UNIT - 10 ACCOUNTS FROM INCOMPLETE RECORDS [Learning Objective ‘After studing this chapter, students shall beable to @ Definethe concept of incomplete records Distingnish between Double entry system and Accounts from Ineom-_| plete records. ‘¢ Ascertain he amount of profit orloss using” Statement of Affairs” method. fe Differntiate between Balance Sheet and Statement of Affairs. Prepare Statement of Affairs using given data [Suggested Methodology f@ Mllustrtion Method ¢ Discussion Method ‘Some small size business entities donot follow the doubleentry system of main- laining the accounting recods because fe Ttis very costly system, @- Ttisatimeconsurning method, and @ Ttrequires expert staffto adhere the principles and accounting stanelards of this system. Due totheabove mentioned reasons, some business entities maintaines books of accounts under the system Accounting from Incomplete records. Under this system only the following accounts are maintained @ Cash book, and @ Personal accounts of debtors and creditors. [NOTE : Realand Nominal accounts arenot maintained under this system, ‘Under this system of maintaining accounts: @ Both the aspects of only certain transactions are recorded, For example cash fed from debtors or cash paid to creditors @ One aspect of some transactions are recorded, For example cash paid for purchase of goods, f@ Some financial events arenotrecerded atall. For example depreciation charged on fixed assets 19 181 myCBSEguide.comA [Kohler defines itas: ‘Assystem of book keeping in which as arule, only records of cash and of per- sonal accounts are maintained; It isalways incomplete double entry system, varying with circumstances Points to Remember: ‘@ Accounting Principles and Accounting Standards are not followed properly under this systern ¢ Original vouchers provide base for preparing the accounts, fe This method ishighly flexible because itean be adjusted according: to the need of te organisation. ‘¢ Profitor loss is ascertained by cither Statement of Affairs method or ‘Con- version into: Double Entry System Metho” SUITABILITY OF INCOMPLETE RECORDS Books according to this system ean be maintained only by those small entities in theformof ‘@ Sole Proprietorship ; or @ Partnership ‘That are not bound to keep records of business transactions as per double entry system, Companies cannot maintain books under this system because of legal provisions. Limitations of Incomplete Records 1. Incomplete method — This method is incomplete method of maintaining the accounting records asbot the aspects, debt and credit, of every transaction are not recorded. 2. Unscientific System- This system is an unscientific system as no set rules are followed for recording the business transactions. 3. Arithmatical Accuracy eannot be cheked-Under this system no rea and:nominal accounts are maintained. As such a rial balance cannot be prepared to check the arithmatical accuracy ofthe hooks of accounts, ‘True Profit or Loss cannot be ascertained-In the absence of trial balance, a trading and profit and loss account cannot be prepared and hence the profitor lossascertained during a partilar period is based an estimates, henee cannotbe relied upon 5. True financial position of the business cannot be Judged- accounts are not maintained, its not possible to prepare. balance sheet showing the true Finaneal postion oftse buusiness. ASStatement of flats is prepared to show the financial position ofthe business hich tsel'shows the estimated values of assets and liabilities ince real 182 CBSEguide.comforbusiness ofall size andall types. 6. Chances of Errors and Frauds Under tis system the principles of double sentry system are not followed hence intemal checking isnot possible. It leads to chances of errors and frauds. Also, it becomes very dificult to detect them. DIFFERENCE BETWEEN DOUBLE ENTRY SYSTEM AND INCOMPLETE RECORDS Basis of DoubleEntrySystem | — Incomplete Records Difference 1. Reoordingof | Underthissystem both | Under thissystem both botiraspects | aspectsofevery transac- | the aspectofonly few tion are recorded. transactions are recorded, Forsomeother transactions one aspect and yet for otherno aspect atall is recorded }2. Maintenance | Alltypes.ofaccounts Only cash book and ofaccounts aaremaintained, personal accounts are ‘maintained. 