Accounts from Incomplete Records
LEARNING OBJECTIVES
After studying the chapter, you will be able to:
● state the meaning of incomplete records;
● distinguish between Balance Sheet and Statement of Affairs;
● calculate Profit or Loss using the Statement of Affairs Method;
● prepare Profit and Loss Account and the Balance Sheet;
We have so far studied accounting records of firms, which follow the double entry system of book keeping. This gives us an impression that all business units follow this system. However, in practice all firms do not maintain accounting records as per the accrual system, and hence, the Generally Accepted Accounting Principles (GAAP) are not fully observed by them. Many small size enterprises keep partial records of their transactions. But, it is essential for them to know the profit or loss and the financial position of the firm for a year. This chapter deals with the ascertainment of profit or loss and financial position of the firm from its incomplete records. For this purpose, chapter is divided into three sections. Section I explains the meaning of incomplete records and reasons thereof. Section II deals with the ascertainment of profit or loss by statement of affairs method. Section III outlines the process whereby the profit or loss and financial position could be ascertained by using principles of double entry system.
9.1 Meaning of Incomplete Records Accounting records, which are not kept according to double entry system, are known as incomplete records. Though some may refer to it as single entry system it is a misnomer. There is no system defined as single entry system. It is also not a ‘short cut’ method as an alternative to the double entry system. One can say that when a firm does not have a double entry system of book keeping, it is having partial records. Thus, records are usually referred to as incomplete records.
Under such a situation, normally transactions of cash, debtors and creditors are recorded by maintaining cashbook, debtors and creditors accounts. Other information relating to assets, liabilities, expenses and revenues are partially recorded which requires careful scrutiny to prepare the accounts.
9.2 Reasons for Incomplete Records Incomplete records may be due to partial recording of transactions as is the case with small shopkeepers such as grocers and vendors. In case of large sized organisations, the accounting records may be rendered to the state of incompleteness due to natural calamity, theft or fire. Thus, partial recording of business transactions may takes place due to:
● Lack of knowledge about double entry system.
● Deliberate omission to maintain records to take advantage of taxation.
● Unable to maintain his/her business transactions because of the time, effort and cost involved. ● Loss of records due to fire, theft or
natural calamity.
9.2.1 Limitations of Incomplete Records
Incompleteness of accounting records by itself is a drawback of the system. Following are the limitations of partial records:
incomplete records because trial balance cannot be prepared. ● Internal checks cannot be enforced,
which increase the chances of cheating and fraud.
● Correct ascertainment and
evaluation of the financial results of business operations cannot be made. This hampers the future decisions about the business.
9.3 Accounts from Incomplete Records
It is necessary to know the result of business activities to assess the efficiency and success or failure of the organization. This gives rise to the need for preparing the financial statements to disclose:
● The profits made or loss sustained by the firm during a given period, and
● To disclose the amount of
assets and liabilities as at the closing date of the accounting period.
This is true even for firms which have incomplete records. The problem faced in this situation is how to ascertain profit or loss for an accounting year and determine the financial position of the entity at the end of that year form the incomplete records. This problem can be solved
by-● Ascertaining the profit or loss by preparing the Statement of Affairs at the beginning and at end of the accounting period, and then analyse the changes in owner’s equity during the accounting period. ● Preparing profit and loss account
and balance sheet by putting the
accounting records in proper order.
9.3.1 Ascertainment of Profit or Loss by preparing the Statement of Affairs
Under this method, statement of assets and liabilities at the beginning and at the end of the relevant accounting period are prepared to ascertain the change in owners equity at the end of accounting period. This is followed by the statement showing ascertainment of profit by analyzing non operating changes in owner’s equity. The statements so prepared show assets on one side and the liabilities on the other just as in case of a balance sheet. The difference between the totals of the two sides is known as owner’s equity. This can be also expressed in the form of accounting equation as follows:
Assets = Liabilities + Owner’s Equity The above equation is rearranged to ascertain the owner’s equity as
follows-Owner’s Equity = Assets – Liabilities Conversely, there may be a situation when the liabilities may exceed the total assets. In such a case, the difference will indicate ‘loss’ carried forward from the previous year. In this case, owner’s equity will be negative.
Though the Statement of Affairs appears to resemble with the balance sheet, but it is not a balance sheet, because the balances of various assets and liabilities are not derived from the ledger accounts.
which is to be adjusted for withdrawals made by the owner and the new capital introduced by the him during the accounting period to ascertain the change in owner’s equity due to operating activities. In case, the balance is positive it will indicate the profit earned during the year, while in case of negative balance it will be the loss sustained by the firm.
To ascertain the profit or loss, following steps are to be taken:
Step 1
Calculate owner’s equity at the beginning (opening owner’s equity) and at the end of the period (closing owner’s equity). Step 2
Subtract the opening balance of owner’s equity from closing balance of owner’s equity. Here, there may be two situations: (i) The change in owner’s equity may be positive, i.e., excess of closing owner’s equity over opening owner’s equity.
(ii) The change in owner’s equity may be negative, i.e., excess of opening owner’s equity over closing owner’s equity.
Step 3
In case of introduction of fresh capital and/or withdrawals made by the owner the following adjustments are required:
(i) Subtract the amount of capital introduced during the period from the amount calculated in step 2. (ii) Add the amount of withdrawals
made by the owner during the
period to the amount calculated in step 2.
