topic 16 incomplete records

• For every small shopkeeper, or small business to keep its books using a full double entry system would be ridiculous

  • owners of small firms likely won't know how to use double entry system even if they wanted to
  • more likely they would use a single entry system
  • might not even do that - resulting to incomplete records
  • many small firms can have all the info they want by simply keeping a cash book not necessarily double entry system
  • the profits will still have to be calculated even with incomplete records
• Profit for the year can be calculated by comparing net assets (assets-liabilities) at the start of a period with net assets at the end of a period. This is an accurate way of determining profit but it has the major drawback that it does not show all the financial details of exactly how the profit was earned. These details are important for management purposes
• Statement of affairs - A statement of affairs is assets-liabilities and is the name given to what would have been shown on a balance sheet if it had been prepared from a full set of complete records
• Opening capital + Additional capital + Profit - Drawings = Closing capital is then calculated to calculate the figure of profit
• Profit = Closing capital + Drawings - Opening capital - Additional capital or P = CC + D - OC -AC
• If a business can only provide incomplete records, it might still be able to produce financial statements if sufficient information is available. When accountants are faced with incomplete records their first task is to find the missing figures. One of the problems is that different businesses provide accountants with different sets of information. No two jobs are the same. However, a number of techniques can be used to find missing figures
• These techniques include:

  • producing a cash book summary to determine the cash and bank balances
  • using control accounts to find the total sales and purchases for the year, to turn to receipts and payments into income and expenditure
  • using ledger accounts for accrued/prepaid expenses/income and depn
  • compiling an opening statement of affairs to calculate opening capital
• Credit sales for the year = Receipts from credit customers - Receivables at the beginning of the year + Receivables at the end of the year
• Explain the role of the statement of affairs when calculating profit for the year:

  • helps in identifying what net assets are (assets-liabilities)
  • net assets equal to closing capital
  • once we have identified what the closing capital is the closing capital formula can be rearranged to workout what the missing profit figure is
  • CC + D - AC - OC = Profit
• Explain the usefulness of a cash book in identifying missing figures:

  • the detail column highlights which account receipts are linked to on the debit side and payments on the credit side
  • receipts - cash sales, cheques from customers
  • payments - cash purchases, cheques to suppliers
• Explain the usefulness of control accounts in identifying missing figures:

  • control accounts are used to check the accuracy of receivable figure in SLCA and payable figure in PLCA by taking the total figures from the appropriate books of prime entry
  • can calculate the missing number on the debit side to match with the credit side and vice versa
• Explain how the revaluation method is used to calculate depreciation - The two conventional methods of depn include straight line and reduced balance which depreciates nca based on an agreed percentage. The revaluation method may be used when this has not been done each year from the purchase of nca or the business wants to identify actual depn based on a recent revaluation. This is calculated by working out the difference between at cost and revaluation