chapter17 incomplete records

7/31/2019 Chapter17 Incomplete Records

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CHAPTER 17

INCOMPLETERECORDS


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1 DISTINCTION BETWEEN INCOMPLETEAND LIMITED ACCOUNTING RECORDS

Incomplete accounting recordsrecords which the trader has not fullycompleted or where no records at all

have been kept of transactions.Limited accounting records :recordskept by a trader of certaintransactions but additional informationis required to prepare financialstatements.


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2 INCOMPLETE ACCOUNTINGRECORDS

The most basis incomplete recordssituation of all is where one isrequired to calculate net profit, given

details only of a sole traders capitalat the beginning and end of the year,and of amounts he has withdrawn(drawings) and contributed (capital)

Profit for the year=Increase in netassetsCapital 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 XProfit for the year X


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3 LIMITED ACCOUNTING RECOREDS

If basis information regarding receipts

and payments is provided, it ispossible to build to a balance sheetand income statement, although

some important assumption may wellneed to be made.

The procedure suggested below is a

full procedure suitable for a widerange of limited records questionsand may be set out in basic steps.


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Step 1 set aside one sheet of paperfor the income statement and one

sheet for the balance sheet. Thesecan be started with the main headingand some information can be inserted

straight into themStep 2 Prepare the opening balancesheet from information on assets and

liabilities. The opening capital accountbalance can be calculated as abalance figure (capital=assets-liabilities)


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Calculation of opening capital

Dr Cr

$ $Bank X

Cash X

Receivables XPayables X

Expense payables X

Inventory XX Y

Net assets=opening capital X-Y


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Step 3 Insert the opening balance inT accounts. Leave plenty of space

between the ledger accounts. Forexample:


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Balance T account required

Cash at bank Cash at bank for bank

transactions)Cash in hand Cash in hand for cash

transactions)

Receivables Accounts receivable control

account (to calculate sales)

Payables Accounts payable controlaccount to calculate purchases)

Accrued expenses Separate account for eachexpense category

Prepayments Separate account for eachexpense category


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Step 4 prepare the cash accountusing any cash and bank information,

and post the cash and bank entries tothe other accounts. If a question givesfull details of the bank account, there

is no need to write it out again as partof your workings.

Depending on the degree ofincompleteness, cash is likely tocontain a missing item of information.This can be found by calculating abalancing 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

ReceivableControl( bal fig) X

X X


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Step 5 insert any closing balancesprovided in the question in respect ofreceivables, payables, accrued expenses

and prepayments. In simple questions, therespective transfers to the incomestatement may be calculated as balancingitems.

Accounts receivable control account$ $

Opening Cash X

Receivables b/d X ClosingSales 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 Closingprepayment 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) XX X


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Step 6 Carry out any further

adjustments as required, such asdealing with doubtful debts anddepreciation.

Step 7 The remaining figures can beinserted into final accounts.


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4 USING RATIOS AND PERCENTAGES

What happens if there are two

unknown in the cash account-forexample, drawing and takings? Whatcan still construct the financial

statements provided we are givensome additional information.

Gross profit percentage

---With gross profit margin thepercentage of profit is given byreference to sales revenue.


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Gross profit percentage or profitmargin=gross profit/ sales revenue*100

Thus if we know that sales revenue totals$8000 and the gross profit percentage is25%,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 byreference to cost of sales.

Gross profit mark-up

percentage=gross/cost of salesThus 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 partto three parts costs. Sales are therefour parts(1+3),sp totalsales=4/3*$6000=$8000


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Converting margins to mark-ups andvice versa

---Suppose we have been told thatsales are $60,000 and the mark-up is25%.The information given can be set

out as follows.$ %

Sales revenue 60000 125

Cost of sales 48000 100Gross profit 12000 25


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---To convert mark-up to margin( wherefigures are percentages):

Margin=mark-up/(mark-up+100)

---To convert margin to mark-up

Mark-up=margin/(100-margin)

---Uses of margin and mark-up

# Suppose that inventory was destroyedin a fire and that there was enoughinformation to calculate sales, purchasesand opening inventory. The gross profit

percentage would enable sales to beconverted to cost of sales. Closinginventory could then be calculated as abalancing figure.


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# Suppose that a trader alwaysreceived a rebate from his suppliers

amounting to 1% of purchases, andthat in the current year the rebateamounted to $172.Clearly this tells us

that purchases were $17200.If cashpaid this suppliers was unknown, itcould the calculated as a balancingfigure.


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5 INCOMPLETE RECORDSQUESTINS IN THE EXAM

All incomplete records questions aredifferent so there is no universallycorrect way of attempting them.

Treat each question on its merits,remembering the overall criterion thatdouble entry bookkeeping should be

used to prepare the required financialstatements.

chapter17 incomplete records

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