Step 4
If the net result is positive, it represents profit and if it is negative, it represents earned loss sustained during the accounting year.
This process of measuring profit or loss is summarized as follows: Profit (Loss) = O1 – O0 + d – I
where;
O0 = A0 – L0 O1 = A1 – L1
O0 = Owner Equity at the beginning A0 = Assets at the beginning
L0 = Liability at the beginning O1 = Owner’s Equity at the end A1 = Assets at the end
L1 = Liability at the end
I = Introduction or addition to the capital during the period D = Withdrawals during the period
∆O = Change in owner’s equity Illustration 1 (Preparation of Statement of Profit)
Calculate the profit or loss from the following data:
Withdrawals by the proprietor during the year Rs. 30,000.
Capital at the beginning of the year i.e., 1 Jan. 2001 Rs.1,20,000.
Capital at the end of the year i.e., 31 Dec 2001 Rs. 2,00,000.
Illustration 2 (Preparation of Closing Statement of Affairs)
Bharat started his readymade garments business on January 1, 2001 with a capital of Rs. 50,000. He was pur-chasing readymade dresses of well-known brands. He was able to procure credit from the suppliers. There were a few shopkeepers from nearby markets who were also purchasing from him on credit basis. During
the year, he introduced fresh capital of Rs. 15,000. He withdrew Rs. 10,000 for his personal use. On Dec 31, 2001 his position was as follows:
Accounts payable Rs.90,000; Accounts Receivable Rs.1,25,600; Stock Rs. 24,750; Cash at Bank Rs. 24,980
Calculate profit and loss made by Bharat during the first year of his business, using (i) Statement of Affairs Method (ii) Equations Method.
Solution
Statement of Profit for the year ended 31-12-2001
Particulars Amount Rs.
Owner’s equity as on 31 December (O1) 2,00,000 Less : Owner’s equity as on 1 January (O0) 1,20,000
Change in owner’s equity (∆o) 80,000
Add : Drawings (D) 30,000
1,10,000 Less : Additional capital introduced (I) 50,000
Profit made during the year (P) 60,000
Solution
I. Statement of Affairs Method
Books of Bharat
Statement of Affairs as on 31.12.2001
Liabilities Amount Assets Amount
Rs. Rs.
Accounts Payable 90,000 Cash at Bank 24,980
Accounts Receivable 1,25,600
Owner’s Equity 85,330 Stock 24,750
Statement of Profit for year ending 31-12-2001
Particulars Amount
Rs.
Owner’s equity as on 31 December (O1) 85,330 Less : Owner’s equity as on 1 January (O0) 50,000 Change in owner’s equity (∆0 ) 35,330
Add : Drawings (D) 10,000
45,330 Less : Additional capital introduced (I) 15,000 Profit made during the year (P) 30,330
II. Equations Method
O 1 = A 1 - L 1 (1) O0 = A1 - L1 (2) P = O 1 - O0 + D – I (3) where : O1 = Closing Capital as on 31.12.2001 A 1 =Assets as on 31.12.2001 L 1 = Liability as on 31.12.2001 O0 = Opening Capital as on 1.1.2001 A0 = Assets as on 1.1.2001 L0 = Liability as on 1.1.2001 D = Drawings during the year 2001 I = Introduction of additional capital
during the year
P = Profit and Loss for the year
∆O = Change in owners equity Calculation of Assets as on 31.12.2001 Rs. Cash at Bank 24,980 Account Receivable 1,25,600 Stock 24,750 Assets (A1) 1,75,330 Calculation of Liabilities as on 31.12.2001 Rs. Accounts Payable 90,000 Liability (L1) 90,000
Calculation of Owners equity as on 31.12.2001
O1 = A1 - L 1
O1 = Rs. 1,75,330 – 90,000
Owners equity Rs. 85,330 Ascertaining Profit or Loss during the year P = O1 - O0 + D – I
= (85,330 – 50,000) + 10,000 – 15,000 = 35,330 + 10,000 – 15,000
= 45,330 – 15,000
Profit = Rs. 30,330
Illustration 3 (Preparation of opening and closing statement of Affairs)
also introduced Rs. 15,000 during the year as additional capital. On 31 March 2001 his position was as follows: Press Rs. 5,25,000; Building Rs. 2,00,000; Stock of press material Rs. 55,000; Cash at Bank Rs. 40,380; Cash in hand Rs.15,340; Dues from Customer Rs.17,210; Payments due to accounts payable Rs. 65,680. Using Statement of Affairs method, calculation the profit made by ABC printers during the year.
9.4 Preparation of Profit and
Loss Account and Balance Sheet from Incomplete Records
Generally, the Statement of Affairs method is used where it is difficult to compile even
a reasonable summary of cash transac-tions. There is a need to obtain as far as much information as possible about the assets and liabilities at the beginning as well as at the close of the year. Bank
ABC Printers
Statement of Affairs as on 31.3.2001
Liabilities 1.4.2000 31.3.2001 Assets 1.4.2000 31.3.2001
Rs. Rs. Rs. Rs.
