Chapter 14: Incomplete records

Chapter learning objectives

Upon completion of this chapter you will be able to:

• explain and illustrate the calculation of profit or loss as the difference between opening and closing net assets
• explain techniques used in incomplete record situations:
  • calculation of opening capital
  • use of ledger total accounts to calculate missing figures.
  • use of cash and/or bank summaries
  • use of given gross profit percentage to calculate missing figures.

1 Incomplete records

When you are preparing a set of accounts, it is likely that you may not have all of the information available to you to complete a set of financial statements.

It is likely that you may have an incomplete ledger or control accounts system.

If this is the case, you will have to use the best information that is available to you and 'guestimate' any missing figures.

There are a number of different ways which we can use to calculate missing figures and balances, such as:

• Accounting equation method
• Opening capital calculations
• Balancing figure approach
• Ratios – mark up and margin
• Lost inventory methods

2 Identification of profit figure using the accounting equation

If a business has recorded very little information of its transactions it may only be possible to calculate net profit for the year. This can be done using the accounting equation as follows:

Net assets = Capital + Profit – Drawings

Therefore:

Change in net assets = Capital introduced + Profit for the period – Drawings for the period.

NB: Net assets = Assets – Liabilities

Test your understanding 1

Andy Carp’s statement of financial position at 31 December 2004 shows that his fishing business has net assets of $5,000. The statement of financial position as at 31 December 20X5 shows that the business has net assets of $8,000. Andy’s drawings for the year amounted to $2,500 and he didn’t introduce any further capital in that year.

What profit is made by Andy Carp in the year ended 31 December 2005?

A $5,500

B $500

C $10,500

D $7,500

NB: Net assets = Assets – Liabilities

3 Identification of individual account balances within financial statements

• In most cases a business will keep limited accounting records from which it is possible to prepare a full set of financial statements. You may be asked to calculate any of the balances within these financial statements.
• In these types of questions the opening asset and liability balances will be given together with details of transactions during the year.
• Opening capital can be calculated as:

Opening assets – Opening liabilities

• Two further methods may be used to identify other missing figures:

  (1) Use of ledger accounts to find a balancing figure

  (2) Use of ratios.

4 The balancing figure approach

The balancing figure approach, using ledger accounts, is commonly used in the following way:

In the case of receivables and payables, you may need to use total receivables and total payables accounts where information given cannot be split between cash and credit sales and purchases:

Test your understanding 2

Suppose that opening receivables for B Rubble’s business are $30,000. There have been total receipts from customers of $55,000 of which $15,000 relates to cash sales and $40,000 relates to receipts from receivables. Discounts allowed in the year totalled $3,000 and closing receivables were $37,000.

What are total sales for the year?

A $65,000

B $50,000

C $47,000

D $62,000

Test your understanding 3

The opening payables of Dick Dastard-Lee’s business are $15,000. Total payments made to suppliers during the year were $14,000. Discounts received were $500 and closing payables were $13,000.

What are total purchases for the year?

A $16,500

B $16,000

C $12,000

D $12,500

Questions may require you to calculate ‘missing’ income statement figures, for example rent and rates values, from a list of information including payments and opening/closing accruals and prepayments.

To calculate the missing value for each expense use either:

• T-accounts, or
• Equations

Test your understanding 4

The following information relates to Ivor Big-Head’s business:

What are the income statement charges for electricity and rent for the year?

Test your understanding 5

On 1 January Elma Fudd’s bank account is overdrawn by $1,367. Payments in the year totalled $8,536 and on 31 December the closing balance is $2,227 (positive).

What are total receipts for the year?

A $4,942

B $7,676

C $9,396

D $12,130

Test your understanding 6

On 1 January, Daisee Chain’s business had a cash float of $900. During the year cash of $10,000 was banked, $1,000 was paid out as drawings and wages of $2,000 were paid. On 31 December the float was $1,000.

How much cash was received from customers for the year?

A $12,900

B $14,900

C $13,100

D $6,900

5 Ratios – mark up and margin

Gross profit can be expressed as a percentage of either sales or cost of sales:

E.g.

• Gross profit margin = (1,000/5,000) x 100 = 20%
• Mark up = (1,000/4,000) x 100 = 25%

Test your understanding 7

Padraig O’Flaherty has sales of $1,000. He makes a margin of 25%.

