CHAPTER 17
INCOMPLETE RECORDS
1 DISTINCTION BETWEEN INCOMPLETE AND LIMITED ACCOUNTING RECORDS
Incomplete accounting records records which the trader has not fully completed or where no records at all have been kept of transactions. Limited accounting records :records kept by a trader of certain transactions but additional information is required to prepare financial statements.
2 INCOMPLETE ACCOUNTING RECORDS
The most basis incomplete records situation of all is where one is required to calculate net profit, given details only of a sole traders capital at the beginning and end of the year, and of amounts he has withdrawn (drawings) and contributed (capital) Profit for the year=Increase in net assets Capital introduced +Drawings.
Net assets this year end Net assets last year end Increasing in net assets Less: capital introduced by owner Add: Drawings Profit for the year
$ X (X)
X (X) X X
3 LIMITED ACCOUNTING RECOREDS If basis information regarding receipts and payments is provided, it is possible to build to a balance sheet and income statement, although some important assumption may well need to be made. The procedure suggested below is a full procedure suitable for a wide range of limited records questions and may be set out in basic steps.
Step 1 set aside one sheet of paper for the income statement and one sheet for the balance sheet. These can be started with the main heading and some information can be inserted straight into them Step 2 Prepare the opening balance sheet from information on assets and liabilities. The opening capital account balance can be calculated as a balance figure (capital=assetsliabilities)
Calculation of opening capital Dr $ Bank X Cash X Receivables X Payables Expense payables Inventory X X Net assets=opening capital X-Y
Cr $
X X
Y
Step 3 Insert the opening balance in T accounts. Leave plenty of space between the ledger accounts. For example:
Balance
Cash at bank Cash in hand Receivables Payables
T account required
Cash at bank for bank transactions) Cash in hand for cash transactions) Accounts receivable control account (to calculate sales) Accounts payable control account to calculate purchases)
Accrued expenses Separate account for each expense category Prepayments Separate account for each expense category
Step 4 prepare the cash account using any cash and bank information, and post the cash and bank entries to the other accounts. If a question gives full details of the bank account, there is no need to write it out again as part of your workings. Depending on the degree of incompleteness, cash is likely to contain a missing item of information. This can be found by calculating a balancing figure. For example:
Cash $ Balance b/d X Expenses Taking banked X Drawings Cash from Customers-accounts X Balance c/d Receivable Control( bal fig) X X
$ X X
Step 5 insert any closing balances provided in the question in respect of receivables, payables, accrued expenses and prepayments. In simple questions, the respective transfers to the income statement may be calculated as balancing items. Accounts receivable control account $ $ Opening Cash X Receivables b/d X Closing Sales revenue receivables c/d X (bal fig) X X X
Accounts payable control account $ $ Cash X Opening trade Bank X payable b/d X Closing trade Purchases Payable c/d X (bal fig) X
X X
Rent account (assuming paid in advance) $ $ Opening Income statement prepayment b/d X (bal fig) X Bank X Closing prepayment c/d X X X
Telephone account (assuming paid in arrears) $ $ Bank X Opening Closing accrual c/d X accrual b/d X Income statement (bal fig) X X X
Step 6 Carry out any further adjustments as required, such as dealing with doubtful debts and depreciation. Step 7 The remaining figures can be inserted into final accounts.
4 USING RATIOS AND PERCENTAGES What happens if there are two unknown in the cash account-for example, drawing and takings? What can still construct the financial statements provided we are given some additional information. Gross profit percentage ---With gross profit margin the percentage of profit is given by reference to sales revenue.
Gross profit percentage or profit margin=gross profit/ sales revenue*100 Thus if we know that sales revenue totals $8000 and the gross profit percentage is 25%,the following can be deduced: $ % Sales revenue 8000 100 (given) Less: cost of sales 6000 75 25 Gross profit 2000 (given)
Margins and mark-ups With gross profit mark-up the percentage of profit is given by reference to cost of sales. Gross profit mark-up percentage=gross/cost of sales Thus if we know that cost of sales is $6000 and the mark-up is one third, we can set out the following:
$ Ratio Sales revenue 8000 4 Cost of sales 6000 3 Gross profit 2000 1 In ratio terms, gross profit is one part to three parts costs. Sales are there four parts(1+3),sp total sales=4/3*$6000=$8000
Converting margins to mark-ups and vice versa ---Suppose we have been told that sales are $60,000 and the mark-up is 25%.The information given can be set out as follows. $ % Sales revenue 60000 125 Cost of sales 48000 100 Gross profit 12000 25
---To convert mark-up to margin( where figures are percentages): Margin=mark-up/(mark-up+100) ---To convert margin to mark-up Mark-up=margin/(100-margin) ---Uses of margin and mark-up # Suppose that inventory was destroyed in a fire and that there was enough information to calculate sales, purchases and opening inventory. The gross profit percentage would enable sales to be converted to cost of sales. Closing inventory could then be calculated as a balancing figure.
# Suppose that a trader always received a rebate from his suppliers amounting to 1% of purchases, and that in the current year the rebate amounted to $[Link] this tells us that purchases were $[Link] cash paid this suppliers was unknown, it could the calculated as a balancing figure.
5 INCOMPLETE RECORDS QUESTINS IN THE EXAM All incomplete records questions are different so there is no universally correct way of attempting them. Treat each question on its merits, remembering the overall criterion that double entry bookkeeping should be used to prepare the required financial statements.