Accounts 75,340 65,680 Printing Press 5,00,000 5,25,000 Payable
Wages pending 5,000 - Building 2,00,000 2,00,000
Change in
Owner’s equity 7,63,590 7,87,250 Stock of press 50,000 55,000 Material Dues from 20,350 17,210 customers Cash at bank 65,600 40,380 Cash in hand 7,980 15,340 8,43,930 8,52,930 8,43,930 8,52,930
Statement of Profit for year ending 31-3-2000
Particulars Amount Rs.
balance can be obtained from the passbook and cash book with bank column. Value of fixed assets, may be ascertained from the purchase documents if available with the trader or estimated by inquiring from the supplier of such an asset. Information should be obtained from the various documents/vouchers such as invoices for sales and purchases receipts for a payment made and cash obtained.
In some firms detailed information may be available about business activities. If details of accounts payable, purchases, cash received, sales, accounts receivable, bills receivables, bills payable, cash payments, with cash summary of transactions are available, it may be possible to workout some of the missing figures by using the logic of double entry system of accounting. This in turn, will help in the preparation of Profit and Loss Account and Balance Sheet.
Hereunder, we demonstrate how available information can be used to prepare the accounts to ascertain missing figures, which will help in preparation of Profit and Loss account and Balance Sheet.
9.4.1 Ascertainment of Missing Information about Credit Purchases and Payables
Credit purchases and Accounts Payables (creditors and bill payables) are
inter-connected. Therefore, missing information about the credit purchases and any item relating to creditors and bills payables can be obtained by preparing these accounts simultaneously. Typical Accounts Payable and Bills Payable accounts are given in (figure 11.2).
When available information is placed in these two accounts, one can ascertain which items are missing. The connecting items between Bills Payable and Accounts Payable accounts are: bill accepted during the year against credit purchases, and dishonoured bills payable. By making use of connecting items, missing information can be ascertained. For example, to calculate missing information about purchases, the bills payable account is to be completed/ closed.
Dr. Total Creditors Account Cr.
Particulars Amount Particulars Amount
Rs. Rs.
Cash (Paid) **** Opening balance ****
Bank **** Bank ****
(Cheques issued) (Cheques dishonoured)
Bills Receivable Bills payable ****
(Endorsed) (Bills dishonoured)
Bills Payable **** Credit Purchases ****
(Bills accepted)
Discount received **** Purchases returns **** Closing Balance ****
***** *****
Bills Payable Account
Dr Cr
Particulars Amount Particulars Amount
Rs. Rs.
Bank (bills matured) **** Opening Balance ****
Creditors **** Creditors **** (Bills accepted) (Bills dishonoured) **** Closing balance **** ***** ***** Figure : 11.2
Illustration 4 (Computation of credit purchases)
The following information is available to you from the books of M/s Linsa Traders. Prepare accounts payable account to find out the missing information, if any. Cash paid to accounts payable Rs. 15,000 Cheques paid through bank Rs. 10,000
Bills endorsed Rs 14,500
Bills accepted during the year Rs. 35,000 Discount received Rs. 5,000 Purchases returns Rs. 2,500 Opening balance of accounts Rs. 15,000 payable as on 1 April 2002
Cheques dishonoured Rs. 8,000 Bills dishonoured (bills payable) Rs. 10,000 Balance of accounts payable Rs. 25,000 as on 31March 2003
▼
▼ ▼
Solution
M/s Linsa Traders
Dr. Accounts Payable Account Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.
Cash (paid) 15,000 Balance b/f 15,000
Bank 10,000 Bank 8,000
(cheques dishonored) (cheques issued)
Bills Receivable 14,500 Bills payable 10,000
(Bill endorsed) (bills dishonoured)
Bills Payable 35,000 Purchases (Credit) 74,000
(Balancing figure)
Discount received 5,000 Purchases returns 2,500 Closing Balance 25,000
1,07,000 1,07,000
Illustration 5 (Calculation of net purchases)
From the following information, you are required to calculate Net purchases:
Rs. Opening Balance of Bill Payable 15,000 Opening Balance of Creditors 18,000
Closing Balance of Bills Payable 21,000 Closing Balance of Creditors 12,000 Bills Payable honoured by firm 26,700 during the year
Returns outwards 3,600
Cash Purchases 77,400
Cash paid to Creditors 90,600
Solution
Dr. Total Creditors Account Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.
Bills Payable 32,7001 Opening Balance 18,000
Bills issued during the year)
Solution
Dr. Bills Payable Account Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.
Cash 26,700 Opening balance 15,000
(Bills honoured)
Closing balance 21,000 Total Creditors 32,7001
(Balancing figure) Bills issued during the year
47,700 47,000
9.4.2 Ascertainment of Missing Information about Credit Sales and Receivables
As you have already studied in the chapter 6 based on bills of exchange, that in the present times sales are made against bills receivables by raising bills of exchange on the customers. Only when accepted by the
customers, the bills of exchange become bills receivable. It is to be noted that credit sales, Debtors and bills receivable are interrelated. Debtors and Bills Receivable account are therefore, prepared simulta-neously. The formats of Accounts Receivables (total debtors and Bills Receivable) are as follows:
Calculation of Net Purchases
Particulars Amount
Rs.
Cash Purchases 77,400
Add: Credit Purchases 1,20,9002
Total Purchases 1,98,300
Less: Returns Outward 3,600
The linking items between the accounts receivable and bills receivable are: Bills receivable by customers during the period and bills receivable dishonoured during the period. By making use of connecting items missing information can be ascertained. For example, to calculate missing information about net sales, at first stage, bills receivable account is to be completed.
