INCOMPLETE RECORDS

1
INCOMPLETE RECORDS

• Many small firms can have all the information
  they want by merely keeping a cash book and a
  record, not necessarily in double entry form, of
  their debtors and creditors. However, there
  remains the need to produce financial statements
  in order to determine, at the very least the
  amount of tax the business has to pay.

2
STATEMENT OF AFFAIRS

• H. Green has not kept proper accounting records,
  but she has kept notes in diary form of the
  transactions of her business. She is able to
  give you details of her assets and liabilities as
  at 31 December 2005 and 31 December 2006.

3
STATEMENT OF AFFAIRS

• At 31 December 2005
• Assets
• Van 1,000
• Fixtures 700
• Stock 850
• Debtors 950
• Cash at Bank 1,100
• Cash in Hand 100

4
STATEMENT OF AFFAIRS

• At 31 December 2005
• Liabilities
• Creditors 200
• Loan from J. Ogden 600

5
STATEMENT OF AFFAIRS

• At 31 December 2006
• Assets
• Van (after depreciation) 800
• Fixtures (after depreciation) 630
• Stock 990
• Debtors 1,240
• Cash at Bank 1,700
• Cash in Hand 200

6
STATEMENT OF AFFAIRS

• At 31 December 2006
• Liabilities
• Creditors 300
• Loan from J. Ogden 400

7
STATEMENT OF AFFAIRS

• At 31 December 2006
• Movement in capital
• Drawings 900

8
STATEMENT OF AFFAIRS

• It is necessary to put these figures into a
  format that will enable you to identify profit.
• That is, you need to prepare a STATEMENT OF
  AFFAIRS AT THE BEGINNING OF THE PERIOD
  (31/12/2005) and a STATEMENT OF AFFAIRS AT THE
  END OF THE PERIOD (31/12/2006) in order to
  calculate the profit for the period.

9
STATEMENT OF AFFAIRS

• From your knowledge of the accounting equation,
  you should know that unless there has been an
  introduction of capital into the firm, the only
  way that capital can be increased is by making a
  profit.
• Of course capital would be decreased by making a
  loss, or by the withdrawal (drawings) of funds by
  the owner/s.

10
H. GreenOpening State of Affairs as at 31
December 2005

• FIXED ASSETS
• Van 1,000
• Fixtures 700
• 1,700
• CURRENT ASSETS
• Stock 850
• Debtors 950
• Bank balance 1,100
• Cash balance 100
• 3,000
• CURRENT LIABILITIES
• Creditors (200)
• Loan J. Ogden (200) (400)
• NET CURRENT ASSETS 2,600
• LONG TERM LIABILITIES
• Loan J. Ogden (400)

11
STATEMENT OF AFFAIRS

• The closing capital is calculated as the
  difference between the assets and the liabilities
  at the end of the year.
• Note, that we know that J. Ogdens loan is
  long-term as only 200 of the loan has been
  repaid as of 31 December 2006.
• Hence, at 31 December 2005, 200 of the loan is
  current, whilst 400 is long term, as only 200
  was repaid in the year to 31 December 2006.

12
H. GreenClosing State of Affairs as at 31
December 2006

• FIXED ASSETS
• Van 800
• Fixtures 630
• 1,430
• CURRENT ASSETS
• Stock 990
• Debtors 1,240
• Bank balance 1,700
• Cash balance 200
• 4,130
• CURRENT LIABILITIES
• Creditors (300)
• Loan J. Ogden (200) (500)
• NET CURRENT ASSETS 3,630
• LONG TERM LIABILITIES
• Loan J. Ogden (200)

13
H. GreenClosing State of Affairs as at 31
December 2006

• FIXED ASSETS
• Van 800
• Fixtures 630
• 1,430
• CURRENT ASSETS
• Stock 990
• Debtors 1,240
• Bank balance 1,700
• Cash balance 200
• 4,130
• CURRENT LIABILITIES
• Creditors (300)
• Loan J. Ogden (200) (500)
• NET CURRENT ASSETS 3,630
• LONG TERM LIABILITIES
• Loan J. Ogden (200)

14
CAPITAL METHOD OF DETERMING PROFIT

• This method of calculating profit is very
  unsatisfactory, due to potential inaccuracies.

