INCOMPLETE

RECORDS

Presented by Tšepiso Letsoalo

Syllabus Content

- Describe the circumstances which lead to

incomplete records.
- Prepare opening and closing balances of
statements of affairs
- Calculate profit or loss from changes in
capital over time
- Calculate sales, purchase, gross profit,
trade receivables and payables and other
figures from incomplete information
Syllabus Content

- Prepare income statements and

statements of financial position
- Male adjustments to financial
statements
- Apply accounting techniques of
mark-up, margin and inventory
turnover to arrive at missing figures
Session Content
Introduction

Incomplete records, as the suggests, are any form of accounting records other than a full
double-entry system.

Incomplete records problems occur when a business does not have a full set of accounting
records, for one of the following reasons:
- The proprietor of the business does not keep a full set of accounts.

- Some of the business accounts are accidentally lost or destroyed.

Statement of affairs
What is a statement of affairs?
- A statement of affairs is similar to a statement of financial position
o The difference is that the business has not used a full set of accounting records
o Therefore the business cannot complete an income statement to find the profit or
loss
- It is prepared to find the missing capital figure at the start or the end of the financial
year
- It is prepared from the assets and liabilities of the business

- The capital can be found using a rearrangement of the accounting equation

o Capital = Assets - Liabilities
How do I prepare a statement of
affairs?
• STEP 1

List all the assets and calculate the total assets

Non Current assets

Current assets

• STEP 2

Write down the value for the total capital and liabilities
o It is the same as the total assets
o Leave the capital value blank
Layout of a statement of affairs
Worked Example

Murray operates a local retail store. Murray does not keep a full set of accounting records.
Murray provided the following information about his assets and liabilities at 1 January 2023

Shop fittings (net book value) $ 9 000

Inventory 35 600

Trade receivables 19 200

Bank 6 000

Trade payables 20 800

Expenses owing 300

Prepare a statement of affairs to calculate Murray's capital at 1 January 2023.

Solution

• Expenses owing is a liability

• Complete the assets section

o The total below is $69800

• The total for the capital and liabilities section will be the same

• Complete the liabilities section

o Expenses owing is an accrued expense which is a liability
o The total below is $21100

• Subtract the liabilities from the assets to find the missing capital value
o $69 800 - $21 100 = $48 700
Calculating Profit

The net assets approach uses the accounting equation in order to find the profit or loss figure for a
year.

Capital = Net assets

Movements in capital during the accounting period mean that the following is true:

Opening capital + Capital injections + Profit – Drawings = Closing capital

Since Capital = Net assets, the following is also true:

Opening net assets + Capital injections + Profit – Drawings = Closing net assets

Or Increase in Net assets = Capital injections + Profit – Drawings

Providing that a sole trader knows what assets he held at the start and end of the year, how much he
put into the business in the year and how much he took out, this equation can used to ascertain profit.
Calculating Profit

If a business has maintained very little information of its transactions, it may only be possible
to calculate net profit or loss for the year. This can be achieved by using the fact that the
profit of a business must be represented by more assets. We list and value the opening and
closing net assets, then calculate the profit as the difference between the two

Profit = Closing net assets – Opening net assets

Allowance must be made for proprietor's drawings and extra capital introduced, so the
formula becomes:

Profit = Closing net assets – Opening net assets + Drawings – Capital introduced

Or use the accounting equation as follows:

Net assets = Capital introduced + Profit - Drawings

Question Technique

In this type of question scenario, the known information should be inserted into the
following proforma:
Worked Example 1

A sole trader's statement of financial position at 31 December 20X5 identified that the
business had net assets of $5 000. The statement of financial position as at 31 December
20X6 identified that the business had net assets of $8 000. The owner's drawings for the
year amounted to $2 500 and he didn't introduce any further capital in that year.