After completing the bills receivable accounts with all the items, one can attempt to complete the accounts receivable account. Once all the items in both the account are available the credit sales during the period is ascertained. This must be added to the cash sales figure available from the cash book summary to obtain total sales for the period. In case any information is available regarding
Total Debtors
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
Opening Balance **** Cash (received) ****
Bills Receivables Bank ****
(Dishonoured) **** (Cheque received)
Bank Discount allowed ****
(Cheque dishonoured) Bad debts ****
Sales returns **** Bills Receivable **** (bills received) Closing Balance **** ***** **** Bills Receivable Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
Cash (bills honoured) ****
Opening Balance **** Bank and Discount ****
Debtors **** (Bills discounted)
(bills received) Debtors (Bills ****
Retained & Dishonored)
sales returns, it is deducted from the total sales to obtain net sales. The figure of net sales is placed on the credit side of Profit and Loss Account.
9.4.3 Preparing summary statement of cash transaction to ascertain missing information
Summary of cash transactions record the cash receipts and cash payments. Cash receipts indicates opening balance of cash and receipts on account of cash sales, cash received from debtors, cash collected on maturity of bills receivable and other receipts such as interest, commission and tax refund. The cash payments includes payment to creditors, payment on retirements of bills payables, payments of dues, expenses and taxes. The
with-drawals made by the proprietor/ partner is also shown on the payments side along with the closing balance. While preparing a cash book summary one may find a missing figure. In case of bank transactions, a bank overdraft appears on the other side. The balancing figure has to be carefully identified as the missing figure.
To ascertain missing information for preparation of final accounts, all the information available should be carefully recorded by simultaneously opening relevant accounts. Then, balance those accounts, which have only one missing information pass transfer entries by making use of connecting items.
Particulars Source of Information
Closing Assets (except stock) and Closing Statement of Affairs Liabilities, Capital.
Opening Assets, Liabilities and Capital Opening Statement of Affairs
Purchases (Cash and Credit) Accounts Payable, Purchases Account, Cash Summary Statement
Sales (Cash and Credit) Cash Sales from Cash Summary, Credit Sales from Accounts Receivable Account and Sales Account Expenses and Revenues As per Cash Summary Statement and additional
information for outstanding and prepaid expenses Losses and Gains From all the accounts and scattered information Bills Receivable received Bills receivable Account/Account Receivable Account Bills Payable accepted Bills Payable Account/Accounts Payable Account Opening and Closing balance of Cash Summary of Cash and bank transactions.
Illustration 6 (Preparation of Accounts Receivable Account)
From the following information supplied by Excel Enterprises of Ganesh, prepare the accounts receivable account and find out the missing figure, if any.
Rs.
Opening balance of Accounts
Receivable as on 1April 2002 1,00,000 Bills Receivable dishonoured
during the year 10,000
Cheque dishonoured (Bank) 5,000 Cash received from Accounts
Receivable 25,000
Cheque received and deposited 10,000 in the bank
Discount Allowed 4,500
Bad debts 2,500
Sales Returns 6,000
Closing balance of Accounts 10,000 Receivable as on
31March 2002
Illustration 7 (Ascertainment of Credit Sales)
From the following information, Calculate the accounts of credit sales
Transactions 1.1.2000 31.12.2000
Rs. Rs.
Balance of Debtors 30,000 22,500
Balance of Bill Receivables 9,000 12,000
Transactions made during the year:
Cash received from customers during the year 1,48,500
Solution
Dr. Accounts Receivable Account Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.
1 Apr Opening balance of 1,00,000 Cash (received from 25,000 Accounts Receivables Accounts Receivable)
Balance b/f
2000 Bills Receivables 10,000 Bank (cheque 10,000
(Dishonoured) received)
Bank 5,000 Discount allowed 4,500
(cheque dishonoured) Bad debts 2,500
Sales returns 6,000
Bills receivable 57,000 (Balancing figure
being bills receivable issued during the year)
Balance c/f 10,000
(Closing balance of of Accounts Receivables)
Dr. Tatal Debtors Account Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2000 Rs. 2000 Rs.
1 Jan Balance b/f 30,000 31 Dec Cash 1,48,500
Bills Receivable 7,500 (Collected from
(Dishonoured) accounts
Sales 1,77,000 receivable)
(Balancing figure) Discount 1,500
being credit sales Bills receivable 31,5001
(Transfer from bills receivable account) Return Inwards 6,000 Bad Debts 4,500 Balance c/f 22,500 2,14,500 2,14,500 Solution
Dr. Bills Receivable Account Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2000 Rs. 2000 Rs.
1 Jan Balance b/f 9,000 31 Dec Cash 21,000
Accounts Receivable 31,500 Accounts 7,500
Receivable
(B/R received) (Dishonoured)
(Balancing figure Balance c/f 12,000
being bills receivable during the year) 40,500 40,500 Discount allowed 1,500 Returns Inwards 6,000
Cash Received against Bills 21,000
Bad Debts 4,500
Bills Receivable (Dishonoured) 7,500
Solution
Illustration 8 (Colcutation of Net Sales)
From the following information calculate the net sales made during the year.
