Accounting From Incomplete Records

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CHAPTER 9

Accounts from Incomplete Records

LEARNING OBJECTIVES

After studying the chapter, you will be able to:

state the meaning of incomplete records;

distinguish between Balance Sheet and Statement of Affairs;

calculate Profit or Loss using the Statement of Affairs Method;

prepare Profit and Loss Account and the Balance Sheet;

detect the missing figures/information by preparing the relevantaccount.


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ACCOUNTANCY390

We have so far studied accounting recordsof firms, which follow the double entrysystem of book keeping. This gives us animpression that all business units followthis system. However, in practice all firmsdo not maintain accounting records as perthe accrual system, and hence, theGenerally Accepted Accounting Principles(GAAP) are not fully observed by them.Many small size enterprises keep partial

records of their transactions. But, it isessential for them to know the profit orloss and the financial position of the firmfor a year. This chapter deals with theascertainment of profit or loss andfinancial position of the firm from itsincomplete records. For this purpose,chapter is divided into three sections.Section I explains the meaning ofincomplete records and reasons thereof.Section II deals with the ascertainment ofprofit or loss by statement of affairs

method. Section III outlines the processwhereby the profit or loss and financialposition could be ascertained by usingprinciples of double entry system.

9.1 Meaning of Incomplete Records

Accounting records, which are not keptaccording to double entry system, areknown as incomplete records. Though somemay refer to it as single entry system it is amisnomer. There is no system defined assingle entry system. It is also not a shortcut method as an alternative to the doubleentry system. One can say that when a firmdoes not have a double entry system of bookkeeping, it is having partial records. Thus,records are usually referred to as incompleterecords.

Under such a situation, normallytransactions of cash, debtors and creditorsare recorded by maintaining cashbook,debtors and creditors accounts. Otherinformation relating to assets, liabilities,expenses and revenues are partiallyrecorded which requires careful scrutinyto prepare the accounts.

9.2 Reasons for Incomplete Records

Incomplete records may be due to partialrecording of transactions as is the casewith small shopkeepers such as grocersand vendors. In case of large sizedorganisations, the accounting records may

be rendered to the state of incompletenessdue to natural calamity, theft or fire. Thus,partial recording of business transactionsmay takes place due to:

Lack of knowledge about doubleentry system.

Deliberate omission to maintainrecords to take advantage oftaxation.

Unable to maintain his/herbusiness transactions because ofthe time, effort and cost involved.

Loss of records due to fire, theft ornatural calamity.

9.2.1 L i m i t a t i o n s o f I ncomp l et e

Records

Incompleteness of accounting records by

itself is a drawback of the system.Following are the limitations of partialrecords:

Arithmetical accuracy of tran-sactions recorded in the bookscannot be checked from


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ACCOUNTS FROM INCOMPLETE RECORDS 391

incomplete records because trialbalance cannot be prepared.

Internal checks cannot be enforced,which increase the chances ofcheating and fraud.

Correct ascertainment andevaluation of the financial resultsof business operations cannot bemade. This hampers the futuredecisions about the business.

9.3 Accounts from IncompleteRecords

It is necessary to know the result ofbusiness activities to assess the efficiencyand success or failure of the organization.This gives rise to the need for preparingthe financial statements to disclose:

The profits made or loss sustainedby the firm during a given period,and

To disclose the amount ofassets and liabilities as at theclosing date of the accountingperiod.

This is true even for firms which haveincomplete records. The problem faced inthis situation is how to ascertain profit orloss for an accounting year and determinethe financial position of the entity at theend of that year form the incompleterecords. This problem can be solved by-

Ascertaining the profit or loss bypreparing the Statement of Affairsat the beginning and at end of theaccounting period, and then analysethe changes in owners equityduring the accounting period.

Preparing profit and loss accountand balance sheet by putting the

accounting records in proper order.

9.3.1 Ascer ta inment of Pro fi t or Loss

by prepari ng the St at ement of

A f fa i r s

Under this method, statement of assetsand liabilities at the beginning and at theend of the relevant accounting period areprepared to ascertain the change in ownersequity at the end of accounting period.

This is followed by the statement showingascertainment of profit by analyzing nonoperating changes in owners equity. Thestatements so prepared show assets on oneside and the liabilities on the other just asin case of a balance sheet. The difference

between the totals of the two sides isknown as owners equity. This can be alsoexpressed in the form of accountingequation as follows:

Assets = Liabilities + Owners Equity

The above equation is rearranged toascertain the owners equity as follows-

Owners Equity = Assets Liabilities

Conversely, there may be a situation whenthe liabilities may exceed the total assets.In such a case, the difference will indicateloss carried forward from the previousyear. In this case, owners equity will benegative.

Though the Statement of Affairsappears to resemble with the balance

sheet, but it is not a balance sheet, becausethe balances of various assets andliabilities are not derived from the ledgeraccounts.

The difference between ownersequity at two points, i.e. opening andclosing, represents the increase or decrease


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ACCOUNTANCY392

which is to be adjusted for withdrawalsmade by the owner and the new capitalintroduced by the him during theaccounting period to ascertain the changein owners equity due to operatingactivities. In case, the balance is positive itwill indicate the profit earned during theyear, while in case of negative balance itwill be the loss sustained by the firm.

To ascertain the profit or loss,

following steps are to be taken:St ep 1

Calculate owners equity at the beginning(opening owners equity) and at the endof the period (closing owners equity).

St ep 2

Subtract the opening balance of ownersequity from closing balance of ownersequity. Here, there may be two situations:

(i) The change in owners equity maybe positive, i.e., excess of closing

owners equity over openingowners equity.

(ii) The change in owners equity maybe negative, i.e., excess of openingowners equity over closingowners equity.