3, Trialbalanee | Arithmatical accuraney Arithmatical curacy ofthe books can be of the books cannot be checked by preparing checked as no trial balance atrial balance: isprepared. 4. True profit Profitsascertained by Profit ascertained by orloss preparing.a Trading, preparing Statement of| and Profitand Loss Affsits are based on accountaremorereliable, | estimatesandhence cannot berelied upon, 5. Financial Trueane fir financial Astatement of affair, position positionofthe business | preparedonthe basis of canbe ascertained by incomplete eords, can not preparing the balance show the true and fair sheet, financial postion of the bussiness, 6. Proof Booksmaintained under | Asthissystemis incomplete this system can be andunscientific thenefone pproduced asevidencein } booksmaintained the court oflaw. can not be produced as evidence inthe courtoflaw. 7. Suitability This suitable This method is suitable only for business of small size where mostofthe transactions are in cash,ASCERTAINMENT OF PROFIT OR LOSS ‘The main objective of any business enterprise isto cam profits, Businessmen is always interested to know the amount of profit camed or loss incurred during an accounting period. In case of organizations maintaining accounts under incomplete records the amount of profitor loss can be ascertained by Satement of Affairs method ‘or Net Worth method. STATEMENT OF AFFAIRS METHOD ‘Under this method, profits o losses of the business are ascertained by comparing, the fe Cepitalattheend, and Capital atthe begenning ofthe accounting period. Notes I ‘When Capital at the Capital atthe end ofan accounting Beginingofthe Period Accunting period Profits = Capital atthe End ~ Capita atthe begining Note: 2 Tica capitate aeeatie tober ee Peed esata Pend Losses = Capital atthe Begining ~Capital atthe End For ascertainment of profitor los, the following steps shall be taker: ‘Step 1—Calculate the amount of “Opening capita” ‘Opening Capital is ascertained by preparing Statement of Affair the beginning of the accounting period. ‘Step 2~Calculate the amount of “Closing Capital’ — ‘Clossing capital isascertained by preparing “Statement of Aflair’,at the and of the accounting period’. Step 3-Calculation of Profit or Loss Profiton Lossis ascertained by preparing Statement of Profit or Loss inthe follwing ‘manner? 184‘STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED O: Particulars = Capital atthe end closing (As ascertained by closing statement of affairs) ‘Add - Drawings during the year Less - Additional capital introduced during the year ( Adjusted capital atthe end Less -CAPITAL at the beginning of the period (Asescertained by Opening Statement of Affairs) Profitorloss forthe year STATEMENT OF AFFAIRS, A Statement of affairs isa statement showing the bslances of assets (including cash and bank balanec) on the right hand side and the balance of liabilities on the left hhand side, on particulars date. The difference in the total of two sides isknown as capital CAPITAL® Total Assets — Total liabilities Astatement of affairs very similar to Balance Sheet as prepared for the business entities maintaining accounts under double entry system, though it should not be described as a Balance Sheet. Statement of Affairs is prepared as Follows STATEMENT OF AFFAIRS, ason.. Tiabilities z Assets z Bank Overdraft “Cahn hand -Sundry Creditors Cash at bank -Bills Payable Bills Receivables -Ouistanding Expenses “Sundry Debtors -Income Received in Advan Stock Prepaid Expenses capital -Acerued Income | Balancing Figure) Furioue DISTINCTION BETWEEN BALANCESIEET ANDSTATEMENT OF AFFAIRS Basis of | Balance Sheet ‘Statement of Affairs Difference