500 3,000
Stock 2,960 3,450
Debtors 1,150 2,060
Bank 925 2,125
Cash __263 ___54
9,798 10,689
Creditors 2,860 3,340
Net assets 6,938 7,349
He has estimated his drawings for 2021 at 12,500,000. Estimate his net profit for the year.
Solution:
Net profit = Closing - Opening + Drawings - Additional
Net Asset Net Asset Net assets
= 7,349,000 – 6,938,000 + 12,500,000
= 12,911,000
(b) Use of Ratios
There are 3 important ratios to be looked at:
1) Gross profit margin
2) Mark up
3) Stock turnover
If a firm has a uniform Gross Profit for all the items sold then any information available on sales
or purchases can be used to derive the total Gross Profit for the period and in case there is
sufficient information on expenses, then the Net Profit can also be derived.
The above ratios are computed as follows:
1) Gross Profit Margin = Gross Profit x 100
Sales (selling price)
Example 2
E.g. If the selling price of a unit is 1,000 and Gross Profit made per unit is 250, the Gross Profit
Margin will be:
= 250 x 100
1,000 = 25%
If a firm sells 1,000 units in a financial period, then the Gross Profit will be:
= 25% (1,000,000)
= 250,000
2) Mark up
= Gross Profit x 100
Cost of Sales (cost price per unit)
In the above example, the markup will be: = 250 x 100
750 = 33.33%
N/B: 750 = 1,000 – 250
Cost = selling price – gross profit
3) Stock Turnover
Measures the rate at which a firm uses its stocks to make sales or turnover.
The formula is: = Cost of Sales
Average Stocks expressed as number of times
Average stock = Opening Stock + Closing Stock
2
Example 3
A firm has the following data for the period:
‘000’
Opening stock 20,000
Purchases 300,000
Closing stock 30,000
Required: The Stock Turnover Ratio.
Average Stock = 30,000,000 + 20,000,000
2
= 25,000,000
Cost of sales = (20,000,000 + 300,000,000) – 30,000,000
= 290,000,000
Stock Turnover = 290,000,000
25,000,000
= 11.6 times
Example 4
Kedenko gives you the following information as at 30 June 2020
‘000’
Stock 1 July 2019 6,000
Purchases 54,000
Kedenko’s mark-up is 50% on cost of goods sold. His average stock during the year was
12,000,000.
Required:
a. Draw up a trading and profit and loss account for the year ended 30 June 2020.
b. Calculate the closing stock as at 30 June 2020.
c. State the total amount of profit and loss expenditure Kedenko must not exceed if he is to
maintain a net profit on sales of 10%.
Solution
a) Average Stock = Opening Stock + closing stock
2
12,000,000 = 6,000,000 + C
2
C = 24,000,000 – 6,000,000
= 18,000,000
Gross profit = 50%
Cost of Sales = 42,000,000
Gross Profit = 50%
42,000
Gross Profit = 21,000,000.
Memorandum Trading Account
‘000’
Sales 63,000
Less cost of sales (42,000)
Gross profit 21,000
Expenses (14,700)
Net profit 6,300
Example 4
Kedenko’s business has a rate of turnover of 7 times. Average stock is 12,600,000. Gross profit
margin allowed is 33¼% off all selling prices. Expenses are 66 ¾% of gross profit.
You are to calculate:
(a) Cost of goods sold.
(b) Gross profit margin.
(c) Turnover.
(d) Total expenses.
(e) Net profit.
Solution:
Profit schedule
‘000’
Turnover 132,300
Cost of goods sold 88,200
Gross profit 44,100
Expenses (29,400)
Net profit 14,700
Turnover = Cost of Sales
Average stock
Margin = Gross Profit
Sales
= Cost of Sales
12,600,000
Cost of Sales = 88,200,000
(c). Use of Cashbook and Bank Statement and Control Accounts.
If there is sufficient information relating to cash payments and receipts, then a simple cashbook
for both cash in hand and cash at bank can be prepared in confirmation of deposits and payments
made from the bank statement.