Calculate the profit made by the sole trader in the year ended 31 December
20X6.
How can I use a statement of affairs
to calculate the profit or loss for
the year?
• You can use a statement of affairs to calculate the opening or closing capital value

• This can then be used to calculate the profit or loss for the year

• Closing capital is calculated using:

o Closing capital = Opening capital + Capital introduced – Drawings + Profit (or –
Loss)

• You can rearrange this to find the profit or loss:

o Profit or loss = Closing capital – Opening capital + Drawings – Capital introduced
o A positive value indicates a profit, a negative value indicates a loss
Continuation

• Alternatively, you can draw up the capital ledger account and find the value that
balances the account
o If the balancing value is on the debit side, then it represents a loss
o If the balancing value is on the credit side then it represents a profit
The layout of the capital account
when finding the profit or loss
Worked Example 2

On 1 January 2023, Murray's capital balance was $48 700. During the year, Murray
introduced $10 000 capital to the business and took out $5 000 drawings. The capital
account had a balance of $80 500 at 31 December 2023.

Calculate the profit or loss for the year ended 31 December 2023.
Solution

Use the formula

Closing capital – Opening capital + Drawings – Capital introduced = Profit

Alternatively draw up a capital account, it can be a rough sketch.

$26 800
Preparing financial statements from
incomplete records

In most cases, a business will keep limited accounting records and therefore it will often be possible
to prepare a more detailed set of financial statements, rather than simply calculating the profit or
loss for the year.

In this question, you will be given information relating to the opening balances for assets and
liabilities of the business. You will then usually be advised about transactions that have occurred
during the year.

This type of question is common in the exam as it requires a good understanding of all basic
accounting principles as well as the ability to work under pressure.

The techniques used to identify missing figures are:

• Use of ledger accounts to find a balancing figure

• Use of cost structures (Ratios)

Question
technique
1. Prepare a pro-forma ledger account or financial statement as required.

2. Record the information given in the question.

3. Using the opening balances in the question set up:

o Receivables' control account
o Payables' control account
o Cash in hand account
o Expense accounts.

4. Complete receivables', payables', cash and bank accounts.

Question technique continuation

5. Record any other adjustments.

6. Complete the pro-forma ledger accounts or statements as required.
Balancing or missing figures

The balancing or missing figure approach is commonly used in the following way:
Ledger account Missing figure
Receivables Sales
Money received from receivables
Payables Purchases
Money paid to payables
Cash at bank Drawings
Money stolen
Cash in hand Cash sales
Cash stolen
Sales (Receivables) Ledger
Control Account
The construction of the sales ledger control account enables the calculation of
figures such as total sales or receivables for the statement of profit or loss and
statement of financial position respectively.
Proforma sales ledger control
account
Notes on the proforma SLCA

Notes:
1. This figure will be given in the question unless the business started in the current
year in which case there will be no opening receivables.
2. The cash received from customers is the credit entry resulting from the debit to
the cash account.
3. The balance carried down on the sales ledger control account will usually be
indicated in the question.
4. The missing figure on the control account is usually sales which can be worked
out by completing the T-account.
Purchase (Payables) Ledger
Control Account
It is necessary to piece together a purchase ledger control account from the credit
purchase payments information and, also, other information in the question. This
construction of the purchase ledger control account is necessary to enable the
credit purchases of the business to be calculated, or possibly the closing payables,
depending upon the information given.
Proforma purchase ledger
control account
Notes on the proforma PLCA

Notes:
1. This figure will be given in the question unless the business started in the current
year in which case there will be no opening payables.
2. The payments to suppliers is the debit entry resulting from the credit for
purchase payments in the bank account.
3. The balance carried down on the purchase ledger control account will usually be
indicated in the question.
4. The missing figure on the control account is usually credit purchases which can
be worked out by completing the T-account.
Cash & Bank Accounts

The central part to an incomplete records type of question is a buildup of the

business's cash account (cash in hand) and bank account (cash at bank) from the
information given in the question.
The use of these accounts is one the techniques which enables the calculation of
figures required in the statement of financial position or statement of profit or loss.
The technique involves the setting up of a cash account and a bank account and
inserting all the entries given in the information in the question. Then, the accounts
can be reviewed for missing figures, which may then be found as balancing figures
on the accounts.
Cash & Bank Accounts
Notes on the cash account

Notes:
1. The main assumption that must be made in doing the bank and cash accounts is that all
monies received by the business are recorded first in the cash account. This reflects the cash
and cheques coming into the business being placed in a till or box before being banked.
Therefore any cash sales will be recorded under this heading along with any received in
respect of credit sales. The double entries to record these items are:
Debit Cash account
Credit Cash sales
Debit Cash account
Credit Sales ledger control account
Notes on the cash account

