Accounts from Incomplete Records

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 relevant account.

390 We have so far studied accounting records of firms, which follow the double entry system of book keeping. This gives us an impression that all business units follow this system. However, in practice all firms do not maintain accounting records as per the accrual system, and hence, the Generally Accepted Accounting Principles (GAAP) are not fully observed by them. Many small size enterprises keep partial records of their transactions. But, it is essential for them to know the profit or loss and the financial position of the firm for a year. This chapter deals with the ascertainment of profit or loss and financial position of the firm from its incomplete records. For this purpose, chapter is divided into three sections. Section I explains the meaning of incomplete records and reasons thereof. Section II deals with the ascertainment of profit or loss by statement of affairs method. Section III outlines the process whereby the profit or loss and financial position could be ascertained by using principles of double entry system. 9.1 Meaning of Incomplete Records Accounting records, which are not kept according to double entry system, are known as incomplete records. Though some may refer to it as single entry system it is a misnomer. There is no system defined as single entry system. It is also not a short cut method as an alternative to the double entry system. One can say that when a firm does not have a double entry system of book keeping, it is having partial records. Thus, records are usually referred to as incomplete records. ACCOUNTANCY Under such a situation, normally transactions of cash, debtors and creditors are recorded by maintaining cashbook, debtors and creditors accounts. Other information relating to assets, liabilities, expenses and revenues are partially recorded which requires careful scrutiny to prepare the accounts. 9.2 Reasons for Incomplete Records Incomplete records may be due to partial recording of transactions as is the case with small shopkeepers such as grocers and vendors. In case of large sized organisations, the accounting records may be rendered to the state of incompleteness due to natural calamity, theft or fire. Thus, partial recording of business transactions may takes place due to: Lack of knowledge about double entry system. Deliberate omission to maintain records to take advantage of taxation. Unable to maintain his/her business transactions because of the time, effort and cost involved. Loss of records due to fire, theft or natural calamity. 9.2.1 Limitations of Incomplete Records Incompleteness of accounting records by itself is a drawback of the system. Following are the limitations of partial records: Arithmetical accuracy of transactions recorded in the books cannot be checked from

ACCOUNTS FROM INCOMPLETE RECORDS 391 incomplete records because trial balance cannot be prepared. Internal checks cannot be enforced, which increase the chances of cheating and fraud. Correct ascertainment and evaluation of the financial results of business operations cannot be made. This hampers the future decisions about the business. 9.3 Accounts from Incomplete Records It is necessary to know the result of business activities to assess the efficiency and success or failure of the organization. This gives rise to the need for preparing the financial statements to disclose: The profits made or loss sustained by the firm during a given period, and To disclose the amount of assets and liabilities as at the closing date of the accounting period. This is true even for firms which have incomplete records. The problem faced in this situation is how to ascertain profit or loss for an accounting year and determine the financial position of the entity at the end of that year form the incomplete records. This problem can be solved by- Ascertaining the profit or loss by preparing the Statement of Affairs at the beginning and at end of the accounting period, and then analyse the changes in owner s equity during the accounting period. Preparing profit and loss account and balance sheet by putting the accounting records in proper order. 9.3.1 Ascertainment of Profit or Loss by preparing the Statement of Affairs Under this method, statement of assets and liabilities at the beginning and at the end of the relevant accounting period are prepared to ascertain the change in owners equity at the end of accounting period. This is followed by the statement showing ascertainment of profit by analyzing non operating changes in owner s equity. The statements so prepared show assets on one side and the liabilities on the other just as in case of a balance sheet. The difference between the totals of the two sides is known as owner s equity. This can be also expressed in the form of accounting equation as follows: Assets = Liabilities + Owner s Equity The above equation is rearranged to ascertain the owner s equity as follows- Owner s Equity = Assets Liabilities Conversely, there may be a situation when the liabilities may exceed the total assets. In such a case, the difference will indicate loss carried forward from the previous year. In this case, owner s equity will be negative. Though the Statement of Affairs appears to resemble with the balance sheet, but it is not a balance sheet, because the balances of various assets and liabilities are not derived from the ledger accounts. The difference between owner s equity at two points, i.e. opening and closing, represents the increase or decrease