The information can then be posted to the relevant accounts e.g. any income received to the
relevant income accounts, expenses to relevant expense accounts and assets and liabilities to
relevant accounts.
Information relating to amounts owed to suppliers/creditors and amounts due from debtors can
be posted in summary to the control accounts.
The preparation of the cashbook and control accounts will enable one to estimate any cash sales
or credit sales and cash purchases or credit purchases.
Steps in Preparing the Final Accounts
a. Prepare a statement of affairs at the beginning of the period (a list of all assets and
liabilities) to determine the beginning capital.
b. Open and post the balances and transactions to these 3 relevant accounts (i.e. the
cashbook (for both cash in hand and bank), sales ledger control account and purchases
ledger control account. Any other account can be opened where necessary.
c. Make adjustments for any accruals or prepayments.
d. Extract a list of the balances into a trial balance.
e. Prepare the final accounts.
Example 6
Kedenko does not keep proper books of account. You ascertain that his bank payments and
receipts during the year to 31st December 2020 were as follows
Reciepts Payments
000 000
Balance 1 Jan 2020 572 Purchases 10,007
Cheques for sales 13,179 Expenses 2,950
Cash banked 14,005 Drawings 11,250
Balance 31 Dec 3,751 Delivery van 7,300
2020
31,507 31,507
From a cash notebook you ascertain:
000
Cash in hand 1 January 2020 62
Cash takings 16,300
Purchases paid in cash 1,850
Expenses paid in cash 375
Cash in hand 31st December 2020 65
Drawings by proprietor in cash Unknown
You discover that assets and liabilities were as follows:
1 Jan 2020 31st Dec 2020
000 000
Debtors 1,850 2,070
Trade creditors 1,250 1,420
Stock on hand 2,650 2,990
Depreciation on the van is to be provided at the rate of 20% per annum.
Required
a. Statement of affairs
b. Control accounts
c. Statement of comprehensive incomes for the year ended 31st December 2020
d. Statement of financial position as at 31st December 2020
Solution
Statement of Affairs as at 1 January 2020
000
Current Assets
Cash at bank 572
Cash in hand 62
Debtors 1,850
Stock 2,650
5,134
Current Liabilities
Creditors (1,250)
Net Assets 3,884
Capital 3,884
Sales Ledger Control Account
000 000
Balance b/d 1,850 Cash Takings 16,300
Sales 29,699 Bank 13,179
______ Bal c/d 2,070
31,549 31,549
Purchases Ledger Control Account
000 000
Cash purchases 1,850 Bal b/d 1,250
Bank 10,007 Purchases 12,027
13,277 13,277
Cash in Hand Account
000 000
Balance b/d 62 Creditors 1,850
Debtors/sales 16,300 Expenses 375
Bank 14,005
Bal c/d 65
_____ Drawings ___67
16,362 16,362
The capital invested at any point of time in a business by the owner is represented by the
difference between the assets and liabilities at that time.
The difference between the capital at the end and the capital at the beginning of the
trading period represents the trading profit made during that period, unless there were
withdrawals or investments of additional capital.
Kedenko
Statement of comprehensive incomes for the year ending 31 December 2020
000 000
Sales 29,699
Less cost of goods sold:
Opening stock 2,650
Add purchases 12,027
14,677
Less closing stock (2,990) 11,687
GROSS PROFIT 18,012
Less Expenses:
Expenses (375 + 2,950) 3,325
Depreciation 1,460 (4,785)
Net Profit 13,227
Kedenko
Statement of financial position as at 31st December 2020
000 000 000
Noncurrent assets Cost Depreciation NBV
Delivery van 7,300 1,460 5,840
Current Assets
Stock 2,990
Debtors 2,070
Cash ___65
5,125
Less current liabilities
Creditors 1,420
Bank overdraft 3,751 5,171 __46
5,794
Financed by:
Capital 3,884
3,884
Add net profit 13,22
7
17,111
Less drawings (11,250 + 67) 11,317
5,794