Accounts from Incomplete Records

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This page contains solutions/answers to Accounts from Incomplete Records theoretical questions. If you’re looking for answers/solutions to the numerical questions you can find them at the following pages.

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Accounts from Incomplete Records – Ascertainment of profit or loss by statement of affairs method (OR) Calculation of profit or loss and ascertainment of statement of affairs at the end of the year (Opening Balance is given) (OR) Ascertainment of statement of affairs at the beginning and at the end of the year and calculation of profit or loss.

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Accounts from Incomplete Records – Ascertainment of Missing Figures – Numerical Questions Solutions

Test Your Understanding – I

Tick the correct answer.

Incomplete record mechanism of book keeping is :

(a)

Scientific

(b)

Unscientific

(c)

Unsystematic ✔

(d)

both (b) and (c)

Opening capital is ascertained by preparing :

(a)

Total debtors account

(b)

Total creditors account

(c)

Cash account

(d)

Opening statement of affairs ✔

Credit purchase, during the year is ascertained by preparing :

(a)

Total creditors account ✔

(b)

Total debtors account

(c)

Cash account

(d)

Opening statement of affairs

If opening capital is ₹ 60,000, drawings ₹ 5,000, capital introduced during the period ₹ 10,000, closing capital ₹ 90,000. The value of profit earned during the period will be :

(a)

₹ 20,000

(b)

₹ 25,000 ✔

(c)

₹ 30,000

(d)

₹ 40,000

Test Your Understanding – II

Write the correct word(s) :

Credit sales can be ascertained as the balancing figure in the account. (Total Debtors)

Excess of over represents loss sustained during the period. (Opening capital, closing capital)

To ascertain the profit, closing capital is to be adjusted by deducting and adding (Fresh capital introduced, drawings)

Incomplete records are generally used by (Small traders)

Short Answers

1. State the meaning of incomplete records?

Incomplete Records are the accounting records which are prepared without strictly following the double entry accounting system. This is a mechanism where in which few of the transactions are recorded either by making one side entry or no entry at all. This practice mostly affect the assets, liability, expenses and revenue recordings and due to this reason these are called incomplete records.

2. What are the possible reasons for keeping incomplete records?

Mostly, the businesses end up with incomplete records due to one or mor e of the following reasons.

When people do not have enough knowledge of the accounting principles, they’re inclined to adopt this method.

To record the transactions under the double entry system, it requires an experienced accountant. As there is a cost involved in hiring an experienced accountant, firms follow the practice of keeping incomplete records.

As only few books are required to be maintained in this system, firms adopt this practice to reduce the effort and time.

Business owners feel it convenience to record only important transactions in accordance with the business needs and leave out the other transactions.

3. Distinguish between statement of affairs and balance sheet.

The following are the differences between statement of affairs and balance sheet

Basis

Statement of Affairs

Balance Sheet

Reliability

Statement of affairs is prepared from incomplete records. So, it is less reliable.

Balance sheet is prepared from double entry records. So, it is more reliable.

Objective

To estimate the balance in the capital account on a particular date.

To project true and fair view of the financial position of the firm on a particular date.

Omission

It is not easy to detect omission of any assets or liabilities.

Using accounting records, it is easy to detect omission of any assets or liabilities

4. What practical difficulties are encountered by a trader due to incompleteness of accounting records?

The following practical difficulties are encountered by a trader due to incompleteness of accounting records.

Accurancy of accounts can not be ascertained and trial balance can not be prepared as the recordings are not as per the double entry system.

Becomes a difficult task to convince the income tax authorities as regarding the reliability of the computed income..

Correctly ascertaining and evaluating the financial results of the business operation will not be possible.

Difficulty (great difficulty) in filing an insurance claim with the insurance companies in case there is a loss of inventory due to theft or fire.

Evaluation of profitability, liquidity and solvency of the business is not possible. Due to this it becomes problematic to raise funds from investors or other stakeholders and also for planning future business activities.

Long Answers

1. What is meant by a ‘statement of affairs’? How can the profit or loss of a trader be ascertained with the help of a statement of affairs?

Definition of Statement of Affairs: A Statement of Affairs is a statement of assets and liabilities, prepared at the beginning and at the end of the accounting period under consideration. It shows the the assets on one side and the liabilities on the other side in the same was as in the case of a balance sheet. The difference between the totals of these assets and liabilities will be the capital.

