Not all businesses keep a proper set of accounting recor s!

Lecture 15 INCOMPLETE RECORDS

Small businesses, such as shopkeepers, market stall holders, hairdressers, landscape gardeners, do not always have the knowledge, expertise and time to keep a complete set of accounting records. However, these businesses will need to have financial statements prepared annually (for tax purposes if nothing else).

&our basic tec"ni%ues use for inco$plete recor s

So "o# can t"e financial state$ents be prepare if t"e bookkeeping recor s are ina e%uate or inco$plete!

1' Construction of opening ( closing balance s"eets or capital )' Construction of a cas" an * or bank su$$ar+ ,' Construction of sales an purc"ase figures-'usuall+ one .ia control accounts /' 0se of gross * net profit percentage

1. Construction of opening & closing balance sheets or capital

The four reasons why capital might change. 1. 2. 3. 4. Introduction of extra capital Withdrawal of capital Profit earned by the business Loss suffered by the business

PROFIT OR LOSS = THE INCREASE OR DECREASE IN CAPITAL.

We can calculate profit when we have details of the opening and closing capital. Activity 1 The opening capital of Edna Clouds at 1 Jan 2005 was 2,000. At 31 December 2005 the capital figure was 8,500. How much profit has been earned during the year?

Activity 2

Opening capital Profit (must be) Closing capital

2,000 6,500 8,500

We can calculate profit when we have details of the opening and closing capital and have details of capital introduced and withdrawn during the year.

The opening capital of Ivy Cladwall at 1 Jan 2005 was 16,000. On 1 July 2005 she introduced further capital of 4,000 and during the year withdrew a total of 8,000. At 31 December 2005 the capital figure was 30,000. How much profit has been earned during the year?

Activity 3

Opening capital Capital introduced Withdrawals Profit (must be) Closing capital

16,000 4,000 - 8,000 12,000 18,000 30,000

The opening capital of Ivor Pain at 1 Jan 2005 was 32,000. During the year he withdrew 1,000 a month. At 31 December 2005 the capital figure was 18,000. How much profit or loss has been earned or suffered during the year?

Opening capital Withdrawals

32,000 -12,000 20,000

Activity 4

PROFIT OR LOSS WHEN THE NET ASSETS AT THE BEGINNING AND END OF THE YEAR ARE KNOWN.

Loss (must be) Closing capital

- 2,000 18,000

What do we mean by net assets?

FIXED ASSETS + CURRENT ASSETS LONG-TERM LIABILITIES CURRENT LIABILITIES

What is the accounting equation?

ASSETS LIABILITIES = CAPITAL + PROFIT - DRAWINGS

Activity 5
Eileen Dover has not kept proper bookkeeping records but has kept notes in diary form of the transactions of her business. She is able to give you details of her assets and liabilities as at 31 December 2004 and 31 December 2005: Dec 2004 2,000 1,400 1,700 1,900 2,200 200 400 1,200 Dec 2005 1,600 (after depreciation) 1,260 (after depreciation) 1,980 2,880 3,400 400 600 800 1,800

Draw up a Statement of Affairs at each balance sheet date

Dece$ber )11/ 2 2 )4111 14/11 ,4/11 14811 14911 )4)11 )11 54111 ; /11 54511 ;14)11 84711 84711 Dece$ber )115 2 2 14511 14)51 )4751 14971 )4771 ,4/11 /11 74551 ; 511 74151 ; 711 1141)1 84711 /41)1 14711 1141)1

3an &i6tures Stock Debtors :ank Cas" Cre itors Loan

Van Fixtures Stock Debtors Bank Cash Creditors Loan Drawings

Capital Profit Dra#ings

84711

<cti.it+ 5

<cti.it+ 5 =cont'>

)' Construction of a cas" or bank su$$ar+

This method of calculating profit is unsatisfactory and should only be done in exceptional circumstances. If #e kno# t"e opening an closing bank account balances #e $ig"t be able to calculate a $issing figure for sales receipts or purc"ases

A full set of financial statements should be drawn up from the available information.

Construction of a cas" or bank su$$ar+ e6a$ple Donal oes not keep proper accounting recor s' ?is bank state$ents s"o# t"at "is opening bank balance #as 2111 an "is closing bank balance #as 2/11' ?e kno#s t"at "is pa+$ents to suppliers #ere 214)11 an "e took ra#ings of 2811 =pai b+ c"e%ue> but "e "as no i ea of "is receipts fro$ ebtors!

Construction of an opening cas" or bank su$$ar+ e6a$ple

T Account
Date Detail Date Detail

Bal b/d Debtors

100 2200 2300

Creditors Drawings Bal c/d

1200 700 400 2300

We now know our receipts from debtors, which might be the sales figure Or could help us calculate the sales figure

Construction of sales and purchase figures.usually done via control accounts

,' Construction of sales an purc"ases

Donal oes not keep proper accounting recor s' ?e kno#s t"at "is opening ebtors #ere 2511 an "is closing ebtors #ere 2/11' ?e "as alrea + reconstructe "is bank account an kno#s t"at receipts fro$ ebtors #ere 2)4)11' ?e nee s to calculate "is sales

Construct a control account Control accounts essentiall+ contain / ite$s'' 1' Opening ebtors )' Closing ebtors ,' Cre it sales /' Receipts fro$ ebtors If we know 3 items , we can calculate the fourth!!

Construction of ebtors control account to calculate sales

/' 0se of gross * net profit percentage

Missing figures can also be calculate using gross or net profit percentages If #e kno# t"at gross profit is )1@ of sales4 #e can calculate t"e cost of sales if #e kno# our sales figure' If #e kno# cost of sales an our opening an closing stock4 #e can easil+ calculate purc"ases

Debtors control
Detail Bal b/d Sales 2100 Bal c/d 2600 400 2600 Detail 2200 500 Bank receipts

0se of gross * net profit percentage e6a$ple Duck "as sales of 2111' ?e kno#s t"at "is gross profit percentage is )1@ of sales' ?is opening stock #as 2)1 an "is closing stock #as 2)5' A"at is Ducks purc"ases!

Duestion 1

1' C'O'S is 71@ of 2111 B 271 )' 2)1 C purc"ases! ; 2)5 B 271 ,' Purc"ases B 275

solution
Find the cost of sales: !S "#$%&'' ( )urchases *"&%"'' $+,%*'' ;C!S -",.%"''/ Cost of sales *'+%&'' Find the sales value Sales ;C S 1ross profit 0 *'+%&'' #'2 3 0

4herefore: Sales 5 C S 6 1ross )rofit 0 5 *'+%&'' 6 '.# 0 07'.#0 6 *'+%&'' '.* 0 6 *'+%&'' 0 6 *'+%&''!'.* 0 6 "%''$%'''