Revision Notes On Incomplete records

• Incomplete records – is the term used for any system of bookkeeping which does not use full double entry.

• Generally applies to small business whether incorporated as Sole Proprietorship or Partnership. For them, generally a simple cash book to record receipts and payments may be enough instead of the proper accounting system complete with day books and ledgers.

        Using incomplete records cannot give an accurate  period end financial statements as they do not tell the whole story. There is no record of outstanding debtors or creditors, nor of stock, nor, without analysis, of for what receipts and payments have been received and paid, or, in some cases, of the split between revenue and capital items. As a result, in an incomplete record system:-

                the figures must be calculated, extrapolated, or extracted in the case of creditors and debtors

                to arrive at the year-end profit and loss account and balance sheet will rely heavily on application of the concept of the accounting equation which is Assets = Proprietors capital + liabilities. Thus the value of capital can be determined at any point in time.

• However, questions on Incomplete records are quite popular with examiners to test the understanding of candidates on Double Entry Methodology.

Learn to master Incomplete Record By:

1. Ensuring you have a SOUND knowledge of DOUBLE ENTRY for Sales (Cash & Credit),Purchase (Cash & Credit), Cash transactions for expenses & other cash received ( usually capital being introduced)

2.Learn how to prepare:

 an opening Statement of Affairs;

main control accounts;

Bank Account;

calculating gross profit;

draft the Profit and Loss Account;

draft the Balance Sheet.

3. Solving incomplete records problems is a matter of working through each of these steps tabulated below. If you use standard workings for each, and insert the figures which are given in the question, the problem becomes one of finding the missing figures.

Steps To Follow Inc Completing Incomplete Records :

1. complete the opening statement of affairs;
2. set out the standard workings;
3. insert the figures from the question;
4. calculate the missing figures;
5. draft the required accounting statements.

Let’s consider each of the steps and the relevant workings.

(1) Prepare Opening Statement Of Account

When a Balance Sheet has to be prepared using estimated values, we refer to it as a Statement of Affairs. The first step is to set out the main headings which are used in a Balance Sheet. We can then use the available information to obtain the relevant values. The main headings which are needed are:

Fixed Assets

Current Assets

Stock
Debtors
Cash and Bank

Current Iiabilities

Creditors
Bank overdraft
Loans

Capital

Salient points:

      Remember these headings before your exam.

        Review the question for the relevant information so that you can insert the values for as many figures as possible.

        Usually there will be two values missing – Fixed assets and capital

        As capital is the balancing figure, it is usually necessary to work out the value for fixed assets.

        A methodical approach is important here. The question will usually tell you when the various assets where acquired, as well as the depreciation policy. Your task is to calculate the net book value at the date of the Statement of Affairs by starting with the year of acquisition and applying the depreciation policy to obtain the net book value at the end of that year. Repeat that process for each year until you have reached the date of the Statement of Affairs. Once you have the value for fixed assets, the capital balance can be calculated:

Fixed assets + current assets – current liabilities = capital

(2) Learn How to prepare the respective Control Account -Debtors, Creditors

Understand how to construct the following Debtors And Creditors Control A/c and Bank Account:

Bank Account

Salient points:

• The opening balance for the Bank Account will also be obtained from the Statement of Affairs.
• You need to take care however as the balance may be either a debit (cash at bank) or a credit (overdrawn).
• The value of cash lodged will be a debit entry, and the value of cheques issued will be a credit entry.
• The closing balance will be the balancing figure.
• Make sure whether the balance is cash on hand or an overdraft.

• The layout for the bank account is as follows:

Calculating Gross profit

Salient points:

• Gross profit is calculated by deducting cost of sales from the value of sales. Questions often require the calculation of either margin or mark up.

Understand Margin

If margin is to be used, the value of sales will already have been calculated as the total of credit sales (derived from the Debtors Control Account) and cash sales (derived from the Cash Account). The gross profit is found by applying the % margin to the value of sales.

For example, if sales are 80,000 and the margin is 20%, the gross profit will be 80,000 x 20% = 16,000.

In questions which involve this calculation, you may have to derive the closing stock value from the resulting cost of sales. The opening value of stock will be taken from the Statement of Affairs. The value of purchases will be the total of credit purchases (derived from the Creditors Control Account) and cash purchases (derived from the Cash Account). Closing stock will be the balancing figure in the calculation:

Sales -cost of sales = gross profit

Cost of sales = opening stock + purchases-closing stock

Understand Mark Up

First of all remember that mark up is gross profit expressed as a percentage of cost of sales. Questions requiring a mark up calculation will have provided all the figures to calculate cost of sales. The problem will be that the Debtors Control Account cannot be completed as two figures are missing -one of which is sales.

In this case calculate the gross profit as follows:

Cost of sales x mark up % = gross profit

Therefore, total sales = cost of sales + gross profit and credit sales = total sales- cash sales.

Profit and Loss Account

Salient points:

Remember:

• that expenses must include both cash expenses and expenses paid by cheque.
• depreciation must be included- but remember to include any assets acquired during the year!

Balance Sheet

Salient points:

Fixed assets = Value from the statement of affairs + new assets -depreciation for period

Current assets:-

Stock = Closing stock as calculated in cost of sales
Debtors = Closing balance on the Debtors Control Account
Cash = Closing balance on the Cash Account
Bank = Closing balance on the Bank Account (if cash on hand)

Current Liabilities

Creditors = Closing balance on the Creditors Control Account
Bank = Closing balance on the Bank Account (if overdrawn)

Capital = Balancing figure which can be confirmed as:

Opening balance from the Statement of Affairs
+ profit from the Profit and Loss Account
– drawings
+ capital introduced