How the profit or loss of a trader can be ascertained with the help of a statement of affairs: The statent of affairs prepared will give the capital both at the beginning and at the end of the accounting period. From this information, a statement of profit and loss is prepared to find out the exact profit or loss made by the business during the accounting period. The following adjustments need to be made to the capital thus computed.

Adjustment for the withdrawals made by the owner.

Any fresh capital introduced by the owner during the accounting period.

From this, the amount of profit or loss of a trader can be ascertained tuding that accounting period. The following is the proforma.

Particulars

Amount
₹

Capital as at the end of year (computed from statement of affairs as at the end of year)

…..

Add

Drawings during the year

…..

Less

Additional capital introduced during the year

(…..)

Adjusted capital at the end of year

…..

Less

Capital as at the beginning of year (computed from statement of affairs as at the beginning of year)

(…..)

Profit or Loss made during the year

…..

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If the net result of the above computation is positive, then we can say that the business has earned profit during that accounting period.

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On the other hand if the net result of the above computating is negative then we can say that the business has incurred losses during that accounting period.

The above computation can also be expressed through the following equation.

Profit or Loss

Capital at end – (Capital at beginning – Drawings during the year + Capital introduced during the year)

Capital at end – Capital at beginning + Drawings during the year – Capital introduced during the year.

Thus using the above procedure, we can ascertain the profit or loss of a trader with the help of a statement of affairs.

2. ‘Is it possible to prepare the profit and loss account and the balance sheet from the incomplete book of accounts kept by a trader’? Do you agree? Explain.

Yes, I agree that we can prepare the Trading and Profit and Loss account and the balance sheet by placing the accounting records in proper order. This method is known as conversion method. To prepare the profit and loss account and the balance sheet we need complete information of the expenses, incomes, asssets and liabilities. Even in case of incomplete records, the details of the some of the items like, debtors, creditors, cash purchases, cash sales, cash payments and cash receitps are easily available. However, the information related to the following has to be ascertained by using same logic that we use in case of the double entry system. The following are the most common items that might be missing and can be worked out:

Opening Capital: If the opening capital is missing, it can be computed by preparing the Statement of Affairs.

Credit Purchases: Credit purchases can be found by preparing the total creditors account. The balancing figure gives the credit purchases.

Credit Sales: Credit purchases can be found by preparing the total debtors account. The balancing figure gives the credit sales.

Bills Payable Accepted: The balancing figure of the Bills Payable account gives the Bills Payable accepted.

Bills Receivable Received: The balancing figure of the Bills Receivable account gives the Bills Receivable received.

Payments to Creditors: This can be ascertained from the total creditors account.

Payments to Debtors: This can be ascertained from the total debtors account.

Any other Cash/Bank related items: This can be ascertained by preparing the cash book summary by recording all the payments and receipts during that accounting period. The balancing figure gives the missing item. In some cases, the amount paid to creditors or the amount received from the debtors might be missing. In that case, it is necessary to prepare the total creditors/total debtors accounts to ascertain these values first. The cash book is prepared once these values are ascertained.

The final accounts i.e. Profit and Loss account and Balance Sheet are prepared either directly after preparing the above details or after preparing the trial balance.

3. Explain how the following may be ascertained from incomplete records:

(a)

Opening capital and closing capital

(b)

Credit sales and credit purchases

(c)

Payments to creditors and collection from debtors

(d)

Closing balance of cash.

(a) Ascertaining Opening Capital from Incomplete Records: The opening capital can be ascertained by preparing the statement of affairs at the beginning of the accounting period. For this the statements of the assets and liabilities are prepared at the beginning of the accounting period. This statement resembles the balance sheet. The difference between both the sides of the statement of affairs (the balancing figure) gives us the opening capital.

Statement of Affairs as at ______________

Liabilities

Amount
₹

Assets

Amount
₹

Bills Payable

…..

Land and Building

…..

Creditors

…..

Plant and Machinery

…..

Outstanding expenses

…..

Furniture

…..

Opening Capital

…..

Stock

…..

(Balancing Figure)*

Debtors

…..

Bank

…..

Cash

…..

Prepaid Expenses

…..

Opening Capital
(Balancing Figure)*

…..

……

Note:* When the total of the liabilities side is more than total of assets side, capital would be shown in assets side and it represents the debit balance of the capital.