Transactions Amount
Rs.
Debtors on 1.1.2000 61,200
Cash received from debtors 1,82,400 during the year
Returns Inward 16,200
Accounts Receivable on 82,800 31.12.2000
Bad Debts 7,200
Cash Sales as per Cash Book 1,69,200
Solution
I Calculation of Credit Sales made during the year
Dr. Accounts Receivable Account Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2000 Rs. 2000 Rs.
1 Jan Balance b/d 31 Dec Cash 1,82,400
(Opening Bal) 61,200 received from
Sales 2,27,400 Accounts
(Balancing figure) Receivable)
being credit sales Return Inwards 16,200
Bad Debts 7,200
Balance c/f 82,800
(Closing Balance)
2,88,600 2,88,600
II Calculation of Net Sales during the year
Particulars Amount
Rs.
Cash Sales as per cash book 1,69,200
Add: Credit Sales 2,27,400
Sales 3,96,600
Less: Returns Inwards 16,200
Solution
Dr. Accounts Receivable Account Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.
Balance b/f (Opning) 9,000 Cash 30,000
Credit Sales 34,400 Discount Allowed 1,400
(Balancing Figure) Balance c/f 12,000
(Closing)
43,400 43,400
9.5 Preparation of Final Accounts Let us now take up few comprehensive illustrations and study how complete final accounts can be prepared from incomplete records.
Illustration 9
Roshan Washing House did not keep his
book of accounts under double entry system. From the following information available from his records, prepare Profit and Loss account for the year ending 31-3-2000 and a balance sheet as on that date, depreciating the washing equipment @ 10%. Other Information 31.3.2000 31.3.2001 Rs. Rs. Accounts Receivable 9,000 12,000 Accounts Payable 14,400 6,800 Stock of Materials 10,000 16,000 Washing Equipment 40,000 40,000 Furniture 3,000 3,000
Discount allowed during the year 1,400
Discount Received during the year 1,700
Receipts Amount Payments Amount
Rs. Rs.
Balance b/f Cash Purchases 14,000
(Opening Balance) 8,000 Paid to Creditors 20,000
Cash Sales 40,000 Sundry Expenses 6,000
Received from accounts 30,000 Cartage 2,000
Drawings 8,000
Balance c/f 28,000 (Closing balance)
78,000 78,000
Statement of Affairs as on 1-4-2000
Particulars Amount Particulars Amount
Rs. Rs.
Accounts Payable 14,400 Washing Equipment 40,000
Owner’s Equity 55,600 Furniture 3,000
(Balancing Figure) Stock of Material 10,000
Accounts Receivable 9,000
Cash 8,000
70,000 70,000
Profit and Loss Account for the year ending 31-3-2000
Particulars Amount Amount Particulars Amount Amount
Rs. Rs. Rs. Rs.
Opening Stock 10,000 Sales:
Purchases: Cash 40,000
Cash 14,000 Credit 34,400 74,400
Credit 14,100 28,100
Cartage 2,000 Closing Stock 16,000
Gross Profit c/f 50,300
90,400 90,400
Sundry Expenses 6,000 Gross profit b/f
Discount Allowed 1,400
Discount Received 50,300
Depreciation on 4,000
washing equipment 1,700
Net Profit transferred to 40,600 Capital a/c
52,000 52,000
Dr. Accounts Payable Account Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.
Cash 20,000 Balance b/f 14,400
Discount 1,700 (Opening)
Received Credit Purchase 14,100
Balance c/f (Closing) 6,800 (Balancing Figure)
28,500 28,500
Balance Sheet as on 1-3-2001
Liabilities Amount Assets Amount
Rs. Rs.
Owner Equity 55,600 Washing equipment 40,000
Add: Net Profit 40,600 Less: Depreciation 4,000 36,000
96,200 Furniture 3,000
Less: Drawings 8,000 88,200 Stock of materials 16,000
Accounts Payable 6,800 Accounts Receivable 12,000
Cash 28,000
95,000 95,000
TERMS INTRODUCED IN THE CHAPTER
● Incomplete Records ● Statement of Affairs
SUMMARY WITH REFERENCE TO LEARNING OBJECTIVES
Incomplete Records: Incomplete records refer to lack of accounting records according to the double entry system. Degree of incompleteness may vary from highly disorganized records to organized but still not complete.
Difference between Statement of Affairs and Balance Sheet: A Statement of Affairs is a statement showing various assets and liabilities of a firm on date, with difference between the two sided denoting owner’s equity. Since the records are incomplete, the values of assets and liabilities are normally estimates based on information available. They are not the balances taken from properly maintained ledger like in the case of Balance Sheet. The balance sheet is derived from a set of books maintained on the basis of double entry system.
Computation of Profit and Loss from Incomplete Records: The statement of affairs is used to compute Profit or Loss when a firm has a highly disorganized set of incomplete records. It may not be possible to prepare a cash summary in such a situation. Two statements of affairs are prepared to find out opening and closing equity amounts. To the difference between the closing and opening equity , any sum withdrawn from business are added back and any additional capital introduced during the year are deducted. To find out Profit and Loss made for the period.