15
DRAWING UP THE FINANCIAL STATEMENTS

• The accountant has found the following details
  of transactions for W. Murphys shop for the year
  ended 31 December 2005.

16
DRAWING UP THE FINANCIAL STATEMENTS

• Sales are mostly on a credit basis. No record of
  sales has been made, but 10,000 has been
  received from persons to whom goods have been
  sold, 9,500 by cheque and 500 by cash.
• The amount paid by cheque to suppliers during the
  year amounted to 7,200.
• Expenses paid during the year, by cheque were
  rent 200 and general expenses 180. In
  addition, a cash payment of rent for 50 was
  made.
• W. Murphy took 10 cash per week (for 52 weeks)
  as drawings.
• Other information is detailed below

17
DRAWING UP THE FINANCIAL STATEMENTS

• 31/12/2004 31/12/2005
• Trade Debtors 1,100 1,320
• Trade Creditors 400 650
• Rent owing 50
• Cash at Bank 1,130 3,050
• Cash in hand 80 10
• Stock 1,590 1,700
• The only fixed asset consists of fixtures which
  were valued at 31 December 2004 at 800. These
  are to be depreciated at 10 per cent per annum.

18
STAGE 1DRAW UP AN OPENING STATEMENT OF AFFAIRS

• W. Murphy
• Statement of Affairs as at 31 December 2004
• FIXED ASSETS
• Fixtures 800
• CURRENT ASSETS
• Stock 1,590
• Debtors 1,100
• Bank 1,130
• Cash 80
• 3,900
• CURRENT LIABILITIES
• Creditors (400)
• NET CURRENT ASSETS 3,500
• 4,300
• CAPITAL 4,300

19
STAGE 2PREPARE BANK AND CASH ACCOUNTS

• CASH A/C
• Bal b/d 80
• Debtors 500
• Rent 50
• Drawings 520
• Bal c/d 10
• 580 580
• Bal b/d 10

20
STAGE 2PREPARE BANK AND CASH ACCOUNTS

• BANK A/C
• Bal b/d 1,130
• Debtors 9,500
• Rent 200
• Creditors 7,200
• General 180
• Bal c/d 3,050
• 10,630 10,630
• Bal b/d 3,050

21
STAGE 3PREPARE TOTAL DEBTORS AND CREDITORS
ACCOUNTS

• TOTAL DEBTORS A/C
• Bal b/d 1,100
• Cash 500
• Bank 9,500
• SALES 10,220
• Bal c/d 1,320
• 11,320 11,320
• Bal b/d 1,320

22
STAGE 3PREPARE TOTAL DEBTORS AND CREDITORS
ACCOUNTS

• TOTAL CREDITORS A/C
• Bal b/d 400
• Bank 7,200
• PURCHASES 7,450
• Bal c/d 650
• 7,850 7,850
• Bal b/d 650

23
STAGE 4EXPENSES

• Where there are no accruals or prepayments either
  at the beginning or the end of the accounting
  period, then expenses paid will equal expenses
  incurred during the period.
• However, where such adjustments exist, then an
  expense account should be drawn up for each
  particular expense.
• In this example, only a rent account needs to be
  drawn up.

24
STAGE 4EXPENSE ACCOUNTS

• RENT A/C
• Cash 50
• Bank 200
• P L A/c 300
• Bal c/d 50
• 300 300
• Bal b/d 50

25
W. MurphyTrading, Profit and Loss AccountYear
Ended 31 December 2005

• Sales 10,220
• Cost of Sales
• Opening stock 1,590
• Purchases 7,450
• 9,040
• Closing stock (1,700) (7,340)
• GROSS PROFIT 2,880
• EXPENSES
• Rent 300
• General expenses 180
• Depreciation Fixtures 80
• (560)
• Net Profit 2,320

