Statement of affairs

2 Incomplete records  Statement of affairs

In this topic you will learn:
 how to prepare a statement
of affairs and calculate profit
or loss from changes in
capital over time
 the reasons for and
drawbacks of maintaining
limited accounting records.
This chapter prepares you to answer incomplete records questions that
often appear daunting, as it can be difficult to assess what information
is of use to you and where it should be placed. In the first topic we will
start by looking at why incomplete records occur, and how a statement
of affairs can be produced to help calculate profit or loss without the
need to complete a profit and loss account. Incomplete records mainly
occur with sole traders but could also be a problem for partnerships and
limited companies. The second topic brings together previous techniques
you have completed at AS level. It is possible to produce a set of final
accounts without a complete trial balance and you will learn how to do
this by the end of the chapter.
In order to calculate the capital at the beginning of the financial year, we
use the accounting equation:
assets – liabilities = capital
Table 1 An example of a statement of affairs for J. Wimpenny as at 1 January 2008
£ £
Assets
Machinery 10, 000
Stock 2, 000
Debtors 1, 000
Bank 5, 500

T
18, 500

T
Liabilities

F
 Calculating profits and losses from changes
Creditors 3, 500

F
in capital

A
Accruals 500 4, 000
Background knowledge

R A
Capital 14, 500
When a business is started the owner or owners are often motivated by profit

R
but don’t have the experience of how it is calculated. The actual product or

D
service of the business is usually what inspires and takes up the owner’s time Total assets – total liabilities = capital

Link
See AQA Accounting AS, Chapter 1,
to remind you of why accounting
records are kept.
D
rather than the keeping of accounting records. There are also circumstances
where accounts are lost, stolen or damaged. Some businesses will prefer to
18,500 – 4,000 = £14,500
simply store all financial information and keep very basic records and then rely So, we can calculate that at 1 January 2008, J. Wimpenny had £14,500
on their accountant to prepare the final accounts at the end of the year. This is Key term
invested in his business.
why we need to be able to take a detective-style approach to this area, looking Statement of affairs: this is a basic
at the information we do have and deciding what this can tell us and how it can A statement of affairs is useful to complete if we do not have a balance balance sheet which can be used
then be used. sheet for the previous year. to calculate missing figures such
as profit, loss, opening or closing
capital
Case study
The reasons for incomplete records
Incomplete records range from partially completed accounts to a list of Sophie Logan
assets and a pile of bank statements. A sole trader or partnership often Sophie Logan saw a gap in the market for a wardrobe tidying service.
has neither the time nor expertise to keep a double entry book keeping This involves sorting, colour-coding and boxing up items from
system. Preparing accounting statements is essential for tax purposes and wardrobes for people who do not have the time or organisational
for numerous management decisions. With the cost of computers and skills to complete this task themselves. Basing the business in Activities
software packages specifically for accounts becoming more cost effective it London, it has grown rapidly, mainly through word of mouth. 1 Outline the reasons Sophie
is increasingly easier for a non-accountant to keep basic records. This will Sophie is great at organising other people, but has no interest in does not currently maintain full
then keep accountancy fees lower when the end of year accounts need to accounts and has little idea of how her business is performing, other accounting records.
be prepared. than it having a healthy bank account.
2 Explain two benefits Sophie
Limited companies would usually employ a bookkeeper and larger could gain from keeping
companies have whole departments with a range of accounting staff. Using a statement of affairs to calculate profit or loss accounting records.
Many accounting software packages are generic, so unless the business
pays for a tailor made package the system may only complete some It is possible to calculate profit without a trading profit and loss account.

Activity
In pairs, discuss which accounting
concepts need to be considered
when an incomplete set of
accounting records have been
maintained.
of the required record keeping. Some sole traders might use a single Unless capital has been introduced the only way capital can increase over Examiner’s tip
entry system. This involves recording all payments, receipts and other the year is by profit being earned. You need to first calculate the opening
transactions in one cash book. This is helpful but we still need to draw and closing capital balances using two statements of affairs, for the start Extract the figures you definitely
out items such as drawings and capital expenditure. Capital expenditure, and the end of the year and then you are able to compare them to find know when completing an
spending or improving on fixed assets means that we need to calculate any increase or decrease in capital which would represent profit or loss incomplete records question and
depreciation. Adjustments for accruals and prepayments will also need to made over the period. then look for the gaps you need to
be made. complete.

 
 Chapter 2 Incomplete records
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Activity
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Complete Figure 1 using Sophie’s
previous information. She has also
introduced £5,000, which was an
inheritance, and has drawings of
£10,000.
Examiner’s tip
If you are just told to calculate the
profit then this should be possible
using the method described in this
chapter, rather than preparing a full
profit and loss account.
 
Illustration
How to calculate profit or loss using opening and closing capital
Table 2
Assets or liabilities At 30 March 2008 At 30 March 2009
Premises 100,000 120,000
Vehicles 30,000 25,000
Stock 2,000 2,500
Debtors 1,800 1,950
Creditors 880 1,020
Long-term loan 20,000 18,000
Sophie Logan presented the above information. The opening capital as at
30 March 2008 is £112,920. We find this by totalling the assets (100,000
+ 30,000 + 2,000 + 1,800) and then subtracting the liabilities (880 +
T
20,000). If we do the same for 2009 we find the closing capital to be
£130,430.
F T
Closing capital – opening capital = profit or loss
A
£130,430 - £112,920 = £17,510 profit
It is likely that a business will have had drawings of either stock or cash
by the owners during the year and possibly have had capital introduced.
In this case we need to adjust using a layout such as the following one:
£ Required
Closing capital (a) Calculate her net profit for the year ended 30 November
Less opening capital
Add drawings (AQA 2003)
Less capital introduced
Net profit
Fig 1 Adjustment
Assessment of using a statement of affairs to calculate
profit or loss
This is a quick method to discover profit or loss without completing a full
trading, profit and loss account. It is accurate as long as the figures
provided are accurate such as the debtors, creditors and stocks etc.
Drawbacks
1 The method is not detailed enough for management purposes.
2 It would not be sufficient for tax or VAT purposes.
Examination-style questions
1 Sharon Segg started a woodworking business on 1 De
cember 2001 with net assets valued at £87,000. She has
been so busy she did not keep any financial records
during the year. However, Sharon is able to give you the
following information as at 30 November 2002.
£
Premises at valuation 47,000
Machinery at net book value 21,600
Van at net book value 12,000
Money owed by customers 1,090
Money owed to suppliers 7,450
Stocks of timber, etc. 5,700
F
Bank overdraft 640
A
During the year Sharon withdrew £9,450 in cash from the
business for her private use. She also used timber valued
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at £2,100 to make improvements to her home.
D
2002.
(b) Evaluate the advantages and disadvantages of the method
that you used to determine net profit.
Tom’s opening capital on 1 March 2003 was £32,000.
His assets and liabilities at 29 February 2004 were:
£
Machinery at valuation 46,000
Two vehicles at valuation 34,000
Loan from Eliza, a friend 20,000
Stock of cleaning materials 380
Amounts outstanding for the purchase of cleaning materials 180
Amounts owed by customers 1,870
Bank balance 640
During the year, Tom:
Took £14,184 cash from the business for his private use;
took cleaning materials to the value of £96 for use in his
home; received a gift of £15,000 from his mother, which
he paid into his business bank account.