EXERCISES
Objective Type Questions
1. Multiple Choice Questions
(a) Incomplete records are generally found in use by (i) Small Traders
(ii) Society (iii) Company (iv) Government
(b) When Closing Owner’s Equity is greater than Opening Owner’s Equity, it denotes (i) Profit
(ii) Loss
(iii) Profit, if there is no introduction of fresh capital (iv) No profit no loss
(c) If owner’s equity in the beginning is Rs 21,000. Fresh capital introduced during the year is Rs. 7,000. Amount withdrawn during the year is Rs. 13,000, then the closing owner’s equity will be:
(i) Rs. 27,000 (ii) Rs. 15,000 (iii) Rs. 41,000 (iv) Rs. 1,000
(d) Credit Sales is obtained from: (i) Bills Receivables
(ii) Accounts Receivables (iii) Accounts Payable (iv) Cash Summary
(e) Credit purchases can be obtained from: (i) Statement of Affair
(ii) Bank
(iii) Bills Receivable (iv) Account Payable
Information about bills received dishonoured can also be obtained from: (v) Summary of cash transaction
(vi) Profit and Loss account (vii) Accounts Payable (viii) Accounts Receivable
(f) Discount received from accounts payable may be obtained from (i) Cash statement
2. Fill in the blanks
(a) To find out the profit, closing capital is to be adjusted by ________________ drawings and _____________________ introduction of fresh capital.
(b) If closing owner’s equity is Rs 1,000; opening owner’s equity is Rs. 500; profit is Rs 700, then there must be a ___________________________ of Rs 200 during the year. (c) Credit purchase can be ascertained as the balancing figure in the
_____________________.
(d) The amount received from debtors can be traced from ___________________. (e) Increase in owner’s equity at the end of the period represents ________________. 3. Calculate the following amounts
(a) Calculate value of Opening Stock
Purchases Rs. 17,500
Sales Rs. 45,000
Closing Stock Rs. 13,000
Gross Profit @ 331/3% on Sales.
(b) Calculate the amount of closing stock
Opening Stock Rs. 17,500
Purchases Rs. 37,500
Sales Rs. 60,000
Gross Profit @ 25% on Cost.
(c ) Mr. Anshul started a business on 1.1.96 without maintaining proper accounts. On personal
Inquiries and scruting of other papers the following information is obtained.
1996 1997 Rs. Rs. Purchases 74,000 68,500 Sales 75,000 90,000 Closing Stock 30,000
Goods privately consumed 1,000 1,500 Prepare Profit and Loss account
Calculate Closing Stock of 1996 and Opening Stock of 1997.
Q 4. From the following information calculate the amount of Net Sales, Net Purchases and Closing Stock in Trade.
Particulars 1.1.98 31.12.98
Rs. Rs.
Account Receivables 31,800 26,500
Bills Payable 21,000 29,000
Bills Receivable 8,800 7,000
Stock in Trade 10,000 ?
Transaction during the year:
Discount allowed 1,000
Discount received 800
Bills Payable discharge 35,600
Bills Receivable collected 20,900
Return Inwards 8,700
Return Outward 4800
Bad Debts 2,800
B/R Dishonoured 1,800
Cash paid to Creditors 1,20,000
Cash received from Debtor 69,000
Cash Sales 40,900
Cash Purchased 1,03,200
Uniform Sales Price of goods being cost plus 25 per cent Short Answer Questions
5. What are incomplete records?
6. What are the possible reasons for maintaining incomplete records? 7. Differentiate between a Statement of Affairs and a Balance Sheet?
8. What practical difficulties are encountered by a trader due to the incompleteness of accounting records?
Long Answers Questions
9. What is meant by a ‘Statement of Affairs’? How can the Profit or Loss of a trader be ascertained with the help of a Statement of Affairs?
10. “Is it possible to prepare the Profit and Loss Account and the Balance Sheet from the incomplete books of accounts kept by a trader”. Do you agree? Explain?
11. Describe the procedure of ascertaining credit sales, collection from accounts receivables, payments to accounts payable closing balance and bills receivable. 12. Explain how the following may be ascertained from incomplete records:
(a) Opening owner’s equity and closing owner’s equity (b) Credit sales and credit purchases
13. Jeevan Lal owns a tailoring shop. He does not maintain complete double entry books of accounts. From the following information, help Jeevan Lal to prepare Statement of Affairs and Profit earned during the year ending 31December 2001.
Particulars Amount (Rs.) Amount (Rs.)
Cash in Hand 20,000 25,000 Bank Overdraft 70,000 45,000 Stock in trade 9.25.000 1,07,500 Sundry Creditors 65,000 55,000 Sundry Debtors 80,000 75,000 Bills receivables 20,000 12,500
Furniture and fittings 12,500 10,000
Machinery 1,00,000 90,000
Building 1,25,000 1,22,500
Bills Payables 10,000 15,000
Motor Vehicles — 60,000
Unpaid Expenses 2,000 1,500
14. Mr Kishan who owns a food grains shop, does not maintain complete double entry books of accounts. From the following details determine the Profit for the year and Statement of Affairs at the end of the year.
Rs 10,000 (cost) furniture was sold for Rs 50,000 on 1January 2001; 10% depreciation is to be charged on furniture . Mr Kishan has drawn Rs 10,000 per month . An amount of Rs 20,000 was invested by Mr Kishan in 2001.