St ep 3

In case of introduction of fresh capitaland/or withdrawals made by the ownerthe following adjustments are required:

(i) Subtract the amount of capitalintroduced during the period fromthe amount calculated in step 2.

(ii) Add the amount of withdrawalsmade by the owner during the

period to the amount calculated instep 2.

St ep 4

If the net result is positive, it representsprofit and if it is negative, it representsearned loss sustained during theaccounting year.

This process of measuring profit orloss is summarized as follows:

Profit (Loss) = O1 O0 + d Iwhere;

O0

= A0 L

0

O1

= A1

L1

O0

= Owner Equity at the beginning

A0

= Assets at the beginning

L0

= Liability at the beginning

O1

= Owners Equity at the end

A1

= Assets at the end

L1

= Liability at the end

I = Introduction or addition to the

capital during the period

D = Withdrawals during the period

O = Change in owners equity

I l l ust ra t i on 1(Preparation of Statement ofProfit)

Calculate the profit or loss from thefollowing data:Withdrawals by the proprietor during theyear Rs. 30,000.Capital at the beginning of the year i.e., 1

Jan. 2001 Rs.1,20,000.Capital at the end of the year i.e., 31 Dec2001 Rs. 2,00,000.Capital brought in by the proprietorduring the year Rs. 50,000.


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I l l u st r a t i o n 2 (Preparation of ClosingStatement of Affairs)

Bharat started his readymade garmentsbusiness on January 1, 2001 with a capitalof Rs. 50,000. He was pur-chasingreadymade dresses of well-known brands.

He was able to procure credit from thesuppliers. There were a few shopkeepersfrom nearby markets who were alsopurchasing from him on credit basis. During

the year, he introduced fresh capital of Rs.15,000. He withdrew Rs. 10,000 for hispersonal use. On Dec 31, 2001 his positionwas as follows:

Accounts payable Rs.90,000; AccountsReceivable Rs.1,25,600; Stock Rs. 24,750;Cash at Bank Rs. 24,980

Calculate profit and loss made byBharat during the first year of his business,using (i) Statement of Affairs Method (ii)Equations Method.

Solution

Statement of Profit for the year ended 31-12-2001

Particulars AmountRs.

Owners equity as on 31 December (O1) 2,00,000

Less : Owners equity as on 1 January (O0) 1,20,000

Change in owners equity (o) 80,000

Add : Drawings (D) 30,000

1,10,000

Less : Additional capital introduced (I) 50,000

Profit made during the year (P) 60,000

Solution

I. Statement of Affairs Method

Books of BharatStatement of Affairs as on 31.12.2001

Liabilities Amount Assets AmountRs. Rs.

Accounts Payable 90,000 Cash at Bank 24,980Accounts Receivable 1,25,600

Owners Equity 85,330 Stock 24,750

1,75,330 1,75,330


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ACCOUNTANCY394

Statement of Profit for year ending 31-12-2001


Owners equity as on 31 December (O1) 85,330

Less : Owners equity as on 1 January (O0) 50,000

Change in owners equity (0) 35,330

Add : Drawings (D) 10,00045,330


Profit made during the year (P) 30,330

II. Equations Method

O1

= A1- L

1(1)

O0

= A1

- L1

(2)

P = O1

- O0 +

D I (3)

where :

O1

= Closing Capital as on 31.12.2001

A1

=Assets as on 31.12.2001

L1

= Liability as on 31.12.2001

O0

= Opening Capital as on 1.1.2001

A0

= Assets as on 1.1.2001

L0 = Liability as on 1.1.2001D = Drawings during the year 2001

I = Introduction of additional capitalduring the year

P = Profit and Loss for the year

O = Change in owners equity

Calculation of Assets as on 31.12.2001

Rs.

Cash at Bank 24,980Account Receivable 1,25,600Stock 24,750

Assets (A1) 1,75,330

Calculation of Liabilities ason 31.12.2001

Rs.Accounts Payable 90,000

Liability (L1) 90,000

Calculation of Owners equity as on31.12.2001

O1

= A1

- L1

O1

= Rs. 1,75,330 90,000Owners equity Rs. 85,330

Ascertaining Profit or Loss during the year

P = O1

-O

0+ D I

= (85,330 50,000) + 10,000 15,000

= 35,330 + 10,000 15,000

= 45,330 15,000

Profit = Rs.30,330

I l lust ra t ion 3 (Preparation of opening andclosing statement of Affairs)

Akhilesh runs ABC printers, a smallprinting firm. He was maintaining onlysome records, which he thought, weresufficient to run the business. On 1 April2000 available information from hisrecords indicated that ABC printers hadthe following assets and liabilities:Printing Press Rs. 5,00,000; Building Rs.

2,00,000; Stock of press material Rs. 50,000;Cash at bank Rs. 65,600; Cash in HandRs.7,980; Dues from customers Rs.20,350;Payments due to Accounts PayableRs.75,340; and Wages pending to workersRs.5,000. He withdrew Rs. 8,000 everymonth for meeting his expenses. He had


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also introduced Rs. 15,000 during the year as additional capital. On 31 March 2001 hisposition was as follows: Press Rs. 5,25,000; Building Rs. 2,00,000; Stock of press materialRs. 55,000; Cash at Bank Rs. 40,380; Cash in hand Rs.15,340; Dues from CustomerRs.17,210; Payments due to accounts payable Rs. 65,680. Using Statement of Affairsmethod, calculation the profit made by ABC printers during the year.

