ACCA 1.1INCOMPLETE RECORDS

Not all businesses keep a proper set of accounting 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).

So how can the financial statements be prepared if the

bookkeeping records are inadequate or incomplete?

Four basic techniques used for incomplete records

1. Construction of opening & closing balance sheets or capital

2. Construction of a cash and / or bank summary

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

4. Use of gross / net profit percentage

Give me four reasons why capital might change.

1.

2.

3.

4.

Construction of opening & closing balance sheets or capital

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 1The 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?

Opening capital 2,000

Closing capital 8,500

Profit (must be) 6,500

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calculate profit when we have details of the opening and closing capital and have details of capital introduced and withdrawn during the year.

Activity 2The 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?

Opening capital 16,000

Capital introduced 4,000

Withdrawals - 8,000

12,000

Closing capital 30,000Profit (must be) 18,000

Activity 3The 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 32,000

Withdrawals -12,000

20,000

Closing capital 18,000Loss (must be) - 2,000

MCQ December 2005: 1

MCQ December 2005: 1Detail £ Detail £

Drawings 68000 net assets (capital) b/d 186000

Drawings 20000 Capital introduced 50000

net assets (capital) c/d 274000 Profit 126000

362000 362000

Activity 4What do we mean by net assets?

What is the accounting equation?

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

FIXED ASSETS + CURRENT ASSETS – LT LIABILITIES – CURRENT LIABILITIES

ASSETS – LIABILITIES = CAPITAL + PROFIT - DRAWINGS

Activity 5Eileen 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 Dec 2005 £ £

Van 2,000 1,600 (after depreciation) Fixtures 1,400 1,260 (after depreciation) Stock 1,700 1,980 Debtors 1,900 2,880 Bank 2,200 3,400 Cash 200 400 Creditors 400 600 Loan 1,200 800 Drawings 1,800

Draw up a Statement of Affairs at each balance sheet date.

December 2004 December 2005 £ £ £ £

Van Fixtures

Stock Debtors Bank Cash

Creditors

Loan

Capital Profit Drawings

2,000 1,400 3,400

1,700 1,900 2,200 200 6,000 - 400

5,600-1,200 7,800

7,800

7,800

1,600 1,260 2,860

1,980 2,880 3,400 400 8,660

8,060- 80010,120

7,800

- 600

10,120-1,800 4,120

This method of calculating profit is unsatisfactory and should only be done in exceptional circumstances.

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

Construction of a cash or bank summary

If we know the opening and closing bank account balances we might be able to calculate a missing figure for sales receipts or purchases

Construction of a cash or bank summary example

Donald does not keep proper accounting records. His bank statements show that his opening bank balance was £100 and his closing bank balance was £400.

He knows that his payments to suppliers were£1,200 and he took drawings of £700 (paid by cheque) but he has no idea of his receipts from debtors?

Date Detail £ Date Detail £

Bal b/d 100 Creditors 1200Debtors 2200 Drawings 700

Bal c/d 4002300 2300

T Account

Construction of an opening cash or bank summary example

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

Construction of sales and purchases

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

Construct a control account Control accounts essentially contain 4

items..1. Opening debtors2. Closing debtors3. Credit sales4. Receipts from debtors

If we know 3 items , we can calculate the fourth!!

Construction of sales and purchases

Donald does not keep proper accounting records. He knows that his opening debtors were £500 and his closing debtors were £400.

He has already reconstructed his bank account and knows that receipts from debtors were £2,200. He needs to calculate his sales

Detail £ Detail £Bal b/d 500 Bank receipts 2200Sales 2100

Bal c/d 4002600 2600

Debtors control

Construction of debtors control account to calculate sales

June 2004 MCQ’s 9 & 10

Use of gross / net profit percentage

Missing figures can also be calculated using gross or net profit percentages

If we know that gross profit is 20% of sales, we can calculate the cost of sales if we know our sales figure.

If we know cost of sales and our opening and closing stock, we can easily calculate purchases

Use of gross / net profit percentage example

Duck has sales of £100. He knows that his gross profit percentage is 20% of sales.

His opening stock was £20 and his closing stock was £25. What is Ducks purchases?

1. C.O.S is 80% of £100 = £802. £20 + purchases? - £25 = £803. Purchases = £85

Question 1