The term incomplete records describe any method of recording transactions that is not based on the double-entry model. This is also known as single-entry bookkeeping, where typically only one aspect of each transaction is recorded.
This situation often occurs in small businesses where owners lack the time or knowledge required for full double-entry bookkeeping.
Nature of Incomplete Records
Incomplete records can describe various situations where full financial statements cannot be prepared in the normal way:
- Only a cash book is maintained.
- Only records of trade receivables and trade payables are kept.
- The records consist merely of invoices for purchases, copies of sales invoices, cheque counterfoils, and bank statements.
At the end of the financial year, owners of small businesses often present their accountant with various paperwork, who then uses specific techniques to reconstruct the necessary financial reports.
Methods for Preparing Accounts from Incomplete Records
The required accounting method depends on the extent of the missing information.
1. Calculating Profit via Statements of Affairs (Capital Comparison)
When records of transactions are insufficient to allow a full income statement to be prepared, profit or loss may sometimes be calculated by comparing the opening and closing capital balances using statements of affairs.
A statement of affairs is a list of the business assets and liabilities at a specific point in time, prepared primarily to calculate the owner's capital.
The core calculation involves reconciling the capital from the start of the year to the end of the year:
Profit = (Closing Capital + Drawings) - (Opening Capital + New Capital Introduced)
This method essentially replicates the capital account movements.
2. Preparing Full Financial Statements (Conversion to Double Entry)
When more records are available (such as bank records, invoices, and debtor/creditor balances), it is possible to prepare an income statement and a statement of financial position. This process converts the incomplete data into the double-entry format needed for full financial statements.
The necessary steps are laid out as follows:
- Prepare an Opening Statement of Affairs: This is essential to calculate the opening capital.
- Prepare a Receipts and Payments Account: This step summarizes cash and bank transactions (similar to a cash book summary, often with cash and bank columns). This account helps in reconciling bank records and identifying missing figures like total takings or unexplained drawings.
- Prepare Control Accounts: The total sales and total purchases for the year must be determined by preparing Trade Receivables Control Accounts (Sales Ledger) and Trade Payables Control Accounts (Purchase Ledger). This process finds the missing revenue and cost figures required for the Income Statement.
- Calculate Adjusted Expenses: Calculate and adjust expenses and income for accruals and prepayments. This ensures consistency with the matching concept.
- Calculate Depreciation: Determine the depreciation charge for the non-current assets.
- Prepare Financial Statements: Use all the derived information (sales, purchases, adjusted expenses, and depreciation) to construct the income statement and the statement of financial position.
Related Techniques Used in Incomplete Records
The sources highlight that successful completion of incomplete records problems relies heavily on specific supplementary skills:
- Inventory Valuation: You must know how to value inventory. If inventory is valued at selling price, it violates the concepts of realisation, matching, and prudence by overstating profit. Inventory must be valued at the lower of cost and net realisable value (NRV).
- Margin and Mark-up: Knowledge of the relationship between margin (Gross Profit as a percentage of Revenue) and mark-up (Gross Profit as a percentage of Cost of Sales) is often necessary to calculate missing sales or cost of sales figures.
- Calculating Lost Inventory: The same calculation techniques (using pro forma trading accounts derived from sales, purchases, and profit margin data) are employed to calculate the value of inventory lost by fire or theft when detailed inventory records are unavailable.
Advantages and Disadvantages of Keeping Full Records
The decision to use incomplete records or a full double-entry system carries consequences:
|
Aspect |
Advantages of Keeping Full Accounting Records |
Disadvantages of Keeping Full Accounting Records |
|
Benefits |
Allows preparation of reliable financial statements. |
Requires significant time to set up and maintain the system. |
|
Control |
Enables better tracking of business performance and efficiency. |
May require specialist knowledge or computer systems. |
|
Legality |
Reduces the risk of fraud and may satisfy legal requirements. |
__________________________________________________________________________________
0 Reviews