ACCOUNTING 1

INCOMPLETE RECORDS 

An incomplete record situation is whereby, the accounting system falls short of the double entry.  This may be due to:

-      Lack of records at all; or

-      Insufficient records that will facilitate the preparation of final accounts.

Reasons for incomplete records:

a)       Managers or owners may not have the skills or expertise in preparing and maintaining an accounting system (records and procedures).

b)      It may not be economical for the business to maintain accounting records due to the volume or/and nature of transactions (small scale businesses)

c)       Records are destroyed (e.g. through fire), stolen or misplaced. 

There are 4 main approaches in preparing final accounts where there are insufficient records.

a)     Estimating income from the net assets.

b)    Estimating income from the use of ratios.

c)     Use of a simple cashbook and bank statement.

d)    Use of control accounts.

N/B:  approach number c and d are normally used together.

(a)          Estimating Income from the Net Assets

Where the available records are so deficient (i.e. it is impossible to compile a reasonable complete cash summary, the only method of estimating the profits or loss for the period, is to prepare statement of affairs showing the net worth of the business at the beginning and at the end of the period.

The profit/loss is estimated by use of the following formulas:

Profit or loss =  Closing        –    Opening     +      Drawings     –      Additional

                        Capital              Capital                                          Capital

Or where there are no non current liabilities then this optional formula can be used

Profit or loss =  Closing            -        Opening       +      Drawings      -    Additional

                         Net Asset                 Net Asset                                         Capital

Example:   6.1

A sole trader’s capital position is as follows:

	31 December
	19X2	19X3
	£	£
Motor vehicle:
Cost	7,500	7,500
Depreciation	3,000	4,500
	4,500	3,000
Stock	2,960	3,450
Debtors	1,150	2,060
Bank	925	2,125
Cash	__263	___54
	9,798	10,689
Creditors	2,860	3,340
Net assets	6,938	7,349

He has estimated his drawings for 19X3 at £12,500.  Estimate his net profit for the year.