Particulars 1 Jan 2001 31 Dec 2001
(Rs.) (Rs.) Stock 4,00,000 6,00,000 Accounts Receivable 3,00,000 4,00,000 Cash 20,000 10,000 Bank 1,00,000 (overdraft) 5,000 Accounts Payable 1,50,000 2,50,000
Out standing expenses 50,000 80,000
Furniture 30,000 20,000
Bank balance on 1 January 2001 is as per cash book, but there was a bank overdraft on 31 December 2001 as per bank statement. Rs 20,000 cheques drawn in December, 2001 have not been encashed within the year.
Particulars 1-1-98 31-12-98 (Rs.) (Rs.) Sundry Creditors 3,600 3,800 Sundry Debtors 3,900 4,500 Bills Receivable 2,500 3,400 Bills Payable 1,600 2,300
Cash in Hand or at Bank 7,000 1,200
Additional Information is given below:
Cash Received against Bills Rs. 10,000
Cash Paid against Acceptance Rs. 14,300
Payment made to Creditors Rs. 14,700
Discount allowed to Customers Rs. 200
Find out Credit sale and Credit Purchases made during the year.
16. Mr Rajan who was not keeping a full accounting system gives you the following information for the year 31March 2001.
Summary of Cash Book
Dr. Cr
Particulars Amount Particulars Amount
Rs. Rs.
Balance at Bank 43,500 Ranjan’s Drawings 1,55,200 Accounts Receivables 3,84,000 Accounts Payable 2,71,000 Bills Payable 93,000
Accounts Receivable 1,20,000 Wages 3,20,000
realised Salaries 1,65,000
Commission 15,000 Rent and taxes 44,000
receives Insurance 8,000
Cash sales 4,86,000 Carriage 12,000
Balance c/d Advertising 13,300
Particulars of other assets and liabilities
Particulars Amount Amount
Rs. Rs. April 1 2000 March 31 2001 Stock in hand 1,87,000 23,400 Accounts receivable 1,20,000 1,40,000 Accounts payable 90,000 15,000 Bills receivable 40,000 50,000 Bills payable 10,000 12,000 Furniture 6,000 6,000 Machinery 1,20,000 1,20,000
A provision of Rs 14,500 is required for doubtful debts and depreciation at 15% is written off on machinery and furniture. Rs 30,000 is outstanding for wages and Rs.12,000 for salaries. Insurance has been paid to the extent of Rs. 2,500. Legal expenses outstanding are Rs. 7,000. Prepare the opening Statement of Affairs, Closing Statement of Affairs, Statement of Profit and Balance Sheet.
17. Mr Kishore could give only the following information about his business transactions. Prepare a Profit and Loss Account for the year ended 31 March 2002, together with Balance Sheet on that date.
Summary statement of transactions
Particulars Amount Particulars Amount
Rs. Rs.
Intrest 1,000 Balance at bank as 24,250
charges 20,000 on 31 March 2001
Personal 85,000 Cash in hand as on 750
withrawals 79,000 31 March 2001
Staff salaries 1,50,000 Accounts receivable 2,50,000
Other business Cash sales 1,50,000
Further details are:
Particulars Amount Amount Particulars Amount Amount
Rs. Rs. Rs. Rs.
1 April 31 1 April 31 March
2001 March 2001 2002 2002 Stock 90,000 1,02,200 Furniture 10,000 10,000 Accounts 80,000 55,000 Payable Office 1,50,000 1,50,000 premises Debtors 3,00,000 3,00,000
Provide 5% interest on Kishore’s Capital balance as on 1 April 2001. Provide Rs 15,000 for doubtful debts, 5% depreciation on all fixed assets, 5% group incentive commission to staff has to be provided for on net profit after meeting all expenses and commissions.
18. Babulal ,keeps a cash book , carbon copies of the customers statements, which are marked off when settled and a file of creditors for running his stationary business. Analysis of cash record for the year ended 30June 2002, shows :
Particulars Amount Particulars Amount
Rs. Rs.
Debt due by 2,32,430 Rent rates and taxes 10,200
customers collected Trade expenses 15,360
Creditors accounts 1,94,070 Purchase of a delivery 4,800
for goods paid van 5,600
Cash purchases 18,230 Cash drawn for 15,360
Wages 24,190 personal use 4,800
5,600
Particulars 1 July 30 Particulars 1 July 30 June
2001 June 2001 2002
2002
Balance at — 18,200 Crediors 16,320
Bank Rent 11,460 1,750
Till float 300 — Trade 1,500 960
on imprest expenses 3,200
system Delivery van 740
Debtors 12,620 14,790
Sales made during the year were Rs 2,85,300.You are required to prepare : (a) The Profit and Loss account for the year ending 30June 2002. (b) Balance Sheet as on that date.
19. Radha Garments commenced business on 1April 2001 with Rs. 45,000 as capital. She maintains books on single entry system. On 31March 2002, books revealed the following information:
Account Payable Rs. 25,000 Furniture and Fittings Rs. 50,000
Stock of ready-made garments Rs. 40,000 Accounts Receivables Rs. 45,000
Cash Rs. 10,000
Drawings Rs. 750 per month
Additional Capital introduced: Rs. 20,000 5% accounts receivable proved as bad Interest on capital 5% p.a.
Depreciation on furniture and fittings 10% p.a.