9.4 Preparation of Profit andLoss Account and Balance Sheetfrom Incomplete Records

Generally, the Statement of Affairs methodis used where it is difficult to compile even

a reasonable summary of cash transac-tions. There is a need to obtain as far asmuch information as possible about theassets and liabilities at the beginning aswell as at the close of the year. Bank

ABC PrintersStatement of Affairs as on 31.3.2001

Liabilities 1.4.2000 31.3.2001 Assets 1.4.2000 31.3.2001Rs. Rs. Rs. Rs.

Accounts 75,340 65,680 Printing Press 5,00,000 5,25,000Payable

Wages pending 5,000 - Building 2,00,000 2,00,000

Change inOwners equity 7,63,590 7,87,250 Stock of press 50,000 55,000

Material

Dues from 20,350 17,210customers

Cash at bank 65,600 40,380

Cash in hand 7,980 15,340

8,43,930 8,52,930 8,43,930 8,52,930

Statement of Profit for year ending 31-3-2000


Owners equity as on 31 Dec. (O1) 7,87,250

Less : Owners equity as on 1 Jan.(O0) 7,63,590

Change in owners equity (D0

) 23,660Add : Drawings (D) 8000 x 12 96,000

1,19,660


Profit made during the year (P) 1,04,660


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Dr. Total Creditors Account Cr.

Particulars Amount Particulars AmountRs. Rs.

Cash (Paid) **** Opening balance ****

Bank **** Bank ****(Cheques issued) (Cheques dishonoured)

Bills Receivable Bills payable ****(Endorsed) (Bills dishonoured)

Bills Payable **** Credit Purchases ****

(Bills accepted)Discount received ****

Purchases returns ****

Closing Balance ****

***** *****

Bills Payable Account

Dr Cr


Bank (bills matured) **** Opening Balance ****

Creditors **** Creditors ****(Bills accepted)

(Bills dishonoured) ****Closing balance ****

***** *****

Figure : 11.2

I l l ust ra t i on 4(Computation of creditpurchases)

The following information is available to

you from the books of M/s Linsa Traders.Prepare accounts payable account to findout the missing information, if any.

Cash paid to accounts payable Rs. 15,000

Cheques paid through bank Rs. 10,000

Bills endorsed Rs 14,500

Bills accepted during the year Rs. 35,000

Discount received Rs. 5,000

Purchases returns Rs. 2,500

Opening balance of accounts Rs. 15,000payable as on 1 April 2002

Cheques dishonoured Rs. 8,000

Bills dishonoured (bills payable) Rs. 10,000

Balance of accounts payable Rs. 25,000

as on 31March 2003


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ACCOUNTANCY398

Solution

M/s Linsa TradersDr. Accounts Payable Account Cr.

Date Particulars J.F Amount Date Particulars J.F AmountRs. Rs.

Cash (paid) 15,000 Balance b/f 15,000

Bank 10,000 Bank 8,000(cheques dishonored) (cheques issued)

Bills Receivable 14,500 Bills payable 10,000(Bill endorsed) (bills dishonoured)

Bills Payable 35,000 Purchases (Credit) 74,000(Balancing figure)

Discount received 5,000

Purchases returns 2,500

Closing Balance 25,000

1,07,000 1,07,000

I l lust ra t i on 5 (Calculation of netpurchases)

From the following information, you are

required to calculate Net purchases:Rs.

Opening Balance of Bill Payable 15,000

Opening Balance of Creditors 18,000

Closing Balance of Bills Payable 21,000

Closing Balance of Creditors 12,000Bills Payable honoured by firm 26,700during the year

Returns outwards 3,600

Cash Purchases 77,400

Cash paid to Creditors 90,600

Solution

Dr. Total Creditors Account Cr.


Bills Payable 32,7001 Opening Balance 18,000Bills issued

during the year)Credit Purchases 1,20,9002

(Balancing figure)Returns outward 3,600Cash 90,600(Bills honoured)Closing balance 12,000

1,38,900 1,38,900


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Solution

Dr. Bills Payable Account Cr.


Cash 26,700 Opening balance 15,000(Bills honoured)Closing balance 21,000 Total Creditors 32,7001

(Balancing figure)Bills issuedduring the year

47,700 47,000

9.4.2 Ascertainment of MissingInformation about CreditSales and Receivables

As you have already studied in the chapter6 based on bills of exchange, that in thepresent times sales are made against bills

receivables by raising bills of exchange onthe customers. Only when accepted by the

customers, the bills of exchange becomebills receivable. It is to be noted that creditsales, Debtors and bills receivable areinterrelated. Debtors and Bills Receivableaccount are therefore, prepared simulta-neously. The formats of Accounts

Receivables (total debtors and BillsReceivable) are as follows:

Calculation of Net Purchases


Cash Purchases 77,400

Add: Credit Purchases 1,20,9002

Total Purchases 1,98,300

Less: Returns Outward 3,600

Net Purchases 1,94,700


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ACCOUNTANCY400

The linking items between theaccounts receivable and bills receivableare: Bills receivable by customers during

the period and bills receivabledishonoured during the period. Bymaking use of connecting items missinginformation can be ascertained. Forexample, to calculate missing informationabout net sales, at first stage, billsreceivable account is to be completed.

After completing the bills receivableaccounts with all the items, one canattempt to complete the accounts

receivable account. Once all the items inboth the account are available the creditsales during the period is ascertained. Thismust be added to the cash sales figureavailable from the cash book summary toobtain total sales for the period. In caseany information is available regarding

Total Debtors

Dr. Cr.


Opening Balance **** Cash (received) ****Bills Receivables Bank ****(Dishonoured) **** (Cheque received)Bank Discount allowed ****(Cheque dishonoured) Bad debts ****

Sales returns ****

Bills Receivable ****(bills received)Closing Balance ****

***** ****

Bills Receivable

Dr. Cr.