392 which is to be adjusted for withdrawals made by the owner and the new capital introduced by the him during the accounting period to ascertain the change in owner s equity due to operating activities. In case, the balance is positive it will indicate the profit earned during the year, while in case of negative balance it will be the loss sustained by the firm. To ascertain the profit or loss, following steps are to be taken: Step 1 Calculate owner s equity at the beginning (opening owner s equity) and at the end of the period (closing owner s equity). Step 2 Subtract the opening balance of owner s equity from closing balance of owner s equity. Here, there may be two situations: (i) The change in owner s equity may be positive, i.e., excess of closing owner s equity over opening owner s equity. (ii) The change in owner s equity may be negative, i.e., excess of opening owner s equity over closing owner s equity. Step 3 In case of introduction of fresh capital and/or withdrawals made by the owner the following adjustments are required: (i) Subtract the amount of capital introduced during the period from the amount calculated in step 2. (ii) Add the amount of withdrawals made by the owner during the ACCOUNTANCY period to the amount calculated in step 2. Step 4 If the net result is positive, it represents profit and if it is negative, it represents earned loss sustained during the accounting year. This process of measuring profit or loss is summarized as follows: Profit (Loss) = O 1 O 0 + d I where; O 0 = A 0 L 0 O 1 = A 1 L 1 O 0 = Owner Equity at the beginning A 0 = Assets at the beginning L 0 = Liability at the beginning O 1 = Owner s Equity at the end A 1 = Assets at the end L 1 = Liability at the end I = Introduction or addition to the capital during the period D = Withdrawals during the period O = Change in owner s equity Illustration 1 (Preparation of Statement of Profit) Calculate the profit or loss from the following data: Withdrawals by the proprietor during the year 30,000. Capital at the beginning of the year i.e., 1 Jan. 2001 1,20,000. Capital at the end of the year i.e., 31 Dec 2001 2,00,000. Capital brought in by the proprietor during the year 50,000.

ACCOUNTS FROM INCOMPLETE RECORDS 393 Solution Statement of Profit for the year ended 31-12-2001 Particulars Amount Owner s equity as on 31 December (O 1 ) 2,00,000 Less : Owner s equity as on 1 January (O 0 ) 1,20,000 Change in owner s 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 Illustration 2 (Preparation of Closing Statement of Affairs) Bharat started his readymade garments business on January 1, 2001 with a capital of 50,000. He was pur-chasing readymade dresses of well-known brands. He was able to procure credit from the suppliers. There were a few shopkeepers from nearby markets who were also purchasing from him on credit basis. During the year, he introduced fresh capital of 15,000. He withdrew 10,000 for his personal use. On Dec 31, 2001 his position was as follows: Accounts payable 90,000; Accounts Receivable 1,25,600; Stock 24,750; Cash at Bank 24,980 Calculate profit and loss made by Bharat during the first year of his business, using (i) Statement of Affairs Method (ii) Equations Method. Solution I. Statement of Affairs Method Books of Bharat Statement of Affairs as on 31.12.2001 Liabilities Amount Assets Amount Accounts Payable 90,000 Cash at Bank 24,980 Accounts Receivable 1,25,600 Owner s Equity 85,330 Stock 24,750 1,75,330 1,75,330

394 ACCOUNTANCY Statement of Profit for year ending 31-12-2001 Particulars Amount Owner s equity as on 31 December (O 1 ) 85,330 Less : Owner s equity as on 1 January (O 0 ) 50,000 Change in owner s equity ( 0 ) 35,330 Add : Drawings (D) 10,000 45,330 Less : Additional capital introduced (I) 15,000 Profit made during the year (P) 30,330 II. Equations Method O = A - L (1) 1 1 1 O 0 = A 1 - L 1 (2) P = O - O D I 1 0 + (3) where : O 1 = Closing Capital as on 31.12.2001 A 1 = Assets as on 31.12.2001 L = Liability as on 31.12.2001 1 O 0 = Opening Capital as on 1.1.2001 A 0 = Assets as on 1.1.2001 L 0 = Liability as on 1.1.2001 D = Drawings during the year 2001 I = Introduction of additional capital during the year P = Profit and Loss for the year O = Change in owners equity Calculation of Assets as on 31.12.2001 Cash at Bank 24,980 Account Receivable 1,25,600 Stock 24,750 Assets (A 1 ) 1,75,330 Calculation of Liabilities as on 31.12.2001 Accounts Payable 90,000 Liability (L 1 ) 90,000 Calculation of Owners equity as on 31.12.2001 O 1 =A 1 - L 1 O 1 = 1,75,330 90,000 Owners equity 85,330 Ascertaining Profit or Loss during the year P = O 1 - O + D I 0 = (85,330 50,000) + 10,000 15,000 = 35,330 + 10,000 15,000 = 45,330 15,000 Profit = 30,330 Illustration 3 (Preparation of opening and closing statement of Affairs) Akhilesh runs ABC printers, a small printing firm. He was maintaining only some records, which he thought, were sufficient to run the business. On 1 April 2000 available information from his records indicated that ABC printers had the following assets and liabilities: Printing Press 5,00,000; Building 2,00,000; Stock of press material 50,000; Cash at bank 65,600; Cash in Hand 7,980; Dues from customers 20,350; Payments due to Accounts Payable 75,340; and Wages pending to workers 5,000. He withdrew 8,000 every month for meeting his expenses. He had

