C02 Financial Accounting Fundamentals Incomplete Records by Cathy Sibley Part 2

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1 C02 Financial Accounting Fundamentals Incomplete Records by Cathy Sibley Part 2 (Before reading this article, please read part 1 which was published in Velocity ) Cost s & the Trading Account We have two potential cost structures that we can use: Margin = Mark up = Sales Cost of goods sold The trading account is simply represented as: Sales Opening inventory Purchases \$ \$ X X X X (X) (X) X When attempting a question from this area the most important thing to identify is whether the cost structure is based on a margin or a mark up. Margins are based on sales. Mark ups are based on costs. Whatever the cost structure is based on becomes 100% in the cost structure itself. Lets look at some simple examples. The basic trading account is below: Sales X Sales X (X) (X) Gross Profit X X 1

2 Starting with a margin of 20% which is based on SALES put 100% into the cost structure Margin Cost \$ % Sales X 100 Gross Profit (X) X Then gross profit is the margin % Margin Cost \$ % Sales X 100 (X) Gross Profit X 20 Finally applying Sales = make cost of sale the balancing %. Margin Cost \$ % Sales X 100 (X) 80 Gross Profit X 20 Now lets compare that to 20% mark up which is based on cost. Start by putting 100% against cost of sales. Sales X 100 Sales X (X) 80 (X) 100 2

3 Gross Profit X 20 X Now put the mark up of 20% again gross profit. Sales X 100 Sales X (X) 80 (X) 100 Gross Profit X 20 X 20 Again applying Sales = make sales the balancing %. Sales X 100 Sales X 120 (X) 80 (X) 100 Gross Profit X 20 X 20 If we now take some numbers we can see how the cost structures can be used. Sales \$3,000 Sales 3, Sales 3, Gross Profit

4 If we calculate for each cost structure divide the sales figure by the number to its right to give 1% and the multiply by 20 to give gross profit in each case. Sales 3, Sales 3, Gross Profit (3, ) x 20 (3, ) x 20 is then the balancing figure. Sales 3, Sales 3, (2,400) 80 (2,500) 100 Gross Profit (3, ) x 20 (3, ) x 20 Or we can calculate cost of sales and let gross profit be the balancing figure. Sales 3, Sales 3, (3, ) x 80 (2,400) 80 (3, ) x 100 (2,500) 100 Gross Profit Let s apply that to a practical question. A business purchased goods on credit for \$3,300 the selling price was based on a gross profit markup of 120%. The goods were all sold for cash. What is gross profit? 4

5 aft a trading account and put in the cost structure based on a mark up of 120%. Mark up Cost \$ % Sales Gross Profit 120 Put in the numbers you have and calculate the missing figures. Mark up Cost Or, Sales (given) 3, Sales (given) 3, (3, ) x 100 (1,500) 100 (balance) (1,500) 100 Gross Profit (Balance) 1, , (3, ) x 120 Introducing opening and closing inventory. During September, your business had sales of \$148,000, which made a gross profit margin of 25%. Purchases amounted to \$100,000 and opening inventory was \$34,000. What is the value of closing inventory? aft a full trading account: Sales Opening inventory Purchases 5

6 Put in the cost structure and figures you know Sales 148, Opening inventory 34,000 Purchases 100, , Complete figures for cost of sales and gross profit using either one as the balancing figure. Sales 148, Opening inventory 34,000 Purchases 100, , , (148, ) x 75 (148, ) x 25 37, If opening inventory + purchases = \$134,000 and cost of sales is \$111,000 then closing inventory must be the difference between the two figures of \$23,000 (134, ,000). The trading account will look as follows: Sales 148, Opening inventory 34,000 Purchases 100, ,000 (23,000) 111, (148, ) x 75 (148, ) x 25 37,

7 The accounting equation You should have seen the accounting equation at the start of your studies. We are going to use the following version as it will generally be profit/(loss) that you are trying to calculate. Profit/(Loss) = movement in net assets* capital introduced +drawings *net assets are total assets less total liabilities This can be applied as follows: A sole trader had opening net assets of \$10,000 and closing net assets of \$4,500. During the period, the owner introduced capital of \$4,000 and withdrew \$8,000 of drawings for their own use. Profit or loss during the period was how much? Movement in net assets capital introduced + drawings = Profit /(Loss) (4,500 10,000) - 4, ,000 = (1,500) Loss Examples of the sorts of questions you may get on incomplete Records Let s consider further examples of incomplete records questions and how you can apply the techniques to other styles of questions. Starting with a purchases example. Using the following information, calculate the value of purchases: Opening payables 142,600 Cash paid to suppliers 542,300 Discounts received from suppliers 13,200 Goods returned to suppliers 27,500 Closing payables 137,800 The figure for purchases will be? \$ Again start by drafting a payables account Payables Account Balance b/d 7

