Incomplete

records

By S.Chaitezvi
• Incomplete records questions may test your ability to prepare accounts
in the following situations.
• A trader does not maintain a ledger and therefore has no continuous
double entry record of transactions.
• Accounting records are destroyed by accident, such as fire.
• Some essential figure is unknown and must be calculated as a balancing
figure. This may occur as a result of inventory being damaged or
destroyed, or because of misappropriation of assets.

By S.Chaitezvi
Incomplete records problems occur when a business does not have a full
set of accounting records for one of the following reasons.

1. The proprietor of the business does not keep a full set of accounts.
2. Some of the business accounts are accidentally lost or destroyed.

By S.Chaitezvi
• The problem for the accountant is to prepare a set of year-end accounts
for the business; ie a statement of profit or loss and a statement of
financial position.

• Since the business does not have a full set of accounts, preparing the
final accounts is not a simple matter of closing off accounts and
transferring balances to the profit or loss account, or showing
outstanding balances in the statement of financial position.

By S.Chaitezvi
The task of preparing the final accounts involves the
following.

(a) Establishing the cost of purchases and other expenses

(b) Establishing the total amount of sales
(c) Establishing the amount of accounts payable, accruals, accounts
receivable and prepayments at the end of the year

By S.Chaitezvi
• Examination questions often take incomplete records problems a stage
further by introducing an 'incident', such as fire and burglary, which
leaves the owner of the business uncertain about how much inventory
has been destroyed or stolen.

By S.Chaitezvi
• To understand what incomplete records are about, we need to look at
what exactly might be incomplete.
• The items we shall consider in turn are:
(a) The accounting and business equations
(b) Credit sales and trade receivables
(c) Purchases and trade payables
(d) Purchases, inventory and the cost of sales
(e) Stolen goods or goods destroyed
(f) The cash book
(g) Accruals and prepayments

By S.Chaitezvi
The accounting and business equations
Two equations are very useful in incomplete records calculations.
• The accounting equation:
Assets = capital + liabilities

• The business equation:

Closing net assets = opening net assets + capital introduced + profit –
drawings

By S.Chaitezvi
The accounting equation
• An exam question might provide information about the assets and
liabilities of the business at the beginning of the period under review,
but then leave the balancing figure (ie the proprietor's business
capital) unspecified.
• If you remember the accounting equation (Assets = Capital +
Liabilities), the problem is quite straightforward.

By S.Chaitezvi
Example: opening statement of financial position

By S.Chaitezvi
Solution

By S.Chaitezvi
By S.Chaitezvi
 The business equation
• The business equation is simply an extension of the accounting
equation.
• Closing net assets = opening net assets + capital introduced + profit –
drawings
• So, if we are able to establish the trader's net assets at the beginning
and end of the period, we can compute profits as follows.
• Profit/(loss) = movement in net assets – capital introduced + drawings
• We want to eliminate any movement caused by money paid in or
taken out for personal use by the trader. So we take out capital
introduced and add back in drawings.
By S.Chaitezvi
QUESTION
• Net assets at the beginning of 20X7 were $101,700. The proprietor
injected new capital of $8,000 during the year and took drawings of
$2,200. Net assets at the end of 20X7 were $180,000.

What was the profit earned by the business in 20X7?

A $72,500 profit
B $88,300 profit
C $84,300 profit
D $(84,100) loss
By S.Chaitezvi
ANSWER
A $72,500 profit
• Profit = movement in net assets – capital introduced + drawings
• Profit = (180,000 – 101,700) – 8,000 + 2,200
• Profit = $72,500

By S.Chaitezvi
Credit sales and trade receivables
• If a business does not keep a record of its sales on credit, the value of
these sales can be derived from the opening balance of trade
receivables, the closing balance of trade receivables, and the
payments received from customers during the period.