Cash (bills honoured) ****Opening Balance **** Bank and Discount ****

Debtors **** (Bills discounted)(bills received) Debtors (Bills ****

Retained & Dishonored)Accounts Payable ****(endorsed to creditors)Closing Balance ****

***** *****


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sales returns, it is deducted from the totalsales to obtain net sales. The figure of netsales is placed on the credit side of Profitand Loss Account.

9.4.3 Prepar ing summary stat ement

of cash t ransact i on t o ascert ai n

missing informat i on

Summary of cash transactions record thecash receipts and cash payments. Cashreceipts indicates opening balance of cashand receipts on account of cash sales, cashreceived from debtors, cash collected onmaturity of bills receivable and otherreceipts such as interest, commission andtax refund. The cash payments includespayment to creditors, payment onretirements of bills payables, paymentsof dues, expenses and taxes. The

with-drawals made by the proprietor/partner is also shown on the payments sidealong with the closing balance. Whilepreparing a cash book summary one mayfind a missing figure. In case of banktransactions, a bank overdraft appears onthe other side. The balancing figure has to

be carefully identified as the missingfigure.

To ascertain missing information for

preparation of final accounts, all theinformation available should be carefullyrecorded by simultaneously openingrelevant accounts. Then, balance thoseaccounts, which have only one missinginformation pass transfer entries bymaking use of connecting items.

Part i cul ars Source of I nformat i on

Closing Assets (except stock) and Closing Statement of AffairsLiabilities, Capital.

Opening Assets, Liabilities and Capital Opening Statement of Affairs

Purchases (Cash and Credit) Accounts Payable, Purchases Account, Cash SummaryStatement

Sales (Cash and Credit) Cash Sales from Cash Summary, Credit Sales fromAccounts Receivable Account and Sales Account

Expenses and Revenues As per Cash Summary Statement and additionalinformation for outstanding and prepaid expenses

Losses and Gains From all the accounts and scattered information

Bills Receivable received Bills receivable Account/Account Receivable Account

Bills Payable accepted Bills Payable Account/Accounts Payable Account

Opening and Closing balance of Cash Summary of Cash and bank transactions.

Figure 11.2: Detecting the Missing Information


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ACCOUNTANCY402

I l lust ra t i on 6(Preparation of AccountsReceivable Account)

From the following information suppliedby Excel Enterprises of Ganesh, preparethe accounts receivable account and findout the missing figure, if any.

Rs.

Opening balance of AccountsReceivable as on 1April 2002 1,00,000

Bills Receivable dishonoured

during the year 10,000

Cheque dishonoured (Bank) 5,000Cash received from Accounts

Receivable 25,000

Cheque received and deposited 10,000in the bank

Discount Allowed 4,500

Bad debts 2,500

Sales Returns 6,000

Closing balance of Accounts 10,000Receivable as on

31

March 2002

I l lust ra t i on 7(Ascertainment of Credit Sales)

From the following information, Calculate the accounts of credit sales

Transactions 1.1.2000 31.12.2000Rs. Rs.

Balance of Debtors 30,000 22,500

Balance of Bill Receivables 9,000 12,000

Transactions made during the year:

Cash received from customers during the year 1,48,500

Solution

Dr. Accounts Receivable Account Cr.


1 Apr Opening balance of 1,00,000 Cash (received from 25,000Accounts Receivables Accounts Receivable)

Balance b/f2000 Bills Receivables 10,000 Bank (cheque 10,000

(Dishonoured) received)Bank 5,000 Discount allowed 4,500

(cheque dishonoured) Bad debts 2,500Sales returns 6,000Bills receivable 57,000(Balancing figurebeing billsreceivable issuedduring the year)Balance c/f 10,000(Closing balance ofof Accounts Receivables)

1,15,000 1,15,000


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Dr. Tatal Debtors Account Cr.

Date Particulars J.F Amount Date Particulars J.F Amount2000 Rs. 2000 Rs.

1 Jan Balance b/f 30,000 31 Dec Cash 1,48,500Bills Receivable 7,500 (Collected from(Dishonoured) accountsSales 1,77,000 receivable)(Balancing figure) Discount 1,500being credit sales Bills receivable 31,5001

(Transfer frombills receivableaccount)Return Inwards 6,000Bad Debts 4,500

Balance c/f 22,500

2,14,500 2,14,500

Solution

Dr. Bills Receivable Account Cr.


1 Jan Balance b/f 9,000 31 Dec Cash 21,000Accounts Receivable 31,500 Accounts 7,500

Receivable(B/R received) (Dishonoured)(Balancing figure Balance c/f 12,000being billsreceivable duringthe year)

40,500 40,500

Discount allowed 1,500

Returns Inwards 6,000

Cash Received against Bills 21,000

Bad Debts 4,500

Bills Receivable (Dishonoured) 7,500

Solution

I. Calculation of credit sales during the year


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ACCOUNTANCY404

I l lust ra t i on 8(Colcutation of Net Sales)

From the following information calculate the net sales made during the year.

Transact i ons Amount

Rs.

Debtors on 1.1.2000 61,200

Cash received from debtors 1,82,400during the year

Returns Inward 16,200

Accounts Receivable on 82,800

31.12.2000Bad Debts 7,200

Cash Sales as per Cash Book 1,69,200

Solution

I Calculation of Credit Sales made during the year



1 Jan Balance b/d 31 Dec Cash 1,82,400

(Opening Bal) 61,200 received fromSales 2,27,400 Accounts(Balancing figure) Receivable)being credit sales Return Inwards 16,200

Bad Debts 7,200Balance c/f 82,800(Closing Balance)

2,88,600 2,88,600

II Calculation of Net Sales during the year

Part icul ars Amount

Rs.

