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Calculating Profit with Incomplete Records

Chapter 17 discusses the challenges small businesses face in maintaining complete accounting records and outlines methods for calculating profit or loss from incomplete records. It emphasizes the importance of comparing opening and closing capital to determine financial performance and provides examples to illustrate these calculations. Additionally, it explains the concept of a statement of affairs as a summary of a business's assets, liabilities, and capital when proper ledgers are not available.

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RAJA RAHAIZAD RAJA ALI
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7 views16 pages

Calculating Profit with Incomplete Records

Chapter 17 discusses the challenges small businesses face in maintaining complete accounting records and outlines methods for calculating profit or loss from incomplete records. It emphasizes the importance of comparing opening and closing capital to determine financial performance and provides examples to illustrate these calculations. Additionally, it explains the concept of a statement of affairs as a summary of a business's assets, liabilities, and capital when proper ledgers are not available.

Uploaded by

RAJA RAHAIZAD RAJA ALI
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

CHAPTER 17: INCOMPLETE

RECORDS (PART 2)
LESSON OBJECTIVES

 Prepare opening and closing statement


of affairs
 Calculate profit/loss for the year from
changes in capital
Not all businesses keep a proper
set of accounting records?

Small businesses, such as shopkeepers, hawkers, and


small traders do not always have the knowledge,
expertise and time to keep a complete set of
accounting records.

However, these businesses will need to have financial


statements prepared annually. (Why ?)
So how can the profit/(loss)
for the year be calculated
if the bookkeeping records
are inadequate or
incomplete?
Two basic techniques used
for incomplete records
1. Comparison of capital
2. Analysis of accounts
Comparing opening & closing
capital

Four reasons why capital might change.


1. Introduction of extra capital
2. Withdrawal of capital (drawings)
3. Profit earned by the business
4. Loss suffered by the business
PROFIT OR LOSS = THE INCREASE
OR DECREASE IN CAPITAL.

We can calculate profit when we have details of the


opening and closing capital.

Example 1
The opening capital of Edward Phillips at 1 Jan 2005
was $2,000. At 31 December 2005 the capital figure
was $8,500.
How much profit has been earned during the year?
Opening capital 2,000
Profit (must be) 6,500
Closing capital 8,500
We can calculate profit when we have
details of the opening and closing capital
and have details of capital introduced
and withdrawn during the year.

Example 2
The opening capital of Mrs Potts at 1 Jan 2005
was $16,000. On 1 July 2005 she introduced
further capital of $4,000 and during the year
withdrew a total of $8,000. At 31 December
2005 the capital figure was $30,000.
How much profit has been earned during the
year?
Opening capital 16,000
Capital introduced 4,000
Withdrawals ( 8,000)
12,000
Profit (must be) 18,000
Closing capital 30,000
Example 3
The opening capital of David James at 1 Jan 2005
was $32,000. During the year he withdrew $1,000 a
month. At 31 December 2005 the capital figure was
$18,000.
How much profit or loss has been earned or suffered
during the year?
Opening capital 32,000
Withdrawals (12,000)
20,000
Loss (must be) (2,000)
Closing capital 18,000
Calculation of profit/(loss)
for the year
Opening capital XXXX
Profit/(Loss) for the year XXXX(balancing figure)
XXXX
(+) Capital introduced XXXX
XXXX
(-) Drawings XXXX
Closing capital XXXX
Statement of affairs
 A summary of business’s assets, liabilities and
capital at a given date.
 It is exactly the same format as statement of
financial position.
 It is called statement of affairs because the
business does not have a ledger from which
balances can be extracted.
 In other words, the transactions are not
recorded using the double entry system.
 It is used to find the capital amount.
An example:
Statement of Affairs
Alan Parson
Statement of Affairs at 31 December 2012

Non-current assets
Motor vehicle 10 000
Furniture 2 000
12 000
Current assets
Inventory 2 500
Trade receivables 2 000
Bank 5 000 9 500
Total assets 21 500

Financed by: Capital (balancing figure) 18 500

Current liabilities
Trade payables 3 000
Total capital and liabilities 21 500
REFLECTION

 What are incomplete records ?


 How to calculate profit/(loss) based on
comparison of capital method ?

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