By S.Chaitezvi
FORMULA TO LEARN

By S.Chaitezvi
 EXAMPLE
• For example, suppose that Joe Han's business had trade receivables of $1,750 on 1
April 20X4 and trade receivables of $3,140 on 31 March 20X5. If payments received
from receivables during the year to 31 March 20X5 were $28,490, and if there are
no bad debts, then credit sales for the period would be:

By S.Chaitezvi
• The calculation above could be made in a T-account, with credit sales
being the balancing figure to complete the account.
• Prepare the T-account.

By S.Chaitezvi
Purchases and trade payables
• A similar relationship exists between purchases of inventory during a
period, the opening and closing balances for trade payables, and
amounts paid to suppliers during the period.
• If we wish to calculate an unknown amount for purchases, the
amount would be derived as follows.

By S.Chaitezvi
FORMULA TO LEARN

By S.Chaitezvi
 EXAMPLE
• For example, suppose that Joe Han's business had trade payables of $3,728 on 1 October
20X5 and trade payables of $2,645 on 30 September 20X6. If payments to trade payables
during the year to 30 September 20X6 were $31,479, then purchases during the year would
be:

By S.Chaitezvi
• Again, the calculation above could be made in a T-account, with
purchases being the balancing figure to complete the account.
Prepare the T-account.

By S.Chaitezvi
Establishing cost of sales
• When the value of purchases is not known, a different approach
might be required to find out what they were, depending on the
nature of the information given to you.
• One approach would be to use information about the cost of sales,
and opening and closing inventory rather than trade payables to find
the cost of purchases.

By S.Chaitezvi
FORMULA TO LEARN

By S.Chaitezvi
• Suppose that the inventory of Joe Han's business on 1 July 20X6 has a
value of $8,400, and an inventory count at 30 June 20X7 showed
inventory to be valued at $9,350. Sales for the year to 30 June 20X7
are $80,000, and the business makes a mark-up of 331/3% on cost for
all the items that it sells.
• What were the purchases during the year?

By S.Chaitezvi
• The cost of goods sold can be derived from the value of sales, as
follows.

By S.Chaitezvi
• Two different terms may be given to you in the exam for the
calculation of profit.

•  Mark-up is the profit as a percentage of cost.

•  Gross profit margin is the profit as a percentage of sales.

By S.Chaitezvi
Looking at the above example:

By S.Chaitezvi
By S.Chaitezvi
Stolen goods or goods destroyed
• A similar type of calculation might be required to derive the value of
goods stolen or destroyed. When an unknown quantity of goods is
lost, whether they are stolen, destroyed in a fire, or lost in any other
way such that the quantity lost cannot be counted, then the cost of
the goods lost is the difference between
• (a) and (b).
• (a) The cost of goods sold
• (b) Opening inventory of the goods (at cost) plus purchases less
closing inventory of the goods (at cost)

By S.Chaitezvi
• In theory, (a) and (b) should be the same. However, if (b) is a larger
amount than (a), it follows that the difference must be the cost of the
goods purchased and neither sold nor remaining in inventory, ie the
cost of the goods lost.

By S.Chaitezvi
Example: cost of goods destroyed
• Orlean Flames is a shop which sells fashion clothes. On 1 January
20X5, it had trade inventory which cost $7,345.
• During the 9 months to 30 September 20X5, the business purchased
goods from suppliers costing $106,420. Sales during the same period
were $154,000. The shop makes a gross profit of 40% on cost for
everything it sells.
• On 30 September 20X5, there was a fire in the shop which destroyed
most

By S.Chaitezvi
• of the inventory in it. Only a small amount of inventory, known to
have cost $350, was undamaged and still fit for sale.

• How much of the inventory was lost in the fire?

By S.Chaitezvi
By S.Chaitezvi
Homework
• Incomplete records and the Cash Book
• Incomplete records and Accruals and Prepayments
• Incomplete records and Drawings

By S.Chaitezvi
 END

By S.Chaitezvi