Cash Sales as per cash book 1,69,200

Add:Credit Sales 2,27,400

Sales 3,96,600

Less:Returns Inwards 16,200

Net Sales 3,80,400


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Solution


Dat e Part i culars J.F Amount Dat e Par t i culars J.F Amount

Rs. Rs.

Balance b/f (Opning) 9,000 Cash 30,000

Credit Sales 34,400 Discount Allowed 1,400(Balancing Figure) Balance c/f 12,000

(Closing)

43,400 43,400

9.5 Preparation of Final Accounts

Let us now take up few comprehensiveillustrations and study how complete finalaccounts can be prepared from incompleterecords.

Illustration 9

Roshan Washing House did not keep his

book of accounts under double entrysystem. From the following informationavailable from his records, prepare Profitand Loss account for the year ending31-3-2000 and a balance sheet as on thatdate, depreciating the washing equipment@ 10%.

Other Information31.3.2000 31.3.2001

Rs. Rs.

Accounts Receivable 9,000 12,000Accounts Payable 14,400 6,800Stock of Materials 10,000 16,000Washing Equipment 40,000 40,000Furniture 3,000 3,000Discount allowed during the year 1,400Discount Received during the year 1,700

Recei pt s Amount Payment s Amount

Rs. Rs.

Balance b/f Cash Purchases 14,000

(Opening Balance) 8,000 Paid to Creditors 20,000

Cash Sales 40,000 Sundry Expenses 6,000

Received from accounts 30,000 Cartage 2,000

Drawings 8,000Balance c/f 28,000(Closing balance)

78,000 78,000

receivables


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ACCOUNTANCY406

Statement of Affairs as on 1-4-2000

Part i culars Amount Part i cul ars Amount

Rs. Rs.

Accounts Payable 14,400 Washing Equipment 40,000Owners Equity 55,600 Furniture 3,000(Balancing Figure) Stock of Material 10,000

Accounts Receivable 9,000Cash 8,000

70,000 70,000

Profit and Loss Account for the year ending 31-3-2000

Part i cul ars Amount Amount Part i cul ars Amount Amount

Rs. Rs. Rs. Rs.

Opening Stock 10,000 Sales:Purchases: Cash 40,000Cash 14,000 Credit 34,400 74,400Credit 14,100 28,100Cartage 2,000 Closing Stock 16,000Gross Profit c/f 50,300

90,400 90,400

Sundry Expenses 6,000 Gross profit b/f

Discount Allowed 1,400 Discount Received 50,300Depreciation on 4,000washing equipment 1,700

Net Profit transferred to 40,600Capital a/c

52,000 52,000

Dr. Accounts Payable Account Cr.

Dat e Part i culars J.F Amount Dat e Par t i culars J.F Amount

Rs. Rs.

Cash 20,000 Balance b/f 14,400Discount 1,700 (Opening)Received Credit Purchase 14,100Balance c/f (Closing) 6,800 (Balancing Figure)

28,500 28,500

Dr. Cr.


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Balance Sheet as on 1-3-2001

Liabilities Amount Assets AmountRs. Rs.

Owner Equity 55,600 Washing equipment 40,000Add:Net Profit 40,600 Less:Depreciation 4,000 36,000

96,200 Furniture 3,000Less:Drawings 8,000 88,200 Stock of materials 16,000Accounts Payable 6,800 Accounts Receivable 12,000

Cash 28,000

95,000 95,000

TERMS INTRODUCED IN THE CHAPTER

Incomplete Records

Statement of Affairs

SUMMARY WITH REFERENCE TO LEARNING OBJECTIVES

I ncompl et e Records: Incomplete records refer to lack of accounting records according tothe double entry system. Degree of incompleteness may vary from highly disorganized

records to organized but still not complete.D if ference betw een St at ement of A ffa i rs and Bal ance Sheet : A Statement of Affairs is astatement showing various assets and liabilities of a firm on date, with difference betweenthe two sided denoting owners equity. Since the records are incomplete, the values of assetsand liabilities are normally estimates based on information available. They are not thebalances taken from properly maintained ledger like in the case of Balance Sheet. The balancesheet is derived from a set of books maintained on the basis of double entry system.

Computat ion of Profi t and Loss from I ncomplete Records:The statement of affairs is usedto compute Profit or Loss when a firm has a highly disorganized set of incomplete records.It may not be possible to prepare a cash summary in such a situation. Two statements ofaffairs are prepared to find out opening and closing equity amounts. To the differencebetween the closing and opening equity , any sum withdrawn from business are addedback and any additional capital introduced during the year are deducted. To find out Profit

and Loss made for the period.Preparati on of Prof it and Loss Account and Bal ance Sheet :When cash summary of a firmis available along with information about personal accounts of creditors and customers, anattempt can be made to prepare the Profit and Loss Account and Balance Sheet. Missingfigures about purchases, sales, debtors, and creditors can be obtained by preparing performaaccounts of debtors, creditors, bills receivables and bills payable using the logic of doubleentry system. Once a Profit and Loss Account and Balance Sheet are prepared, it will bepossible for the firm to start a complete accounting system for future.


