PART F PREPARING BASIC FINANCIAL STATEMENTS Study guide e "| Incomplete records (@ _| Understand and apply techniques used in incomplete record situations | (Use of accounting equation | (i) Use of ledger accounts to calculate missing figures (il) Use of cash and/or bank summaries (iv) Use of profit percentages to calculate missing figures. Exam guide Incomplete records questions appeared regularly in the exam under the old syllabus. You will ceri a question on this topic. 1 Incomplete records questions Incomplete records questions may test your ability to prepare accounts in the following situations, © Atrader does not maintain a ledger and therefore has no continuous double entry record of transactions Accounting records are destroyed by accident, such as fire , ‘Some essential figure is unknown and must be calculated as a balancing figure. This may occur a result of inventory being damaged or destroyed, or because of misappropriation of assets. Incomplete records problems occur when a business does not have a full set of accounting records, ft 3 the following reasons. = The proprietor of the business does not keep a ful set of accounts, ‘+ Some ofthe business accounts are accidentally lost or destroyed. ‘The problem for the accountant is to prepare a set of year-end accounts for the business; ie an income statement, and a balance sheet. Since the business does not have a full set of accounts, preparing the fal accounts is not a simple matter of closing off accounts and transferring balances to the trading, income ‘and expense account, or showing outstanding balances in the balance sheet. The task of preparing the final accounts involves the following. (@) Establishing the cost of purchases and other expenses (b) Establishing the total amount of sales (©) _ Establishing the amount of accounts payable, accruals, accounts receivable and prepayments ct the end of the year Examination questions often take incomplete records problems a stage further, by introducing en ‘incident’, such as fire or burglary which leaves the owner of the business uncertain about how much inventory has been destroyed or stolen. ‘The great mert of incomplete records problems is that they focus attention on the relationship between cash received and paid, sales and accounts receivable, purchases and accounts payable, and inventory, 2 well as calling for the preparation of final accounts from basie principles.18 INCOMPLETE RECOR ‘To understand what incomplete records are about, it will obviously be usefu! now to look at what exactly right be incomplete, The items we shall consider in turn are: (@) The opening balance shest (b) Credit sales and trade accounts receivable {@) Purchases and trade accounts payable (6) Purchases, Inventory an the cost of sles (@) Stolen goods or goods destroyed (f) The cash book (@) _Accrals and prepayments (h) Drawings Tox avord quesions a2 gd wt wher you awa ea rooh gap of ou rt. Eraminer are fond of ther With practice they become easier and can be very stisying | 2 The opening balance sheet In practice there should not be any missing item in the opening balance sheet of the business, because it should be available from the preparation of the previous year's final accounts. However, an examination problem might provide information about the assets and liabilities of the business at the beginning of the period under review, but then leave the balancing figure (ie the proprieto’s business capital) unspecified It you remember the accounting equation (A = C +L), the problem is quite straightforward 2.1 Example: Opening balance sheet ‘Suppose Joe Han's business has the following assets and liabilities as at 1 January 20X3. 8 Fixtures and fittings at cost 7,000 Provision for depreciation, fixtures and fitings 4,000 Motor vehicles at cost 12,000 Provision for depreciation, motor vehicles 6,800 Inventory 4,500 Trade accounts receivable 5,200 Cash at bank and in hand 1,230 Trade accounts payable 3.700 Prepayment 450 Accrued rent 2,000 You are requited to prepare a balance sheet for the business, inserting a balancing figure for propristor’s capital.geen cas Pl les Solution Cre BALANCE SHEET AS AT 1 JANUARY 20X3 itt ine Assets the Non-current assets Fixtures and fittings at cost Less accumulated depreciation PART F PREPARING BASIG FINANCIAL STATEMENTS qt Motor vehicles at cost i Less accumulated depreciation Current assets Inventory Trade accounts receivable Prepayment Cash Total assets Capital and tabilties Proprietor’s capital as at 1 January 20X3 (balancing figure) Current liabilities Trade accounts payabl Accrual Total capital and liabilities 3 Credit sales and trade accounts receivable ‘The approach to incomplete records questions isto build up the Information given $0 as to complete the necessary double entry. This may involve reconstructing control accounts for: © cashand bank ‘© trade accounts receivable and payable Ifabusiness does not Keep a record ofits sales on credit, the vale ofthese sales can be derived from the opening balance of trade accounts receivable, the closing balance of trade accounts receivable, and the payments received from customers during the period. Payments from trade accounts receivable Plus closing balance of trade accounts receivable (since these represent sales in the current period for which cash payment has not yet been received) Less opening balance of trade accounts receivable (these represent credit sales in a previous period) Credit sales in the period For example, suppose that Joe Han's business had trade accounts receivable of $1,750 on 1 April 20X4 and trade accounts receivable of $3,140 on 31 March 20XS. If payments received from receivables dund the yer to 31 March 20X5 were $28,490, andi there are no bad debts, then credit sales forthe pio’ would be