ACCOUNTS FROM INCOMPLETE RECORDS 395 also introduced 15,000 during the year as additional capital. On 31 March 2001 his position was as follows: Press 5,25,000; Building 2,00,000; Stock of press material 55,000; Cash at Bank 40,380; Cash in hand 15,340; Dues from Customer 17,210; Payments due to accounts payable 65,680. Using Statement of Affairs method, calculation the profit made by ABC printers during the year. ABC Printers Statement of Affairs as on 31.3.2001 Liabilities 1.4.2000 31.3.2001 Assets 1.4.2000 31.3.2001 Accounts 75,340 65,680 Printing Press 5,00,000 5,25,000 Payable Wages pending 5,000 - Building 2,00,000 2,00,000 Change in Owner s equity 7,63,590 7,87,250 Stock of press 50,000 55,000 Material Dues from 20,350 17,210 customers 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 Particulars Amount Owner s equity as on 31 Dec. (O 1 ) 7,87,250 Less : Owner s equity as on 1 Jan.(O 0 ) 7,63,590 Change in owner s equity (D 0 ) 23,660 Add : Drawings (D) 8000 x 12 96,000 1,19,660 Less : Additional capital introduced (I) 15,000 Profit made during the year (P) 1,04,660 9.4 Preparation of Profit and Loss Account and Balance Sheet from Incomplete Records Generally, the Statement of Affairs method is used where it is difficult to compile even a reasonable summary of cash transactions. There is a need to obtain as far as much information as possible about the assets and liabilities at the beginning as well as at the close of the year. Bank

396 balance can be obtained from the passbook and cash book with bank column. Value of fixed assets, may be ascertained from the purchase documents if available with the trader or estimated by inquiring from the supplier of such an asset. Information should be obtained from the various documents/vouchers such as invoices for sales and purchases receipts for a payment made and cash obtained. In some firms detailed information may be available about business activities. If details of accounts payable, purchases, cash received, sales, accounts receivable, bills receivables, bills payable, cash payments, with cash summary of transactions are available, it may be possible to workout some of the missing figures by using the logic of double entry system of accounting. This in turn, will help in the preparation of Profit and Loss Account and Balance Sheet. Hereunder, we demonstrate how available information can be used to prepare the accounts to ascertain missing figures, which will help in preparation of Profit and Loss account and Balance Sheet. ACCOUNTANCY 9.4.1 Ascertainment of Missing Information about Credit Purchases and Payables Credit purchases and Accounts Payables (creditors and bill payables) are interconnected. Therefore, missing information about the credit purchases and any item relating to creditors and bills payables can be obtained by preparing these accounts simultaneously. Typical Accounts Payable and Bills Payable accounts are given in (figure 11.2). When available information is placed in these two accounts, one can ascertain which items are missing. The connecting items between Bills Payable and Accounts Payable accounts are: bill accepted during the year against credit purchases, and dishonoured bills payable. By making use of connecting items, missing information can be ascertained. For example, to calculate missing information about purchases, the bills payable account is to be completed/ closed. Once the bills payable account is completed with all the required items then accounts payable account needs to be completed. The total credit purchases made during the year will be available on the credit side of accounts payable account. By adding cash purchases (available from the cashbook summary) to this figure we obtain total purchases made during the period. If there are purchase returns, they have to be deducted from the total purchases to get the net purchases. This figure of net purchases can be placed on the debit side of the Profit and Loss Account.

