CHAPTER 17 INCOMPLETE RECORDS 1 DISTINCTION BETWEEN

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CHAPTER 17

• INCOMPLETE RECORDS

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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.

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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  of amounts he has withdrawn (drawings) and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 yearIncrease in net assets
  Capital introduced Drawings.

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• 
  
• Net assets this year end X
• Net assets last year end (X)
• Increasing in net assets X
• Less capital introduced
• by owner (X)
• Add Drawings X
• Profit for the year X

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• 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.

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• 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 (capitalassets-liabilities)

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• Calculation of opening capital
• Dr
  Cr
• 
  
• Bank X
• Cash X
• Receivables X
• Payables X
• Expense payables X
• Inventory X
• X
  Y
• Net assetsopening capital X-Y

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• Step 3 Insert the opening balance in T
  accounts. Leave plenty of space between the
  ledger accounts. For example

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• 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

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• Cash
• 
  
• Balance b/d X Expenses X
• Taking banked X Drawings X
• Cash from
• Customers-accounts
• X Balance c/d X
• Receivable
• Control( bal fig) X
• X
  X

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• 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

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• 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

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• 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

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• 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

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• 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.

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• 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.

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• Gross profit percentage or profit margingross
  profit/ sales revenue100
• 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)
• 
  

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• 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 percentagegross/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

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• 
  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(13),sp
  total sales4/360008000

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• 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

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• ---To convert mark-up to margin( where figures
  are percentages)
• Marginmark-up/(mark-up100)
• ---To convert margin to mark-up
• Mark-upmargin/(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.

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• 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 172.Clearly this tells us
  that purchases were 17200.If cash paid this
  suppliers was unknown, it could the calculated as
  a balancing figure.

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• 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.