Accounting for Single Entry &
Incomplete Records
INTRODUCTION TO FINANCIAL ACCOUNTING
Prepared by
Francis Aboagye-Otchere
Learning Objectives
Explain how the accounting equation permits the
measurement of profit when accounting records are
incomplete.
Draw up a statement of affairs of a business with single entry
and incomplete records.
Draw up a statement of affairs of a business with single entry
and incomplete records.
Determine profit from incomplete records using opening and
closing statement of affairs.
Determine profit from incomplete records using opening and
closing statement of affairs.
Deduce sales and purchases figures from single entry and
incomplete records.
Importance of Keeping Records
•
Performance assessment
•
Planning and control of operations
•
Tax purposes
•
Determination of profit/loss
•
Requirement for sourcing for funds
•
Business Valuations
Cash Basis and Accrual Basis
•
Cash Basis of accounting
–
Used when revenue is recognized based on cash actually received
and expenses is recognized only when payment is made.
–
This method is commonly used by small and petty traders who
are unable to advance credit for goods sold.
•
Accrual Basis of accounting
–
Revenue is recognized (earned) once goods are delivered or
services rendered to a customer and expenses are incurred once
benefits is derived or services are provided by another party.
Incomplete Records
•
Accounting records which have not been maintained
according to strict double entry principles.
•
Full records are not kept either because
– the proprietor of the business doesn’t keep a full set of
accounts.
– some of the business accounts are accidentally destroyed or
lost.
– there is no legal requirement.
– the cost of a bookkeeper is not justified.
– information for preparation of financial statements can be
Determination of Profit
•
Net Assets (Capital) Approach
–
Based on the accounting equation.
–
The only way capital can increase is either
by introduction of cash/resources or making
profit.
•
Cash Book (Income) Approach
–
Elements of the financial statements are
Net Assets (Capital) Approach
•
This method of determining profit/loss is based
on the assumption that capital grows by way of
profit and reduces by losses made.
•
Accounting equation:
Assets – Liabilities = Capital
Net Assets = Capital
•
Profits are determined using the opening and
Net Assets (Capital) Approach
Statement of Affairs as at …
Assets
Non current assets
xx
Current assets
xx
xx
Liabilities
Non current liabilities
xx
Current liabilities
xx
(xx)
Profit Determination
•
Drawings
–
This has the tendency to reduce the closing capital and
hence the profit.
–
They are either added to “apparent profit” or
subtracted from “apparent losses”
•
Capital Introduced
–
This has the effect of increasing the closing capital and
hence the profit.
–
It is therefore subtracted from the ‘‘apparent profit” or
Net Assets (Capital) Approach
Determination of Profit
Closing Capital
xxx
Plus: Drawings
xxx
xxx
Less: Opening Capital
(xxx)
Additional Capital
(xxx)
Illustration
Below are the opening and closing balances of Fear &
Panic Enterprise, a trader at the night market for year
2006 and 2007:
As at 31.12.2006 As at 31.12.2007
Van - $18,000 Van (net of depreciation) - $15,000 Furniture - $5,400 Furniture (net of depn.) - $4,800 Trade Receivables - 12,300 Trade Receivables - $18,600
Net Assets (Capital) Approach
•
Determine the opening and closing capital at the
beginning and end of the period via preparation
of statement of affairs.
•
Trace all withdrawals made by owners for their
personal use (drawings).
•
Determine whether there have been any
injection of additional capital
Cash Book (Income) Approach
•
A full income statement and statement of
financial position are prepared from the
incomplete records provided.
•
It is mostly used when a cashbook could
be drawn up, opening and closing
Income Approach - Steps involved
•
Compute the opening capital (using the statement of affairs
template)
•
Prepare your cash account to find missing figures such as
drawings etc.
•
Ascertain credit sales (using Trade receivables control
account)
•
Ascertain credit purchase (using trade payables control
account)
•
Ascertain the expenses chargeable to the income statement
by making adjustments to accruals and prepayments
Incomplete Records and Missing Figures
•
Drawings/Cash Received/Cash Paid:
–
Where the missing amount is in respect of payments,
then its normal to assume that the missing figure is
the amount required to make both totals agree in the
cash column of the cash book (note that for bank
related transactions a copy of all transactions can
always be obtained from the bank).
Illustration
As a professional accountant, you have been hired by Mr. Sikadanka,
owner of Hajia Shikishiki Enterprise, a sole proprietorship selling ‘fula’ at Zongo to help prepare his business’ final account for the year ending 31.12.2007. After a thorough check on his books you have obtained the following information about his business:
a. No record of sales has been kept (most of which is usually on credit). A payment of $61,500 ($48,000 by cheque) has been received from a customer for credit sale earlier.
b. A total of $31,600 was paid to suppliers during the period by cheque. c. Expenses paid during the period (by cheque): rent $3,800; general
expenses $310; rent (by cash) $400
Illustration
Additional information on Hajia Shikishiki enterprise are as follows:
31.12.2006 31.12.2007
$ $
Trade receivables 5,500 6,600 Trade payables 1,600 2,600
Rent owing - 350 Bank 5,650 17,940 Cash 320 420
Inventories 6,360 6,800