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ACCOUNTANCY408

EXERCISES

Objective Type Questions

1. M ult ipl e Choice Questi ons

(a) Incomplete records are generally found in use by

(i) Small Traders(ii) Society(iii) Company(iv) Government

(b) When Closing Owners Equity is greater than Opening Owners Equity, it denotes(i) Profit(ii) Loss(iii) Profit, if there is no introduction of fresh capital(iv) No profit no loss

(c) If owners equity in the beginning is Rs 21,000. Fresh capital introduced duringthe year is Rs. 7,000. Amount withdrawn during the year is Rs. 13,000, then theclosing owners equity will be:

(i) Rs. 27,000(ii) Rs. 15,000(iii) Rs. 41,000(iv) Rs. 1,000

(d) Credit Sales is obtained from:

(i) Bills Receivables(ii) Accounts Receivables(iii) Accounts Payable(iv) Cash Summary

(e) Credit purchases can be obtained from:

(i) Statement of Affair(ii) Bank(iii) Bills Receivable(iv) Account Payable

Information about bills received dishonoured can also be obtained from:

(v) Summary of cash transaction

(vi) Profit and Loss account(vii) Accounts Payable(viii) Accounts Receivable

(f) Discount received from accounts payable may be obtained from(i) Cash statement(ii) Bills Receivables(iii) Accounts Receivables(iv) Accounts Payables


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2. Fill in the blanks

(a) To find out the profit, closing capital is to be adjusted by ________________drawings and _____________________ introduction of fresh capital.

(b) If closing owners equity is Rs 1,000; opening owners equity is Rs. 500; profit is Rs700, then there must be a ___________________________ of Rs 200 during the year.

(c) Credit purchase can be ascertained as the balancing figure in the_____________________.

(d) The amount received from debtors can be traced from ___________________.

(e) Increase in owners equity at the end of the period represents ________________.

3. Calculate the following amounts

(a) Calculate value of Opening Stock

Purchases Rs. 17,500

Sales Rs. 45,000

Closing Stock Rs. 13,000

Gross Profit @ 331/3% on Sales.

(b) Calculate the amount of closing stock

Opening Stock Rs. 17,500

Purchases Rs. 37,500

Sales Rs. 60,000

Gross Profit @ 25% on Cost.

(c ) Mr. Anshul started a business on 1.1.96 without maintaining proper accounts. Onpersonal

Inquiries and scruting of other papers the following information is obtained.

1996 1997

Rs. Rs.

Purchases 74,000 68,500

Sales 75,000 90,000

Closing Stock30,000

Goods privately consumed 1,000 1,500

Prepare Profit and Loss account

Calculate Closing Stock of 1996 and Opening Stock of 1997.

Q 4. From the following information calculate the amount of Net Sales, Net Purchasesand Closing Stock in Trade.

Particulars 1.1.98 31.12.98Rs. Rs.

Account Receivables 31,800 26,500

Account Payables 24,000 16,000


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ACCOUNTANCY410

Bills Payable 21,000 29,000

Bills Receivable 8,800 7,000

Stock in Trade 10,000 ?

Transaction during the year:

Discount allowed 1,000

Discount received 800

Bills Payable discharge 35,600

Bills Receivable collected 20,900

Return Inwards 8,700

Return Outward 4800

Bad Debts 2,800

B/R Dishonoured 1,800

Cash paid to Creditors 1,20,000

Cash received from Debtor 69,000

Cash Sales 40,900

Cash Purchased 1,03,200

Uniform Sales Price of goods being cost plus 25 per cent

Short Answer Questions

5. What are incomplete records?

6. What are the possible reasons for maintaining incomplete records?

7. Differentiate between a Statement of Affairs and a Balance Sheet?

8. What practical difficulties are encountered by a trader due to the incompleteness ofaccounting records?

Long Answers Questions

9. What is meant by a Statement of Affairs? How can the Profit or Loss of a trader beascertained with the help of a Statement of Affairs?

10. Is it possible to prepare the Profit and Loss Account and the Balance Sheetfrom the incomplete books of accounts kept by a trader. Do you agree?Explain?

11. Describe the procedure of ascertaining credit sales, collection from accounts

receivables, payments to accounts payable closing balance and bills receivable.12. Explain how the following may be ascertained from incomplete records:

(a) Opening owners equity and closing owners equity

(b) Credit sales and credit purchases

(b) Payments to creditors and collection from debtors

(c) Closing balance of cash


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13. Jeevan Lal owns a tailoring shop. He does not maintain complete double entry books ofaccounts. From the following information, help Jeevan Lal to prepare Statement of Affairsand Profit earned during the year ending 31December 2001.

Particulars Amount (Rs.) Amount (Rs.)

Cash in Hand 20,000 25,000

Bank Overdraft 70,000 45,000

Stock in trade 9.25.000 1,07,500

Sundry Creditors 65,000 55,000

Sundry Debtors 80,000 75,000

Bills receivables 20,000 12,500

Furniture and fittings 12,500 10,000

Machinery 1,00,000 90,000

Building 1,25,000 1,22,500

Bills Payables 10,000 15,000

Motor Vehicles 60,000

Unpaid Expenses 2,000 1,500

14. Mr Kishan who owns a food grains shop, does not maintain complete double entrybooks of accounts. From the following details determine the Profit for the year andStatement of Affairs at the end of the year.

Rs 10,000 (cost) furniture was sold for Rs 50,000 on 1January 2001; 10% depreciation is

to be charged on furniture . Mr Kishan has drawn Rs 10,000 per month . An amount ofRs 20,000 was invested by Mr Kishan in 2001.

Particulars 1 Jan 2001 31 Dec 2001(Rs.) (Rs.)

Stock 4,00,000 6,00,000

Accounts Receivable 3,00,000 4,00,000

Cash 20,000 10,000

Bank 1,00,000 (overdraft) 5,000

Accounts Payable 1,50,000 2,50,000

Out standing expenses 50,000 80,000

Furniture 30,000 20,000

Bank balance on 1 January 2001 is as per cash book, but there was a bank overdraft on 31December 2001 as per bank statement. Rs 20,000 cheques drawn in December, 2001 have notbeen encashed within the year.