26
W. MurphyBalance Sheet as at 31 December 2005

• FIXED ASSETS COST DEP NBV
• Fixtures 800 80 720
• CURRENT ASSETS
• Stock 1,700
• Debtors 1,320
• Bank 3,050
• Cash 10 6,080
• CURRENT LIABILITIES
• Creditors 650
• Accruals 50 (700)
• NET CURRENT ASSETS 5,380
• 6,100
• CAPITAL
• Balance brought forward 4,300
• Net Profit 2,320
• 6,620
• Drawings (520)

27
INCOMPLETE RECORDS AND MISSING FIGURES

• In practice, part of the information relating to
  cash receipts or payments is often missing.
• If the missing information is in respect of one
  type pf payment, then it is normal to assume that
  the missing figure is the amount required to make
  both sides of the cash account total to the same
  amount.

28
EXAMPLE

• The following information on cash and bank
  receipts and payments is available

29
EXAMPLE

• CASH BANK
• Cash lodged at bank 5,500
• Receipts from debtors 7,250 800
• Paid to suppliers 320 4,930
• Drawings for year ? 0
• Expenses paid 150 900
• Balances (01/01/2005) (Debit) 35 1,200
• Balances (31/12/2005) (Debit) 50 1,670

30
EXAMPLE

• BANK A/C
• Bal b/d 1,200
• Debtors 800
• Creditors 4,930
• Expenses 900
• Bal c/d 1,670
• Cash 5,500
• 7,500 7,500
• Bal b/d 1,670

31
EXAMPLE

• NOTE THAT THE BANK ACCOUNT SHOULD BE ACCURATE,
  AS IT CAN USUALLY BE CONSTRUCTED FROM A BANK
  STATEMENT.

32
EXAMPLE

• CASH A/C
• Bal b/d 35
• Debtors 7,250
• Creditors 320
• Expenses 150
• Bank 5,500
• Drawings 1,265
• Bal c/d 50
• 7,285 7,285
• Bal b/d 50

33
FURTHER EXAMPLE

• The following information on cash and bank
  receipts and payments is available

34
FURTHER EXAMPLE

• CASH BANK
• Cash withdrawn from bank
• (for business use) 920
• Receipts from debtors ? 6,080
• Paid to suppliers 0 5,800
• Drawings for year 1,180 315
• Expenses paid 640 230
• Balances (01/01/2007) (Debit) 40 1,560
• Balances (31/12/2007) (Debit) 70 375

35
FURTHER EXAMPLE

• BANK A/C
• Bal b/d 1,560
• Debtors 6,080
• Creditors 5,800
• Expenses 230
• Drawings 315
• Cash 920
• Bal c/d 375
• 7,640 7,640
• Bal b/d 375

36
FURTHER EXAMPLE

• CASH A/C
• Bal b/d 40
• Bank 920
• Expenses 640
• Drawings 1,180
• DEBTORS 930
• Bal c/d 70
• 1,890 1,890
• Bal b/d 70

37
FURTHER EXAMPLE

• It must be emphasised that balancing figures are
  acceptable only when all the other figures have
  been verified. For example, if a cash expense
  has been omitted when the cash from debtors is
  being calculated, then this would result in an
  understatement, not only of expenses, but also
  sales.

38
TWO PIECES OF INFORMATION ARE MISSING?

• If both cash drawings and cash receipts from
  debtors (or from cash sales) were not known, it
  would not be possible to deduce both of these
  figures separately.
• The only course of action would be estimate
  whichever figure was more capable of being
  accurately assessed, use this as a known
  figure. And then deduce the other.
• This is a most unsatisfactory position as both
  figures are estimates, the accuracy of one
  relying entirely upon the accuracy of the other.

39
CASH SALES AND PURCHASES FOR CASH

• Where there are cash sales as well as sales on
  credit terms, then the cash sales must be added
  to sales on credit to provide the total sales for
  the year.
• Similarly, purchases for cash will be need to be
  added to credit purchases in order to produce the
  figure of total purchases.