1.0
INTRODUCTION
The objectives of this
note is to consider the problem of preparing an Income Statement and Balance
Sheet in circumstances when a business has not kept complete records leading to
a Trial Balance, and what must be done to carry out the conversion to double
entry.
2.0
OBJECTIVES
At the end of this note,
you should be able to:
• explain the meaning
of Incomplete Records
• prepare final
accounts from an Incomplete Record.
3.0
MAIN CONTENT
3.1
Meaning of Incomplete Records
Any kind of
books-keeping which falls short of double entry is "Incomplete" and
wherever possible should be completed. Exercises on this theme are valuable in
leading students to a clear apprehension of the double-entry principle.
3.2
Causes of Incomplete Records
A trader may perhaps
keep a cash-book which he writes up but does not post to a ledger. His takings
are partly in cash, but he does not pay the full amount of cash received into
the bank, since he pays an assistant's wages, and draws his own living
expenses, first of all. He too, as a shopkeeper, he takes goods out of stock
for private use.
At some time in the
year he may introduce further capital, or perhaps buy a motor van out of his
own resources, for business use.
This state of affairs
may persist until an assessment for Income Tax is made which he would like to
dispute. He is then compelled to call upon the services of an accountant to
help him to prepare proper accounts.
3.3
Stages of Completion of Records
The stages of this
preparation of account are as follows:
• Prepare an opening
statement of Affairs, showing the trader's assets and liabilities at the
beginning of the period under review. This will be inform of a Balance Sheet,
and it will now be picked up in the ledger through a journal entry, the cash
balance being posted to the cash book, and the other items to such accounts as
freehold shop, furniture and fittings, stock, debtors and creditors. The
balancing figure is taken as capital and posted to that account.
• Prepare a Bank
Reconciliation Statement covering the period since the date of the opening
statement of affairs, to make sure that the cash book is correct.
• Analyze both sides
of the cash book under suitable headings and post the totals of the analysis
columns to Ledger Accounts.
• Be especially
careful to post cash paid to creditors and cash received from debtors to their
respective total accounts.
• Find out, by
examining carefully the accounts, the amount of the Debtors and Creditors at
the beginning and end of the period
• This has
been partly done already, for the opening statement of affairs. The absolute
importance of the last two stages can be seen
thus:
Total
Debtors
From your knowledge
of control accounts you will remember that the entry for total sales journal is:
Debit Total Debtors
Credit Sales.
And that the entry
for total purchases from the Bought Journal is
Debit Purchases
Credit Total
Creditors
Because the records
are incomplete, we have to work backwards, as it were. A Trading Account cannot
be prepared until the amount of sales and purchases has been established.
• Find out by
questioning the proprietor of the business
- How much cash he
has kept back from the cash takings, and what it has been used for from the
point of view of the business i.e
Wages
Business
expenses
Private
drawings.
The double entry must
now be completed:
Debit
Wages
“
Expenses
“
Drawing
Credit
Cash Sales
- How much he has
drawn "in kind" from the business (at cost price). Again the double
entry must be completed:
Debit
Drawings
Credit
Purchases
- If he has brought
any further capital into the business other than in cash (which would have been
seen in the cash book analysis):
Debit
Asset Account
Credit
Capital
- The amount of the
opening and closing stocks. The opening stock was required for the opening
statement of affairs, and the closing stock is required in order to make the
appropriate adjustment. Note carefully that if the closing stock is understated
by the proprietor it results in the profit for the year also being understated.
- See that all
postings have been made and then extract and balance off the Trial Balance.
- Make all
adjustments for accrued charges, closing stock and payments in advance.
- Prepare Trading
Account, Profit and Loss Account, and Balance Sheet at the closing date.
3.4
Single Entry
It is sometimes the
case that no records at all have been kept, or the information available is so
fragmentary that completion of double entry over a period is virtually
impossible. This result in what is termed "pure single entry" and the
only thing to do is to prepare two statements of affairs in the form of a
Balance Sheet, by comparison of which the state of the capital account at the
beginning and the end of the period can be observed.
The difference, if upward
is assumed profit, and if downward, is assumed loss. The later result would not
be accepted without careful enquiry, if all the outward signs of the business
point to a far different conclusion.
The Statement of
Affairs are often accompanied by a Statement of Profits, which is in the
following form:
information
in double-entry form.
4.0
CONCLUSION
The objectives of
this note is to consider the problems of preparing an Income Statement and
Balance Sheet in circumstances when a business has not kept complete records
leading to Trial Balance, and what must be done to carry out the conversion to
double entry.
5.0
SUMMARY
It is very essential
for all the transactions of every business note to be kept in proper records.
This is commonly and traditionally presented in double entry. However, this is
not always the case, especially in small business notes that employ incompetent
book-keepers to man the recording of the business activities.
What is common as
such is keeping the records by entering the transactions once only-single
entry. As a result, some items of transactions may be missing thereby making
the records incomplete. This therefore brings about incomplete records. This
record have to be completed in stages before final accounts can be prepared.
0 comments:
Post a Comment