15. The following figures are available with Suresh who keeps his books on Single EntrySystem


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ACCOUNTANCY412

Particulars 1-1-98 31-12-98(Rs.) (Rs.)

Sundry Creditors 3,600 3,800

Sundry Debtors 3,900 4,500

Bills Receivable 2,500 3,400

Bills Payable 1,600 2,300

Cash in Hand or at Bank 7,000 1,200

Additional Information is given below:

Cash Received against Bills Rs. 10,000

Cash Paid against Acceptance Rs. 14,300

Payment made to Creditors Rs. 14,700

Discount allowed to Customers Rs. 200

Find out Credit sale and Credit Purchases made during the year.

16. Mr Rajan who was not keeping a full accounting system gives you the followinginformation for the year 31March 2001.

Summary of Cash Book

Dr. Cr


Balance at Bank 43,500 Ranjans Drawings 1,55,200Accounts Receivables 3,84,000 Accounts Payable 2,71,000

Bills Payable 93,000Accounts Receivable 1,20,000 Wages 3,20,000realised Salaries 1,65,000Commission 15,000 Rent and taxes 44,000receives Insurance 8,000Cash sales 4,86,000 Carriage 12,000Balance c/d Advertising 13,300

10,82,000 10,82,000


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Particulars of other assets and liabilities

Particulars Amount AmountRs. Rs.

April 1 2000 March 31 2001

Stock in hand 1,87,000 23,400

Accounts receivable 1,20,000 1,40,000

Accounts payable 90,000 15,000

Bills receivable 40,000 50,000

Bills payable 10,000 12,000

Furniture 6,000 6,000Machinery 1,20,000 1,20,000

A provision of Rs 14,500 is required for doubtful debts and depreciation at 15% is written offon machinery and furniture. Rs 30,000 is outstanding for wages andRs.12,000 for salaries. Insurance has been paid to the extent of Rs. 2,500. Legal expensesoutstanding are Rs. 7,000. Prepare the opening Statement of Affairs, Closing Statement of

Affairs, Statement of Profit and Balance Sheet.

17. Mr Kishore could give only the following information about his business transactions.Prepare a Profit and Loss Account for the year ended 31 March 2002, together withBalance Sheet on that date.

Summary statement of transactions


Intrest 1,000 Balance at bank as 24,250

charges 20,000 on 31 March 2001

Personal 85,000 Cash in hand as on 750

withrawals 79,000 31 March 2001

Staff salaries 1,50,000 Accounts receivable 2,50,000

Other business Cash sales 1,50,000expensesAccounts

payable paid


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ACCOUNTANCY414

Further details are:

Particulars Amount Amount Particulars Amount AmountRs. Rs. Rs. Rs.

1 April 31 1 April 31 March2001 March 2001 2002

2002

Stock 90,000 1,02,200 Furniture 10,000 10,000Accounts 80,000 55,000Payable Office 1,50,000 1,50,000

premisesDebtors 3,00,000 3,00,000

Provide 5% interest on Kishores Capital balance as on 1 April 2001. ProvideRs 15,000 for doubtful debts, 5% depreciation on all fixed assets, 5% group incentivecommission to staff has to be provided for on net profit after meeting all expenses andcommissions.

18. Babulal ,keeps a cash book , carbon copies of the customers statements, which aremarked off when settled and a file of creditors for running his stationary business.Analysis of cash record for the year ended 30 June 2002, shows :


Debt due by 2,32,430 Rent rates and taxes 10,200customers collected Trade expenses 15,360

Creditors accounts 1,94,070 Purchase of a delivery 4,800

for goods paid van 5,600

Cash purchases 18,230 Cash drawn for 15,360

Wages 24,190 personal use 4,8005,600

Particulars 1 July 30 Particulars 1 July 30 June2001 June 2001 2002

2002

Balance at 18,200 Crediors 16,320Bank Rent 11,460 1,750Till float 300 Trade 1,500 960on imprest expenses 3,200system Delivery van 740Debtors 12,620 14,790Stock 17,400 19,250


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Sales made during the year were Rs 2,85,300.You are required to prepare :

(a) The Profit and Loss account for the year ending 30 June 2002.

(b) Balance Sheet as on that date.

19. Radha Garments commenced business on 1April 2001 with Rs. 45,000 as capital. Shemaintains books on single entry system. On 31March 2002, books revealed the followinginformation:

Account Payable Rs. 25,000

Furniture and Fittings Rs. 50,000

Stock of ready-made garments Rs. 40,000

Accounts Receivables Rs. 45,000

Cash Rs. 10,000

Drawings Rs. 750 per month

Additional Capital introduced: Rs. 20,000

5% accounts receivable proved as bad

Interest on capital 5% p.a.

Depreciation on furniture and fittings 10% p.a.

Provision for baddebts @ 2.5% and Statement of Affairs ended 31March 2002.

20. Ganesh is conducting business as a retail merchant. He does not maintain regular

account books. From cash sales effected, by him he makes business and other payments.He always retains cash of Rs. 10,000 on hand and deposit the balance in the bank. Theinventories for for the year ended 31 December 2001 are lost. However, he informs youthat he has sold goods invariably at a price which yields him a profit of 33.33 % oncost. From the following information supplied to you, prepare Profit and Loss Accountand a Balance Sheet for the year ended 31 December 2001.

Assets and Liabilities 1 Jan 2001 31 Dec 2001

Rs. Rs.

Cash in hand 10,000 10,000

Cash at bank 40,000 90,000

Accounts receivable N.A. 80,000

Stock of goods 10,00,000 3,50,0002,80,000 N.A.


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ACCOUNTANCY416

Analysis of the bank pass book reveals the following information:

Particulars Amount Rs.

