Professional Documents
Culture Documents
Incomplete records
$
Sales 100
Less Cost of sales 25
Equals Gross profit 75
Credit sales, purchases and cost of sales 6
• Mark-up is profit as a % of cost, eg 33 ⅓% mark-up
$
Sales 133.3% 80
COS 100% (60)
Gross profit 33.3% 20
Credit sales, purchases and cost of sales 7
• Margin is profit as a % of sales eg 25% margin
$
Sales 100% 80
COS 75% (60)
Gross profit 25% 20
Stolen or destroyed goods 1
Stolen goods or goods destroyed
• The cost of goods stolen/destroyed can be calculated as follows:
$
Cost of goods sold based on gross profit margin
or mark-up A
Cost of goods sold calculated using standard formula
(ie opening inventory plus purchases less
closing inventory) (B)
Difference (lost/stolen inventory) C
Stolen or destroyed goods 2
• If no goods have been lost, A and B should be the same and therefore C should be nil.
• If goods have been lost, B will be larger than A, because some goods which have been
purchased were neither sold nor remaining in inventory, ie they have been lost.
Stolen or destroyed goods 3
• Stolen or lost inventory is accounted for in two ways depending on whether the goods
were insured:
— If insured
DEBIT Insurance claim account (receivable)
CREDIT Cost of sales
— If not insured
DEBIT Expenses (eg Admin)
CREDIT Cost of sales
Cash book 1
Cash book
• Incomplete records problems often concern small retail entities where sales are mainly
for cash. A two column cash book is often the key to preparing final accounts.
• The bank column records cheques drawn on the business bank account and cheques
received from customers and other sources.
• The cash column records till receipts and any expenses or drawings paid out of till
receipts before banking.
Cash book 2
Debits (receipts) Credits (payments)
Cash Bank Cash Bank
$ $ $ $
Cash book 3
• Don't forget that movements between cash and bank need to be recorded by contra
entries. This will usually be cash receipts lodged in the bank (debit bank column, credit
cash column), but could also be withdrawals of cash from the bank to top up the till
(debit cash column, credit bank column).
Cash book 4
• Incomplete records problems will often feature an unknown figure to be derived. Enter
in the credit of the cash column all amounts known to have been paid from till
receipts: expenses, withdrawals, lodgements into bank. Enter in the debit of the cash
column all receipts from cash customers or other cash sources.
Cash book 5
• The balancing figure may then be a large debit, representing the value of cash sales if
that is the unknown figure.
• Alternatively it may be a credit entry that is needed to balance, representing the
amount of cash withdrawals or of cash stolen.
Accruals, prepayments and drawings 1
Accruals and prepayments
• When there is an accrued expense or prepayment, the SPL charge can be calculated
from the opening balance, the cash movement and the closing balance. Sometimes it
helps to use a 'T' account, eg as follows (for a rent payment).
Accruals, prepayments and drawings 2
RENT
$ $
Prepayment: bal b/f 700 SPL (bal fig) 9,000
Cash 9,300 Prepayment: bal c/f 1,000
10,000 10,000
Accruals, prepayments and drawings 3
Drawings
Note three tricky points about drawings.
• Owner pays personal income into business bank account
DEBIT Cash
CREDIT Drawings
Accruals, prepayments and drawings 4
• Owner pays personal expenses out of business bank account or takes goods for
personal use
DEBIT Drawings
CREDIT Cash/Purchases
Tackling the exam
• Wording of an exam question
— 'Drawings approximately $40 per week'
Therefore drawings for year = $40 × 52 = $2,080
— 'Drawings between $35 and $45 per week'
Therefore drawings are a missing number to be calculated.
Lecture example 1
W Co has on average a profit margin of 40%. In 20X7 sales total $476,000.
Required
What is cost of sales?
Answer to lecture example 1
% $
Sales 100 476,000 ×60%
COS 60 285,600
GP 40 190,400
Lecture example 2
Y Co operates with a standard mark-up of 30% and has the following information
available for 20X7.
$
Sales 221,000
Opening inventories 43,000
Closing inventories 47,500
Required
What is the value for purchases in 20X7?
Answer to lecture example 2
% $
Sales 130 221,000 X100/130
GP 30 51,000
Answer to lecture example 2 (cont'd)
Purchases: $
Cost of sales
Opening inventory 43,000
+ Purchases 174,500
Required
Based on the information above what was the value of purchases made during the
year?
Answer to lecture example 4
Trade payables
$ $
Bal b/d 38,450
Till 430
Bank 167,224
Balance c/d 43,825 Purchases 173,029
211,479 211,479
Total bankings in the year amounted to $28,454, and opening and closing trade
receivables were $1,447 and $1,928 respectively.
Lecture example 5 (cont'd)
Required
Based on the information above what was the value of sales made during the year?
Answer to lecture example 5
Cash
$ $
Bal b/d 50
Receipts from General expenses 4,500
Trade receivables 39,204 Drawings 6,250
(1)
Bankings 28,454
Bal c/d 50
39,254 39,254
Answer to lecture example 5 (cont'd)
Trade receivables
$ $
Bal b/d 1,447 Cash (deduced from
cash a/c) 39,204
Sales (2) 39,685
Bal c/d 1,928
41,132 41,132
Lecture example 6
Bob owns and manages B Co although he does not keep detailed accounting records.
All of Bob's sales are for cash. He pays certain expenses from his till and then banks the
remaining funds.
Bob maintains a $1,000 float and operates with a margin of 20%. He has provided you
with the following information.
Lecture example 6
$
Purchases of goods (on credit) 20,000
Wages for clerical assistant (per week;
there are 52 weeks in the year) 100
Stationery 500
Electricity 1,200
Bankings 12,800
Opening inventories 2,000
Closing inventories 3,000
Lecture example 6 (cont'd)
Bob is unsure of the level of drawings taken during the year but estimates they were
between $60 and $90 per week.
Required
What were Bob's drawings during the year?
Answer to lecture example 6
$4,050
Cost structure:
$
Sales = 100% = 23,750
∴ COS = 80% = 19,000
Gross profit 20% 4,750
Answer to lecture example 6 (cont'd)
Cash
$ $
Bal b/d 1,000 Wages 5,200
Stationery 500
Sales 23,750 Electricity 1,200
Bankings 12,800
∴ drawings 4,050
Bal c/d 1,000
24,750 24,750
Tackling the exam
Exam focus point:
Questions on incomplete records in your exam will usually be based on short scenarios.
You may also need to use the techniques illustrated in this chapter in one of the 15 mark
questions, either on this topic or on accounts preparation.
Chapter summary 1
1 Issue
Not all businesses keep proper accounting records, however
all businesses need to know how much profit they have made
in a particular year so that they can pay the relevant amount
of tax over to the tax authorities.
Where a business does not have sufficient records to produce
financial statements they need to piece together the missing
information.
Chapter summary 2
2 Cost structures
A margin is where a business expresses gross profit as a
percentage of sales.
A mark-up is where gross profit is expressed as a percentage
of cost of sales.
Chapter summary 3