T, Accounting | Balance sheets prepared | StaiemenisoFaifansis Method | whenaccountsare prepared when aecounts are Iss2, Objective accuracy: 5. Valueor Assetsand Liabilities ‘maintained under Double city system, Balance Sheet is prepared toascertain the financial position af the busines. Balance Sheet is considered asareliablestatensent Docause tis based on principles of double entry system, Thetellyingofbalance sheet indicates about the arithmnatical accuracy of theaccountsas thereis nnobalancing figure. ‘The value ofassetsand Iiabilities shown in a balance sheet are based onactual Figures, ‘maintained under “Accounts from Incomplete Records’ method. Statement ofA flair is prepared tofind outthe amount of capitalatacertain pointof fime. Sinceitisbased on incomplete records and estimates it isnot areliablestatement, A Statement offfaits doesnot provethearithmaticl accuracy oftheaccountsas Capital” is, thebalancing fre ‘The valueofassetsand liabilities shown ina Statement of Affairsare based on estimates and on physical inspection, Mlustration -1 (Case I— When opening and closing capital are not given. Aarushi maintains incomplete records of her business. She wants toknow the resultof her business on 31st march, 2011 and for that, following information are available TstApril, 2010 Bistmarch, 2011 z z Cashin and 3,00,000 3,50,000 Bank balance 15,00,000 12,00,000 Furniture andl 2,00,000, 2,00,000 fixmare Stock 10,00,000 9,00,000 Billspayable 7,00,000 8,00,000 Debtors 5,00,000, 6,00,000 Personal expenses of Aarushi paid from business account amounted to 12,40,000 and goods worth *2,60,000 were withdrawn by her for personal use. She sold her car for 5,00,000 and invested that amount into the business. Calculate her profitor loss, 186Solution ‘Step-1; Caleulate the amount of Opening Capital by preparing Statement of Affairs tthe beginning ofthe accounting period. STATEMENT OF AFFAIRS, son Ist April,2010 Liabilities % Assets e Bills payable 7,00,000 | Cashinfand 3,00,000 Bank balance 15,00,000, Capital 28,00,000 | Fursiturennd (balancing figure) Fisture 2,00,000 Stock’ 10,00,000, Debtors 5,00,000 35,00,000 35,00,000 Slap Caleulate the amount of Closing Capra’ by preparing “Statement of Aturs at the end of the accounting period. Liabilities x Sse = Bills Payable 800,000 | Cash in Hand 3,50,000 Bank balance 12,00,000 Capital 24,50,000 | Furnitureand (Balancing Figure) Fixture 2,00,000 Stock 900,000 Debtors 6,00,000 32,850,000 32,50,000 Step 3: Caloulate te: Statement of Profit or Loss forthe year ending on 31st March, 2011 mount oF ‘profit or loss by preparing "Statement of Profit or Loss Particulars x ‘Closing capital as on 3 Mares, 2011 24,50,000 Ada: Drawings x G)Imcash 12,40,000 i)Ingoods 72,60,000 15,00,000 Less: Further capital instroduced 39,50,000 (carsold) (5,00,000) Adjusted closing capital 34,50,000 Less: Opening Capital as on Ist Apeil (28,00,000) Profits forthe Year 6,50,000Feuide.com Case Il - When opening and closing capital aregiven, Mlustration :2 ‘Simran tells you that her capital on31stmarch, 2011 is®25,00,000 and her capital on 3istmarch,2010 was 18,00,000. She further informed you that during the year she gave a loan of % 4,00,000 to her sister on private account and withdrew £15,000 per month for personal purposes. She also used a fat forher personal use, the rent of which € 8,000 per month and electricity charges at an average rate of + 6000 per quarter were paid from the business account. During the year Simran sold her 10,000 shares of ABC Lin the open market ata price of 150 er share and brought that money in tothe business. Besides this, there {sno further information. You are requited to prepare a Statement or Profit or Loss for the year ending on 31.March, 2011 to ascertain the amount of profit or los. Solution : STATEMENT OF PROFIT OR LOSS for the year ending on 31% march, 2011 Particulars ze ‘Closing capital ason 31" March, 2011 25,00,000 Add: ‘Drawings during the year (Loan to Siser 4,00,000 Gi