Notes:
2. The business will pay certain of its expenses in cash, for example, wages or
window cleaning. These expenses are entered on the credit side of the cash
account, the other side of the double entry being a debit to the statement of profit
or loss expenses section.
3. Having paid out cash expenses, the remaining money will be paid into the bank
account ('banked'), the double entry being:
Debit Bank account
Credit Cash account
Notes on the cash account

Notes:
4. The balance at the start of the year will be shown in the question unless the
business began in the current year, in which case there will be no opening balance.
5. The closing balance may be given in the question. If this is the case, one of the
other figures in the cash account will be a balancing figure requiring calculation.
Cash & Bank Accounts
Notes on the bank account

Notes:
1. This is the other side of the double entry in note 3 in the cash account. You should
always perform this complete double entry in the cash account and bank account.
2. Some expenses will be paid for specifically out of the bank account by cheque or
standing order, for example, salaries, rent or rates. These expenses are credited as
normal to the bank account and debited to the relevant expense category in the
statement of profit or loss.
3. Payments to suppliers are usually made by cheque. The double entry is:
Debit Purchase ledger control account
Credit Bank account
Notes on the cash account

Notes:
4. Drawings would be a typical 'missing figure requiring calculation in an exam question.
5. The balance at the start of the year will be shown in the question unless the business began
in the current year, in which case there will be no opening entry. This could be a debit or credit
balance.
6. The closing balance in the bank account may be given in the question, in which case one of
the other figures in the bank account will be a balancing figure, or it will have to be worked out
from other figures. The only potential complication may be the balance per bank statement. In
this instance, there will be some information in respect of unpresented cheques and outstanding
lodgments enabling the calculation of the closing bank account balance by means of a bank
reconcialiation. Again, as with the opening balance, this may be a debit ot credit balance.
USING COST STRUCTURES TO
FIND MISSING FIGURES
- If we know what the relationship between sales revenue, cost and profit is, we can
use this information to help us to deduce missing information.

- The two different relationships you need to know are margins and mark-ups, these
are key in an incomplete records question.
Gross Profit Percentage
(Margin)
In the statement of profit or loss, the relationship between sales and gross profit is
measured in terms of gross profit percentage.

Definition: It is a financial metric that indicates the percentage of revenue that

exceeds the cost of goods sold.

It is a key indicator of a company’s financial health and operational efficiency,

providing insights into how well a company is generating profit from its sales.

So, Gross Profit Margin is the profit made per $100 of sales, expressed as a
percentage.
Gross Profit Percentage
(Margin)
For example, take the following statement of profit or loss:

The business will make $20 of gross profit from sales of $100, therefore the gross
profit percentage is 20%.
Gross Profit Percentage
(Margin)
This figure can be worked out for any level of sales by dividing gross profit by sales
and multiplying by 100. (The multiplication is to convert the figure to a percentage.)

So for the previous example:

Gross profit percentage = 20/100 * 100 = 20%

Mark Up

When a business purchases goods for resale, it will often add an amount on to the
purchase price to get the selling price. For example, if goods are purchased for $100
and the selling price is $130, the mark up is $30.

Definition: Mark-up is the amount of profit added to cost to get the selling price.

That means you add a certain amount to the cost of goods to cover overhead and
profit.

This figure is often expressed as a percentage of purchase price:

Mark-up on cost = 30/100*100=30%

Establishing a cost structure

For any calculations involving gross profit margins or mark-ups, it is imperative to

work out a cost structure linking cost and selling price in % terms before any attempt
is made at the calculation. The golden rule with cost structures is that whatever
profit is based on is 100%.

For example, the cost structure for a gross margin of 20%:

Establishing a cost structure

A gross profit margin calculates profit as a percentage of sales, so profit is based on

selling price. Therefore, selling price is 100%, profit is 20%, so cost must be the
balancing figure of 80%.

In contrast, the cost structure for a mar-up of 30% on cost is:

Establishing a cost structure

A mark-up is based on cost; it is the profit that is added on to cost and therefore cost
is 100% this time.

The profit of 30% when added to cost gives a selling price of 130%.

Conclusion: The cost structure is very important in calculating figures needed in

incomplete records questions. To remember which figure is 100% in the cost
structure learn these phrases:

• Mark-up on cost

• Gross margin on sales.