What is the cost of sales figure?

A $200

B $800

C $750

D $250

Test your understanding 8

Ratios

Lorna McDuff has cost of sales of $600 and a 25% mark up.

What is her sales figure?

A $750

B $800

C $250

D $200

Using margin and mark up

An exam question will often provide you with margin and cost of sales or mark up and sales. You will then be required to calculate the remaining figures in the income statement. This can be done using the following ‘relationship’ columns:

Therefore, if we know the mark up or margin percentage and one of the figures in the income statement, we can calculate the remaining figures in the income statement.

Test your understanding 9

Jethro Longhorn can tell you the following with regard to his business:

Margin 5%

Opening inventory $800

Closing inventory $600

Purchases $2,840

Complete Jethro’s income statement with the above figures.

6 Cost of lost inventory

• In incomplete record questions, inventory may have been lost – probably due to a fire or flood.
• Closing inventory that has not been lost is subtracted from cost of sales because by definition, the inventory has not been sold in the year.
• Lost inventory has not been sold in the year and therefore also needs subtracting within cost of sales.
• Therefore, to work out the cost of lost inventory, complete the trading account from the information given and then lost inventory can be calculated as a balancing figure.

Test your understanding 10

Jack Spratt provides the following information about his business:

What is the cost of inventory lost in the fire?

A $12,000

B $9,000

C $69,000

D $5,667

Double entries for inventory and lost inventory

Actual closing inventory is posted by:

Lost inventory will still be credited to the income statement so that it is removed from cost of sales. However, the debit side of the entry will depend on whether or not the lost inventory has been insured:

Test your understanding 11

Fred lost his entire inventory in a fire. His unsigned insurance policy is still in the pocket of his good suit. Fred has supplied you with the following information:

Mark up 25%

Sales $10,000

Opening inventory $2,000

Purchases $7,500

Prepare Fred’s income statement and show the journal to record closing inventory.

7 Reconstruction of full financial statements

Although you will not face an exam question of this length, the following illustration will help you to see how a full set of financial statements can be reconstructed using the methods within this chapter.

Illustration 1 – Reconstruction of full financial statements

Malcolm is a retailer, selling stationery. He does not keep a full set of records. The following records have been extracted from his books.

He also has the following cash and bank transactions for the year ended 30 September 2005.

The following further information is available:

(1) The loan was received at the beginning of the year and is entitled to 5% interest pa.

(2) The motor vehicle disposed of during the year had cost $10,000 and the accumulated depreciation on it as at 30 September 2004 was $1,900.

(3) Discount received during the year amounted to $500.

(4) Goods amounting to $1,000 at cost were withdrawn by Malcolm during the year.

(5) The depreciation policy is as follows

(6)The allowance for receivables is to be provided at 5% pa on the closing receivables.

Completing a full set of financial statements

Solution

(a) Malcolm’s income statement for the year ended 30 September 2005

(b) Malcolm’s statement of financial position as at 30 September 2005

(W1)

(W2)

(W3)

(W4) Allowances for receivables

(W5) Fixtures and fittings

(W6) Motor vehicles

(W7) Capital as at 30 September 2004

(W8) Drawings

Chapter summary

Test your understanding answers

Test your understanding 1

The correct answer is A

Change in net assets = Capital introduced + Profit for the year- Drawings for the year

$8,000 – $5,000 = 0 + Profit for the year – $2,500

Profit = $3,000 + $ 2,500

= $5,500

Test your understanding 2

The correct answer is A

Receivables

Total sales = $50,000 + $15,000 = $65,000

OR

Test your understanding 3

The correct answer is D

Test your understanding 4

The correct answer is B

Income statement (extracts):

Expenses

Electricity (–250 + 1,000 + 300) = $1,050

Rent (300 + 2,000 – 400) = $1,900

Test your understanding 5

The correct answer is D

Test your understanding 6

The correct answer is C

Test your understanding 7

The correct answer is C

Gross profit: $1,000 x 25% = $250
Cost of sales:

Test your understanding 8

The correct answer is A

Gross profit: $600 x 25% = $150

Test your understanding 9

Test your understanding 10

The correct answer is B

Test your understanding 11

Being the recording of uninsured inventory destroyed by the fire.

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