INCOMPLETE RECORDS In this chapter, you will learn about handling problems of incomplete records. You will how to implement different accounting tools and equation to identify the profit of a period, when only opening and closing figures and drawings are known. You will learn how to find the figures for cash drawings or the figures for cash expenses when all other cash receipts and payments are known. You will be able to identify the total sales and purchase from incomplete records. (Frank Wood, Business Accounting)
Why to learn ‘Incomplete Records’
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Many small businesses like coffee shop, internet café and others do no maintain double entry systems. This is because they are not even familiar with this concept of accounting. At best these businesses maintain a cashier copy, and keep track of daily basis sales revenue. However, they must do have to prepare financial statement and need to track down the actual profit. Now think of how this could be calculated in the bookkeeping records are inadequate or incomplete? Single entry is going be a solution to such problems.
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Then, what do you need to learn to find solution from ‘Incomplete Records’
Finding sales figures using debtor’s account
Finding purchase figures using creditor’s account.
Finding actual expense or income incurred using different adjustments.
Finding yearend cash/bank balance using data from total receipts and payments.
Finding business capital using equation.
Finding profit or loss using tools from profitability and liquidity ratios.
Complete the financial statement using all the findings mentioned above.
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O’LEVEL HANDOUTS
FINDING SALES FIGURES: This may include both cash and credit sales for the given period, Cash sales figures are normally given on the debit side of cash book. To obtain credit sales figures you need to prepare a debtors account using amount received from debtors from cash book and other related adjustments. In many cases you may need to considered amount withdrawn out of the cash taking for obtaining the total sales figures.
DEBTORS ACCOUNT £ Balance b/d
xxx
Credit Sales
xxx
£ Bank
xxx
Discount allowed
xxx
Bad Debts
xxx
Return inward/ Sales return
xxx
Contra: Purchase Ledger
xxx
Balance c/d
xxx
xxx Balance b/d
xxx
xxx
Total Sales = Credit Sales + Cash Sales
The following examples will help you to understand how any drawings out of the cash takings are used to obtain total sales figures.
X
Mr. X deposited £200 of cash taking except £50 which he spent for his own personal use.
WHAT IS THE TOTAL SALES FIGURES £200 + £50 = £250
Therefore:
BANK
?
Total Sales = Credit Sales + Cash Sales + Withdrawn items from Sales
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O’LEVEL HANDOUTS
FINDING PURCHASE FIGURES: This may include both cash and credit purchase for the given period, Cash purchase figures are normally given on the credit side of cash book. To obtain credit purchase figures you need to prepare a creditors account using amount paid to supplier from cash book and other related adjustments.
CREDITORS ACCOUNT £
`
Bank
xxx
Discount received
xxx
Return outwards
xxx
Contra: Sales Ledger
xxx
Balance c/d
xxx
£
Balance b/d
xxx
Credit Purchase
xxx
xxx Balance b/d
xxx
Total Purchase = Credit Purchase + Cash Purchase
Worked Example for your understanding how does this work to obtain total purchase for given period:
GIVEN:
Creditors Account
Opening creditors £5000
£ Cash purchase £12300 Payment to supplier £35600 Discount received £400
Bank
35600
Disc received
400
Return out
800
Balance c/d
3400
Purchases return £800
£ Balance b/d
5000
Credit Purchase
35200
40200
40200 Balance b/d
Closing creditors £3400
TOTAL PURCHASE = £35200 + £12300 =
£47500
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3400
O’LEVEL HANDOUTS
OBTAINING ACTUAL EXPENSES AND INCOMES INCURRED: In according to accrual concepts any expenses, income or revenue must be recognized within the financial period, doesn’t matter how much is paid or not yet paid. As a result the amount mention in cash book must be adjusted with prepaid and outstanding bill to determine how much to transfer to profit & loss account. It is wise if you prepare the expenses and income account to adjust the actual expenses or incomes incurred.
EXPENSES ACCOUNT £
`
£
Balance b/d (advance)
xxx
Balance b/d (owing)
Bank
xxx
Profit & Loss
xxx
xxx
Balance c/d (advance)
xxx
Balance c/d (owing)
xxx
xxx
xxx
INCOME ACCOUNT £ Balance b/d (owing)
£
xxx
Balance b/d (advance)
xxx xxx
Profit & Loss
xxx
Bank
Balance c/d (advance)
xxx
Balance c/d (owing)
xxx
Profit & Loss extraction: Gross Profit
(-) Expenses
£ xxx
xxx
Balance Sheet extraction: £
(+) Income
xxx
xxx (xxx)
£
Fixed Assets:
£ xxx
Current Assets: Expense Prepaid
xxx
Income Owing
xxx
Expenses Owing
xxx
Income Prepaid
xxx
Current Liabilities:
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O’LEVEL HANDOUTS
OBTAINING CASH/BANK BALANCE: Cash book plays a very important role in solving incomplete records. Most the business who do not keep proper records, at least maintain a receipts and payments account, where you can find how much cash is paid and how much is received from different source of incomes. Many time candidates may require to find the closing cash balance to determine current assets or overdraft as current liabilities.
CASH BOOK £
£
Balance b/d
1
xxx
Balance b/d
Sales
2
xxx
Purchase
7
xxx
Debtors
3
xxx
Creditors
8
xxx
Loan
4
xxx
Expense
9
xxx
Capital
5
xxx
Fixed Assets
10
xxx
Other incomes
6
Drawings
11
xxx
Loan interest
12
xxx
Repayment of loan
13
xxx
Balance c/d
14
xxx
Balance b/d
15
xxx
xxx
xxx Balance b/d
xxx
Balance b/d
xxx
Explanation for each of the entries in Cash Book: 1
Opening Balance at the beginning of financial period represent how much balance is carried forward from previous financial period.
2
Cash received on sales of goods.
3
Cash received from credit customers (debtors).
4
Loan from banks or others, usually treated as long term liabilities.
5
Introduction of additional capital as bank or cash, to expand business investment.
6
Cash received as income from other sources such as rent receivable.
7
Cash paid on purchase of goods.
8
Cash paid to settle the balance against credit customers (creditors).
9
Cash paid for different expenditure, usually this are treated as operating expenses for the business.
10
Cash paid for acquisition of fixed assets.
11
Cash withdrawn by owners for personal purpose.
12
Payment of loan interest arising from l ong term liabilities.
13
Repayment of loan to bank or other lenders.
14
15
Closing debit balance indicating the balance in hand and is treated as current assets in balance sheet. Closing credit balance indicating overdraft for the business and is treated as current liabilities in balance sheet
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O’LEVEL HANDOUTS
CALCULATION OF CAPITAL: This is a very important part, every student need a greater knowledge. Capital can be calculated using different equation. For your knowledge all what you need to visualize the balance sheet. For many businesses capital is not properly mentioned as a result using assets, liabilities, net profit, net loss and drawings you can easily obtain how much capital is available at beginning and end of every financial year.
Capital = Fixed Assets + Current Assets – Current Liabilities
Capital = Fixed Assets + Working Capital
Capital = Opening Capital + New Capital + Net Profit/ (-) Net Loss – Drawings + Loan
Capital = Business Equity + Loan
CAPITAL ACCOUNT £
£ Balance b/d
xxx
Drawings
xxx
New Capital
xxx
Net Loss
xxx
Net Profit
xxx
Balance c/d
xxx xxx
xxx Balance b/d
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