Payment to accounts payables 7,00,000

Business expenses 1,20,000

Receipts from accounts receivables 7,50,000

Loan from Ajhit(taken on 1 Jan 2000 @ 10% p.a) 1,00,000

Deposit in the bank 1,00,000

In addition he paid cash Rs 20,000 to accounts payables and salaries Rs 40,000. He retained

Rs 8,000 cash for his personal expenses.

21. Nagi furnishes you the following particulars:

Make 5% provision for doubtful debts and provide 10% depreciation on furniture.The difference in cash may be taken as drawings on cash sales.

Particulars 31 Dec 1999(Rs.) 31 Dec 2000(Rs.)

Cash at Bank 32,000 48,000

Stock 2,24,000 1,76,000

Account Receivables 4,00,000 3,60,000

Furniture 8,000 8,000

Account Payables 1,76,000 1,92,000

Out standing salary 40,000 6,400

Other Transactions:

Rates and Taxes 6,400

Postage Stamps 7,200

Salary 46,000

Creditor 6,24,000

Debtors 7,84,000

Conveyance 4,000

Bad Debts 4,000

Discount Received 2,400

Discount Allowed 6,400

Purchase return 8,000

Sales Return 16,000

22. Mr. S. Senapati Started business as a provision merchant on Jan 11996. He opened abank account for the business with Rs. 25,000 and immediately spend Rs 12,500 onfixtures and fittings. The only records kept were of cash Sales which amounted to Rs.37,500 in 1996 and Rs. 45,000 in 1997. There were no Credit Sales. The following factswere ascertained.


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(1) All expenses of the business had been met by cheque, and an analysis of the bank passbook showed the following payments in 1996 and 1997:

Rs.

Purchases (Rs.37, 000 on related to 1996) 63,750

Rent and rates 5,100

Salaries 11,000

Advertising 1,400

Other expenses 2,880

(2) The value of the stock on 31 December 1997 was Rs.15, 000. No stock was taken on 31December 1996,but a uniform rate of gross profit may be assumed.

(3) Liabilities outstanding and on 31 December 1997, were : Rs.

Purchases 7,500

Advertising 500

Other expenses (light, heat, telephone, etc.) 170

(4) Amounts paid in advance at 31 December 1997 were: Rs.

Rates 100Other Expenses (insurance ) 50

(5) All business expenses arose equally in two periods.

(6) Goods were taken from stock for private consumption, the estimated cost being Rs. 500in 1996 and Rs 7,50 in 1997.

(7) Private Drawings amounting Rs. 6,620 were met out of cash received and balance wasbanked.

(8) Private Income of Rs 2,250 had been paid into the bank.The fixtures and fittings are to be written off over 10 years in equal installments.

On the basis of the foregoing information prepare :

(a) The Trading and Profit and Loss Account of each of the years 1996 and 1997; and

(b) The Balance Sheet as on 31 December 1997.

23. Saxena keeps his books by Single Entry System. An analysis of his CashBook for the year ended 31December 1993, is as follows:

Cash Receipts: Rs.From Accounts Receivables 41,000

From Cash Sales 37,000

From Saxena as additional Capital on 1April 1993 10,000

Total Cash Receipts 88,000


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ACCOUNTANCY418

Cash Payments: Rs.

Cash Purchases 24,000Paid to Accounts Payables 16,200Productive Expenses 5,400Salary Paid 8,100Sundry Expenses 6,500New Furniture purchased 4,000Private Payments 7,800

Total Cash Payments 72,000

Assets and Liabilit ies as on: 31

Dec. 1992 31

Dec. 1993Rs. Rs.

Accounts Receivables 12,000 ?Accounts Payables 6,200 ?Cash 8,000 ?Stock 20,200 16,100Furniture 6,000 9,500

Other Informations

(1) Credit Sales during the year were Rs.48,000(2) Sales Returns Rs.2,600(3) Credit Purchases during the year were Rs.20,000(4) Discount allowed to Debtors Rs.200(5) Discount received from creditors Rs.300(6) Bad Debts written off during the year were Rs.1,200

Adjustments

(1) Write off further bad debts Rs.1,000(2) Provide 5% for doubtful debts and 2% for discount on Accounts Receivables(3) Allow interest on Capital @ 10% per annum

ANSWERS

1. (a) i(b) ii(c) i

(d) ii(e) iv(f ) i

2. (a) Adding, Subtracting(b) Drawing(c ) Accounts Payables(d) Cash Summary(e) Profit


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3. Opening owners equity Rs. 3,03,000Closing owners equity Rs. 3,86,000Profit Rs. 83,000

4. Opening owners equity Rs. 6,50,000Closing owners equity Rs. 6,30,000

5. Credit Sales Rs. 10,800Credit Purchase Rs. 29,200

6. Opening owners equity Rs. 4,16,500Closing owners equity Rs. 4,22,200Profit during the year Rs. 1,60,900

Balance Sheet Rs. 5,31,7007. Net profit Rs. 52,848

8. Gross Profit Rs. 45,800Net Profit Rs. 18,170Balance Sheet Rs. 55,740

9. Gross Profit Rs. 3,67,200Net Profit Rs. 1,54,000Balance Sheet Rs. 4,70,000

10. Gross Profit Rs. 3,10,000Net Profit Rs. 1,40,000Balance Sheet Rs. 5,60,000

11. Gross Profit Rs. 64,000Net Profit Rs. 29,200Balance Sheet Rs. 5,73,200

12. Gross Profit Rs. 12,500Rs. 15,000

Net Profit Rs. 800Rs. 3,300

Balance Sheet Rs. 31,650

13. Gross Profit Rs. 28,900Net Profit Rs. 5,984Balance Sheet Rs. 62,634

Documents

Accounting From Incomplete Records