CHAPTER 22
INCOMPLETE RECORDS
22.0 LEARNING OBJECTIVES
At the end of this chapter, students are expected to construct final accounts from any set of accounting records which fall short of complete double entry. Since in extreme cases there may be no any records whatever of the day-to-day transactions, it is expected that the students shall be able to build up accounts largely from estimates. In other instances, books may have been kept by ‘single entry’ or data may be available by means of which double entry can be constructed.
22.1 APPROACH TO BE ADOPTED
In order to prepare the Statement of Profit and Loss and Comprehensive Income and the Statement of Financial Position, the following procedure is recommended: Stage 1
Construct a statement of the financial condition at the beginning of the period. This requires assets and liabilities to be determined.
The values of any non-current assets can be obtained from such details as the trader is able to supply of their cost and the dates upon which they were acquired, provision for depreciation from the date of acquisition to the commencement of the current period being deducted. The trader must provide an estimate of the value of his inventories and particulars of any book debts and liabilities. Accounts should be opened, and estimated asset values posted to the debit side. Total of the book debts should be debited to total trade receivables account, and the total of the liabilities credited to a total trade payables account. This is illustrated in a later section. The excess of the aggregate of the assets over the liabilities may be taken to represent the amount of the trader’s capital at the commencement of the period and should be credited to his/her capital account.
Stage 2
A careful analysis should be made of the bank statement, and a cash summary (which may take a form of receipts and payments account). For this purpose, analysis columns should be prepared for each of the principal headings of receipts and payments. For example, the lodgments into the bank may be analysed under the heading of cash takings, income from investments, the sale of assets, new capital paid in and private income of the trader. Payments from the bank should be analysed as between payments for goods purchased, rent, rates, insurances and other business expenses, cheques cashed for wages, petty cash and personal expenditure, and cheques drawn for the trader’s private purposes.
Stage 3
Ascertain the amounts of any cash takings which have not been paid into the bank, but have been used by the trader for the payment of business expenses, goods purchased for cash and personal expenses. An estimate should also be obtained of the value of any inventory which may have been withdrawn by the trader for his own personal use or for that of his/her family.
Stage 4
On completion of the above analysis, postings will be made as follows:
- From the debit side of the cash summary:
- cash takings to the credit side of the total trade receivables account;
- income from investments (if any) to the credit of income from investments account;
- proceeds of sale of assets (if any) to the credit of the appropriate asset accounts;
- other items to the credit of the respective accounts.
If a profit or loss on the sale of assets is disclosed, this should be transferred either to Income Statement (the Statement of Profit and Loss and Comprehensive Income) or the proprietor’s capital account.
- From the credit side of the cash summary:
- payments for goods purchased to the debit of total trade payables account;
- payments of expenses to the debit of the relevant nominal account;
- cheques drawn for petty cash to the debit of petty cash account;
- the proprietor’s personal drawings to the debit of his current account;
- the purchase of assets (if any) to the debit of the respective assets accounts.
Stage 5
The amount of any cash takings used for business or private purposes should be noted, the appropriate account debited and the appropriate receivables (trade or other) account credited. Note, however, that in incomplete record situations, private drawings may need to be calculated as a balancing figure.
Stage 6
This involves calculating year-end adjustments and balances.
A schedule should be compiled of the book debts outstanding, the total of which should be carried down in the total trade receivables account. The balance of this account will now represent the total sales for the period and should be transferred to the credit of trading account.
Similarly, s schedule should be made of liabilities outstanding trade and other payables. The total should be carried down in the total trade payables account. The balance of this account will now represent the total purchase for the period and should be transferred to the debit of trading account.
Accruals and prepayments will be carried down as closing balances in the relevant expenses accounts.
Stage 7
The whole of the transactions will now be recorded in total double entry form and it will be possible to extract a Statement of Profit and Loss and Comprehensive Income as well as a Statement of Financial Position in the usual way.
22.3 RELIABILITY OF INFORMATION
The gross profit percentage revealed by the trading account may afford some indication as to the accuracy or otherwise of the data and estimates used in compiling the accounts. If it is found that this percentage is substantially lower than the percentage of gross profit normally earned in the particular trade, doubt would be thrown on the accuracy of the amounts of the opening and closing inventories, purchases or sales. Further enquiry would therefore be necessary. In particular, information should be elicited as to the style in which the trader lives. It will often be found that the amount of cash takings alleged to be withdrawn for private use is wholly incompatible with the size and character of the trader’s domestic establishment and mode of life. A re-estimation of the amount of personal drawings might thus be necessary. See section x.5 on Use of the Gross Profit Percentage for further comments.
USE OF THE GROSS PROFIT PERCENTAGE
In the above illustration there was sufficient information to enable the sales figure of K11,638 to be calculated from total trade receivables account.
In some questions, however, such information is not always readily available. In cases such as these, it may be possible to calculate sales indirectly as long as a gross profit percentage is provided.
The approach is quite simple:
- Calculate cost of sales:
Opening inventory + purchases – closing inventory;
- Convert cost of sales to sales:
eg if gross profit percentage is 20%, sales = 100/80 x cost of sales.
Once sales for the year have been estimated, and opening and closing trade receivables taken into account, the figure of cash takings can be calculated as a balancing figure in the total trade receivables account.
22.6 DEFICIENT ACCOUNTING RECORDS
Where the available records are so deficient that it is impossible to compile a reasonably complete cash summary, the only method of estimating the profit or loss for the period is to prepare statements of affairs showing the ‘net worth’ of the business at the beginning and at the end of the period respectively.
A statement of affairs for this purpose is a document in the form of a Statement of Financial Position, showing on one side the estimated amounts of the various assets, and on the other the liabilities, the difference between the two sides representing the proprietor’s ‘net worth’ or capital at the date of the statement.
If a statement of affairs has been drawn up at the end of the preceding period, the opening capital for the current period would be shown thereby. It would then be necessary to prepare a similar statement at the end of the current period, and to find the difference between the opening and closing figures of capital, the amount of which, after adding back any sums withdrawn, and deducting any new capital introduced, would represent the profit or loss for the period.
SUMMARY OF THE CHAPTER
The chapter explained how accounts may be prepared from incomplete records. There are different situations where this approach may be appropriate. However, reliability of the information may be brought into question at times since the amounts used are mainly based on estimates.