Personal Expenses: (Drawing @ 715000 ppermonth (1500 * 12) 1,80,009] (b)Rentoftlax@ T 8000 permonth (8000 * 12) 96,00 (©) Blecticity Charges (@ 6000 per quarter (6000 * 4) 24,00 Less: Further capital introduced during the year (Sale of shares in ABC Led, 10000 shares x 150 each) {(15,00,000) Adjusted closing capital 17,00,000 Less: Opening eapital as on 31*March, 2010 18,00,000) Loss for the Year (1,00,000) 188Note? ‘When calculating the amount ofexpenses incurred during the year, itshould be carefully noticed that whether the expenses are give on monthly or quarteriy o| attyearly bass Case: :Ifexpenses are given on monthly basis: Total expenses incurred during the year= Monthly Expenses x 12 Case IL: Lfexpenses are given on quarterly basis Total expenses incurred during the year= Quarterly Expenses « 4 CaseII: Total expenses incurred during the year= Half Yearly Expenses x 2 ‘expenses are given on half-yearly basis: Case TV : expenses are given on bi-monthly basis: Total expenses incurred during the year = Bi-monthly Expenses x 6 (Cash-IIT: When opening capital is given IMustration 3 Ms. Preeti started a business with acapital of © 10,00,000. Atte and of the year her position was jel ‘Amountiey Cash in and 150,000 (Cash at Bank 1,50,000 Sundry Debtors 80,000 BillsReceivables 70,000 Stock 2,00,000 Fumiture 3,00,000 Machinery 7,50,000 Sundry creditors on this date was 1,00,000.. During the year she introduced further capital of 4,50,000 and with draw for household expenses 1,50,000. You are required to ascertain the profit or loss during the year 189myCBSEguide.com Solution: STATEMENT OF AFFAIRS (CLOSING) Asat the end of the year iabilities z Assets % ‘Sundry Creditors | 1,00,000 | Cashin Hand 1,50,000 (Cosh at Bank 1,50,000 Capital 16,00,000 | Sundry Debtor 80,000 (Balancing Figure) Bills Receivables 70,000 Stok 2,00,00 Fumiture 3,00,00 Machinery 7,50,000 17,00,000 17.00.00 ‘Statement of Profit or loss For the year ended on. Particulars x ‘Capital atthe end 16,00,000 Ad, Drawing (Housebold Expenses) 1,50,000 17, 50, 000 Less ; Further Capital lteoduced 4,50,000) Adjusted Closing Capital 15,00,000 Less :Capital in the beginning 10,00,000) Profits forthe Year 3,00,000 Note “Statement of Affairs’ at the beginning of the period is not prepared because ing capital is given in the question 190= Mlustration 4: Miss Sangeeta runs a Bakery shop. She was not maintaining hee accounts on the double entry system, on April 01,2011 she had started the business with a capital of 39,000, On March 31, 2012 her incomplete records courd provide the following data 0 «a iy ww) o wi wit) (itt) Amount due to suppliers of raw materials® 15,000. Stock of raw material and finished goods were € 4,000 and & 3,000 respectively. Fixed Assets 50,000 Amount due from customers €25,000. She had withdrawn 5,000 quarterly for meeting her personal expenses She had introduced 40,000 ascapital during the yeas. She has cash atbank € 21,000 andeash in hand 2,500. Outstanding eleetricity bill 1,500. Caleulate the profivloss of her business during the year using Statement of Affairs method. Solution: As Capital atthe beginning of the accounting period is given in the questior \wewill find the amount of Capital at the end by preparing astatement of affais.as on closing date of accounting period. STATEMENT OF AFFAIRS as on 31st March, 2012 Liabilities = ‘Assets z Creditors (Suppliers) 15,000] Stock Outstanding Raw Material 4.000 Electriity Bill 1,500| Finished Products 3,500 Capital Balancing Figure) | 89,500 Debtors (Customers) 25,000 Cash in hand 21,000 Cash at Bank 2,500 Fixed Assets 50,000 191 myCBSEguide.comSTATEMENT OF PROFIT OR LOSS. for the year ending March 31, 2012 = Dr ce. Particulars z Capita at the end ofthe ye (March 31, 2012) $9,500 Add: Drawing (@ S000 4) 20,000 109.500 Less: Fresh Capital Introduced 40,000 Adjusted Closing Capital 99.500" Less: Capital atthe begining ofthe year (apsito1, 2011) 39,000 Profit forthe period T0500 192 myCBSEguide.com