ACCOUNTING FOR INCOMPLETE RECORDS

PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS >>

Advance Financial Accounting (FIN-611)

LESSON # 1

ACCOUNTING FOR INCOMPLETE RECORDS

Introduction

This topic is also known as Single Entry System of Accounting. In this chapter we will

learn how an accountant prepares financial statements of those organizations which

are not keeping up proper double entry book keeping system of accounting.

From accounting system stand point, business organizations can be classified into

three broad categories:

1.1

Small scale business entities

These consist of very small sized business entities like; barber shop, mutton

shop, washer man, general store, electrician etc. etc.

1.2

Medium scale business entities

These consist of medium sized business entities like; drycleaner, motor car

dealers, house building contractors, schools etc. etc.

1.3

Large scale business entities

These consist of large sized business entities like; importers/exporters, motor

car manufactures, transporters etc. etc.

Here it must be made clear that large scale business entities have these much resources

with them that these can easily afford a systematic accounts department where they

will be following the double entry book keeping system. Moreover, most of these

concerns are incorporated bodies and these have to maintain systematic accounting

records in order to fulfill requirements of the Companies Ordinance 1984 and

International Financial Reporting Standards (IFRS).

Accounting for Small scale business entities

Small scale business entities are often single owner organizations (Sole

proprietorship). These are very small in size and can not really run an accountants

department in their organizations. They have a very little setup in which a sole trader

is acting so many rolls; he/she is the sales manager, and also the purchase manager,

also responsible for marketing and accounts matters as well.

A sole proprietor is also concerned about financial performance (profitability) and

financial position of the organization, which can make him/her able to take certain

future decisions. Certain government agencies, like taxation department, also require

knowing profits of the organization.

But as the size of the organizations are very little and these can hardly afford an

accountant therefore a very simple accounting system is proposed for such

organizations.

2.1

Accounting Records

These organizations do not have to keep any complex accounting records, these are

directed by their accounts consultant (Qualified Accountants) to keep certain

information relating to cash receipts (introduction of fresh capital) and payments

(drawings) and also relating to the period end balances of assets and liabilities. As size

of the transactions are very little therefore one can remember very easily what are the

Advance Financial Accounting (FIN-611)

year end balances of loan taken or was there any addition or disposal of assets during

the year. Finally the consultants prepare a statement of profit or loss for the period and

also a balance sheet as on the closing date of such period.

2.2

Statement of Profit or Loss

As you have studied in your earlier courses that profit is an out come of the Income

Statement that is prepared in a systematic way with the help of a trial balance

extracted from the ledger. But over here in the absence of a trial balance we are not

able to prepare an Income Statement. Here we will see that where that profit goes

within the financial statements, we finally find that the profit is added up in the

Owner's Equity, which appears like this:

Rs.

Owner's Equity (opening balance)

***

Add

Fresh capital (introduced during the year)

***

Net profit (for the year)

***

Less

Drawings (during the year)

(**)

Owner's Equity (closing balance)

***

For small scale business entities, which are not preparing proper books of accounts

and cannot extract a trial balance, the technique to calculate Net Profit will be to come

other way round.

To calculate Net Profit figure from the above equation one must know the all other

information that has to be put into it. Now the above equation will be reversed and

Net Profit figure will be its out come and this equation is then named as the

"Statement of Profit or Loss".

Name of the Organization

Statement of Profit or Loss

For the year ended December 31, 20x7

Rs.

Owner's Equity (closing balance)

***

Add

Drawings (during the year)

***

Less

Owner's Equity (opening balance)

(**)

Fresh Capital (introduced during the year)

(**)

Net profit (for the year) [balancing figure]

***

2.3

Statement of Affairs

From examination stand point, Drawings and Fresh capital will be given in the

questions but often the students will be required to calculate the opening and closing

balances of Owner's Equity as these will not be given in the question as a single

amount.

Advance Financial Accounting (FIN-611)

If you have not yet forgotten the basic accounting equation then Statement of Affairs is

very simple to understand. What you learned in the basic accounting equation was

that:

ASSETS

OWNER'S EQUITY + LIABILITIES

So to calculate the balance of owner's equity the equation will be reversed like:

OWNER'S EQUITY = ASSETS

+ LIABILITIES

Name of the Organization

Statement of Affairs

As on Opening and Closing Date

Opening

Closing

Rs.

ASSETS

Furniture and fixture (net of depreciations)

***

Stocks

***

Debtors (net of provisions)

***

Prepaid expenses

***

Bank

***

Cash

***

LIABILITIES

Loan

(**)

Creditors

(**)

Accrued expenses

(**)

OWNER'S EQUITY (Net Assets)

***

The balance of Owner's Equity can also be termed as Net Assets as it is the balance of

assets after subtracting all liabilities.

2.4

Difference between Balance Sheet and Statement of Affairs

The only difference is that in Balance Sheet we put RESOURCES (Assets) against the

SOURCES (Owner's equity and Liabilities) by doing this we come to know the

financial position of the organization, whereas in Statement of Affairs we simply

calculate the balance of owner's equity at opening/closing dates of the accounting

period by subtracting liabilities for the asset. Balance sheet equation provides help in

calculating the balance of owner's equity and that's all.

Practice Questions

From the following information prepare statement of profit or loss for the

year.

Rs.(000)

Opening balance of capital

100

Closing balance of capital

150

Drawings

Fresh capital introduced during the year

Advance Financial Accounting (FIN-611)

Bilal Anwar started in business on 1 January 2005 with Rs. 10,000 in a bank

account. Unfortunately he did not keep proper books of account. He is

forced to submit a calculation of profit for the year ended 31 December 2005

he had stock valued at cost Rs. 3,950, a van which had cost Rs. 2,800 during

the year and which had depreciated by Rs. 550, debtors of Rs. 4,970,

expenses prepaid of Rs. 170, bank balance Rs. 2,564, cash balance Rs. 55,

trade creditors Rs. 1,030, and expenses owing Rs. 470. His drawings were:

cash Rs. 100 per week for 50 weeks, Cheque payments Rs. 673. Draw up

statements to show the profit or loss for the year.

Jehan Zeb is a dealer who has not kept proper books of account. At 31

August 2006 his state of affairs was as follows:

Cash

115

Bank Balance

2,209

Fixtures

4,000

Stock

16,740

Debtors

11,890

Creditors

9,052

Van (at valuation)

3,000

During the year to 31 August 2007 his drawings amounted to Rs. 7,560.

Winnings from a football pool Rs. 2,800 were put into the business Extra

fixtures were bought for Rs. 2,.000. At 31 August 2007 his assets and

liabilities were: Cash Rs. 84; Bank overdraft Rs. 165; stock Rs. 21,491;

Creditors for goods Rs. 6,002; Creditors for expenses Rs. 236; Fixtures to be

depreciated Rs. 600; Van to valued at Rs. 2,500; Debtors Rs. 15,821; prepaid

expenses Rs. 72 Draw up a statement showing the profit and loss made by

Jehan Zeb for the year ended 31 August 2007.

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