Provision for baddebts @ 2.5% and Statement of Affairs ended 31March 2002. 20. Ganesh is conducting business as a retail merchant. He does not maintain regular
account books. From cash sales effected, by him he makes business and other payments. He always retains cash of Rs. 10,000 on hand and deposit the balance in the bank. The inventories for for the year ended 31December 2001 are lost. However, he informs you that he has sold goods invariably at a price which yields him a profit of 33.33 % on cost. From the following information supplied to you, prepare Profit and Loss Account and a Balance Sheet for the year ended 31 December 2001.
Assets and Liabilities 1 Jan 2001 31 Dec 2001
Rs. Rs.
Cash in hand 10,000 10,000
Cash at bank 40,000 90,000
Accounts receivable N.A. 80,000
Stock of goods 10,00,000 3,50,000
Analysis of the bank pass book reveals the following information:
Particulars Amount Rs.
Payment to accounts payables 7,00,000
Business expenses 1,20,000
Receipts from accounts receivables 7,50,000
Loan from Ajhit(taken on 1 Jan 2000 @ 10% p.a) 1,00,000
Deposit in the bank 1,00,000
In addition he paid cash Rs 20,000 to accounts payables and salaries Rs 40,000. He retained Rs 8,000 cash for his personal expenses.
21. Nagi furnishes you the following particulars:
Make 5% provision for doubtful debts and provide 10% depreciation on furniture. The difference in cash may be taken as drawings on cash sales.
Particulars 31 Dec 1999(Rs.) 31 Dec 2000(Rs.)
Cash at Bank 32,000 48,000
Stock 2,24,000 1,76,000
Account Receivables 4,00,000 3,60,000
Furniture 8,000 8,000
Account Payables 1,76,000 1,92,000
Out standing salary 40,000 6,400
Other Transactions:
Rates and Taxes 6,400
Postage Stamps 7,200 Salary 46,000 Creditor 6,24,000 Debtors 7,84,000 Conveyance 4,000 Bad Debts 4,000 Discount Received 2,400 Discount Allowed 6,400 Purchase return 8,000 Sales Return 16,000
(1) All expenses of the business had been met by cheque, and an analysis of the bank pass book showed the following payments in 1996 and 1997:
Rs.
Purchases (Rs.37, 000 on related to 1996) 63,750
Rent and rates 5,100
Salaries 11,000
Advertising 1,400
Other expenses 2,880
(2) The value of the stock on 31 December 1997 was Rs.15, 000. No stock was taken on 31 December 1996,but a uniform rate of gross profit may be assumed.
(3) Liabilities outstanding and on 31 December 1997, were : Rs.
Purchases 7,500
Advertising 500
Other expenses (light, heat, telephone, etc.) 170 (4) Amounts paid in advance at 31 December 1997 were: Rs.
Rates 100
Other Expenses (insurance ) 50
(5) All business expenses arose equally in two periods.
(6) Goods were taken from stock for private consumption, the estimated cost being Rs. 500 in 1996 and Rs 7,50 in 1997.
(7) Private Drawings amounting Rs. 6,620 were met out of cash received and balance was banked.
(8) Private Income of Rs 2,250 had been paid into the bank.
The fixtures and fittings are to be written off over 10 years in equal installments. On the basis of the foregoing information prepare :
(a) The Trading and Profit and Loss Account of each of the years 1996 and 1997; and (b) The Balance Sheet as on 31 December 1997.
23. Saxena keeps his books by Single Entry System. An analysis of his Cash Book for the year ended 31December 1993, is as follows:
Cash Receipts: Rs.
From Accounts Receivables 41,000
From Cash Sales 37,000
From Saxena as additional Capital on 1April 1993 10,000
Cash Payments: Rs.
Cash Purchases 24,000
Paid to Accounts Payables 16,200
Productive Expenses 5,400
Salary Paid 8,100
Sundry Expenses 6,500
New Furniture purchased 4,000
Private Payments 7,800
Total Cash Payments 72,000
Assets and Liabilities as on: 31Dec. 1992 31Dec. 1993
Rs. Rs. Accounts Receivables 12,000 ? Accounts Payables 6,200 ? Cash 8,000 ? Stock 20,200 16,100 Furniture 6,000 9,500 Other Information’s
(1) Credit Sales during the year were Rs.48,000 (2) Sales Returns Rs.2,600
(3) Credit Purchases during the year were Rs.20,000 (4) Discount allowed to Debtors Rs.200
(5) Discount received from creditors Rs.300
(6) Bad Debts written off during the year were Rs.1,200
Adjustments
(1) Write off further bad debts Rs.1,000
(2) Provide 5% for doubtful debts and 2% for discount on Accounts Receivables (3) Allow interest on Capital @ 10% per annum
ANSWERS 1. (a) i (b) ii (c) i (d) ii (e) iv (f ) i
2. (a) Adding, Subtracting (b) Drawing
3. Opening owner’s equity Rs. 3,03,000 Closing owner’s equity Rs. 3,86,000
Profit Rs. 83,000
4. Opening owner’s equity Rs. 6,50,000 Closing owner’s equity Rs. 6,30,000
5. Credit Sales Rs. 10,800
Credit Purchase Rs. 29,200
6. Opening owner’s equity Rs. 4,16,500 Closing owner’s equity Rs. 4,22,200 Profit during the year Rs. 1,60,900