8 Balance c/d Balance b/d Now fill in the figures that you have starting with opening and closing balances. Payables Account Balance b/d 142,600 Balance c/d 137,800 Balance b/d 137,800 Now think about your purchase ledger control account and enter the transactions. Payables Account Cash paid (to suppliers) 542,300 Balance b/d 142,600 Discount received (from suppliers) 13,200 Returns outwards (to suppliers) 27,500 Balance c/d 137,800 Balance b/d 137,800 And finally, balance the account showing purchases as the balancing figure. Payables Account Cash paid (to suppliers) 542,300 Balance b/d 142,600 Discount received (from suppliers) 13,200 PURCHASES (balancing figure) 578,200 Returns outwards (to suppliers) 27,500 Balance c/d 137, , ,800 Balance b/d 137,800 8

9 Now practice one for yourself. Cook is a sole trader whose accounting records are incomplete. All the sales are cash sales and during the month \$50,000 was banked, including \$5,000 from the sale of a business vehicle. He paid \$12,000 wages in cash from the till and withdrew \$2,000 as drawings. The cash in the till at the beginning and end of the month was \$300 and \$400 respectively. There were no other payments in the month. What were the sales for the month? Balance b/d Cash Account Balance c/d Balance b/d The answer can be found at the end of the article. Now a trading account with inventory figures A sole trader who does not keep full accounting records wishes to calculate her sales revenue for the year. The following information is available opening inventory \$17,000, closing inventory \$24,000, purchases \$91,000 and gross profit margin is 40%. What are the sales and gross profit figures? Sales Opening inventory Purchases 9

10 Again the answer can be found at the end of the article. Incomplete records processes can also be used to identified lost or stolen goods On 31 December 2011 the some of the inventory of Green was destroyed by fire but the following information is available. Inventory at 1 December 2011 at cost 28,400 Purchases made during December ,600 Sales during December 2011 at selling price 64,800 \$ Remaining undamaged inventory at 31 December 2011 at cost 5,860 margin 30% aft a trading account as before, inputting all the information that you have Sales 64, Opening inventory 28,400 Purchases 49,600 78,000 Inventory destroyed by fire (5,860)? Apply your cost structure. Sales 64, Opening inventory 28,400 Purchases 49,600 78,000 Inventory destroyed by fire (64, ) x 70 (5,860)? 45,

11 (Balance) 19, Finally, opening inventory + purchases = \$78,000, cost of sales is \$45,360 with closing undamaged inventory of \$5,860 then the closing inventory lost in the fire must be \$26,780. \$ % Sales 64, Opening inventory 28,400 Purchases 49,600 78,000 Inventory destroyed by fire (5,860) (26,780) 45, (64, ) x 70 19, Another example; There is a \$100 cash float in the till at the year end Scone, but the accountant has discovered that some cash has been stolen. At the beginning of the year there was \$50 in the till and sales in the year were \$230,000. Cash and cheques banked from the till were \$160,000. Scone had paid wages of \$2,000 per month and made cash purchases of \$45,000. How much cash was stolen during the year? Open a cash account and put in all the information you have. Cash Account Balance b/d 50 Cash banked 160,000 Sales 230,000 Wages (12 x 2,000) 24,000 Purchases 45,000 Balance c/d 100 Balance b/d

12 Balance the account and the balancing figure should be the cash that has been stolen. This style of question could also be applied to a bank account or use drawings as the missing figure rather than cash stolen. Cash Account Balance b/d 50 Cash banked 160,000 Sales 230,000 Wages (12 x 2,000) 24,000 Purchases 45,000 CASH STOLEN (balance) 950 Balance b/d 100 Balance c/d , ,050 Answers to practice questions: Cash Account Balance b/d 300 Cash banked 50,000 Sale of vehicle 5,000 Wages 12,000 awings 2,000 SALES 59,100 Balance c/d ,400 64,400 Balance b/d 400 Trading account Sales (84,000 60) x , Opening inventory 17,000 Purchases 91, ,000 (24,000) 84, ,

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