(a) Ascertaining Closing Capital from Incomplete Records: The closing capital can be ascertained by preparing the statement of affairs at the end of the accounting period. For this the statements of the assets and liabilities are prepared at the end of the accounting period. This statement resembles the balance sheet. The difference between both the sides of the statement of affairs (the balancing figure) gives us the closing capital.

Statement of Affairs as at ______________

Liabilities

Amount
₹

Assets

Amount
₹

Bills Payable

…..

Land and Building

…..

Creditors

…..

Plant and Machinery

…..

Outstanding expenses

…..

Furniture

…..

Closing Capital

…..

Stock

…..

(Balancing Figure)*

Debtors

…..

Bank

…..

Cash

…..

Prepaid Expenses

…..

Closing Capital
(Balancing Figure)*

…..

Note:^* When the total of the liabilities side is more than total of assets side, capital would be shown in assets side and it represents the debit balance of the capital.

(b) Ascertaining Credit Sales from Incomplete Records: The Credit Sales are missing most of the times from the incomplete records. To evaluate it, the total debtors account need to be prepared. The total sales returns, if any, should be deducted from the total debtors account. The balancing figure gives us the credit sales.

Total Debtors A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount
₹

Date

Particulars

J.F.

Amount
₹

Balance b/d

…..

Cash

…..

Bill Receivable

…..

(Cash Received)

(Bills Dishonoured)

Bank

…..

Bank

…..

(Cheque Received)

(Cheque Dishonoured)

Discount Allowed

…..

Credit Sales

…..

Bad Debts

…..

(Balancing Figure)

Sales Returns

…..

Bills Receivable
(Bills Received)

…..

Balance c/d

…..

(b) Ascertaining Credit Purchases from Incomplete Records: The Credit Purchases are missing most of the times from the incomplete records. To evaluate it, the total creditors account need to be prepared. The total purchases returns, if any, should be deducted from the total creditors account. The balancing figure gives us the credit sales.

Total Creditors A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount
₹

Date

Particulars

J.F.

Amount
₹

Cash Paid

…..

Balance b/d

…..

Bank
(Cheques Issued)

…..

Bank
(Cheque Dishonoured)

…..

Bills Payable
(Bills Accepted)

…..

Bills Payable
(Bills Dishonoured)

…..

Discount Received

…..

Credit Purchases

…..

Purchases Returns

…..

(Balancing Figure)

Balance c/d

…..

(c) Ascertaining Payment to Creditors from Incomplete Records: The Payments to creditors are missing most of the times from the incomplete records. To evaluate it, the total creditors account need to be prepared. The total purchases returns, if any, should be deducted from the total creditors account. The balancing figure gives us the paymnt to creditors.

Total Creditors A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount
₹

Date

Particulars

J.F.

Amount
₹

Bills Payable

…..

Balance b/d

…..

(Bills Accepted)

Credit Purchases

…..

Discount Received

…..

Bank

…..

Purchases Returns

…..

(Cheque Dishonoured)

Cash/Bank

…..

Bills Payable

…..

(Payments to Creditors)
(Balancing Figure)

(Bills Dishonoured)

Balance c/d

…..

(c) Ascertaining Collections from Debtors from Incomplete Records: The Collections from Debtors are missing most of the times from the incomplete records. To evaluate it, the total debtors account need to be prepared. The total sales returns, if any, should be deducted from the total debtors account. The balancing figure gives us the collections from debtors.

Total Debtors A/c

Dr.

Cr.

Date

Particulars

J.F.

Amount
₹

Date

Particulars

J.F.

Amount
₹

Balance b/d

…..

Discount Allowed

…..

Credit Sales

…..

Bad Debts

…..

Bill Receivable

…..

Sales Returns

…..

(Bills Dishonoured)

Bills Receivable

…..

Bank

…..

(Bills Received)

(Cheque Dishonoured)

Cash/Bank Collections from Debtors
(Balancing Figure)

…..

Balance c/d

…..

(d) Ascertaining Closing Balance of Cash from Incomplete Records: The closing balance of cash is missing some times from the incomplete records. To evaluate it, the cash book summary need to be prepared. The cash book summary includes contains all the receipts received and all the payments done during that accounting period. If the amount paid to creditors or the amount received from the debtors is missing then the total creditors/total debtors accounts need to be prepared first and these amounts need to be ascertained first. The balancing figure then gives the closing balance of cash.