ACCOUNTS FROM INCOMPLETE RECORDS 397 Dr. Total Creditors Account Cr. Particulars Amount Particulars Amount 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 **** ***** ***** Dr Bills Payable Account Particulars Amount Particulars Amount Bank (bills matured) **** Opening Balance **** Creditors **** Creditors **** (Bills accepted) (Bills dishonoured) **** Closing balance **** ***** ***** Cr Figure : 11.2 Illustration 4 (Computation of credit purchases) The following information is available to you from the books of M/s Linsa Traders. Prepare accounts payable account to find out the missing information, if any. Cash paid to accounts payable 15,000 Cheques paid through bank 10,000 Bills endorsed Rs 14,500 Bills accepted during the year 35,000 Discount received 5,000 Purchases returns 2,500 Opening balance of accounts 15,000 payable as on 1 April 2002 Cheques dishonoured 8,000 Bills dishonoured (bills payable) 10,000 Balance of accounts payable 25,000 as on 31 March 2003

398 ACCOUNTANCY Solution M/s Linsa Traders Dr. Accounts Payable Account Cr. Date Particulars J.F Amount Date Particulars J.F Amount 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 Illustration 5 (Calculation of net purchases) From the following information, you are required to calculate Net purchases: Opening Balance of Bill Payable 15,000 Opening Balance of Creditors 18,000 Closing Balance of Bills Payable 21,000 Closing Balance of Creditors 12,000 Bills Payable honoured by firm 26,700 during the year Returns outwards 3,600 Cash Purchases 77,400 Cash paid to Creditors 90,600 Solution Dr. Total Creditors Account Cr. Date Particulars J.F Amount Date Particulars J.F Amount Bills Payable 32,700 1 Opening Balance 18,000 Bills issued during the year) Credit Purchases 1,20,900 2 (Balancing figure) Returns outward 3,600 Cash 90,600 (Bills honoured) Closing balance 12,000 1,38,900 1,38,900

ACCOUNTS FROM INCOMPLETE RECORDS 399 Solution Dr. Bills Payable Account Cr. Date Particulars J.F Amount Date Particulars J.F Amount Cash 26,700 Opening balance 15,000 (Bills honoured) Closing balance 21,000 Total Creditors 32,700 1 (Balancing figure) Bills issued during the year 47,700 47,000 Calculation of Net Purchases Particulars Amount Cash Purchases 77,400 Add: Credit Purchases 1,20,900 2 Total Purchases 1,98,300 Less: Returns Outward 3,600 Net Purchases 1,94,700 9.4.2 Ascertainment of Missing Information about Credit Sales and Receivables As you have already studied in the chapter 6 based on bills of exchange, that in the present times sales are made against bills receivables by raising bills of exchange on the customers. Only when accepted by the customers, the bills of exchange become bills receivable. It is to be noted that credit sales, Debtors and bills receivable are interrelated. Debtors and Bills Receivable account are therefore, prepared simultaneously. The formats of Accounts Receivables (total debtors and Bills Receivable) are as follows:

400 ACCOUNTANCY Dr. Total Debtors Cr. Particulars Amount Particulars Amount 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 **** ***** **** Dr. Bills Receivable Cr. Particulars Amount Particulars Amount Cash (bills honoured) **** Opening Balance **** Bank and Discount **** Debtors **** (Bills discounted) (bills received) Debtors (Bills **** Retained & Dishonored) Accounts Payable **** (endorsed to creditors) Closing Balance **** ***** ***** The linking items between the accounts receivable and bills receivable are: Bills receivable by customers during the period and bills receivable dishonoured during the period. By making use of connecting items missing information can be ascertained. For example, to calculate missing information about net sales, at first stage, bills receivable account is to be completed. After completing the bills receivable accounts with all the items, one can attempt to complete the accounts receivable account. Once all the items in both the account are available the credit sales during the period is ascertained. This must be added to the cash sales figure available from the cash book summary to obtain total sales for the period. In case any information is available regarding

ACCOUNTS FROM INCOMPLETE RECORDS 401 sales returns, it is deducted from the total sales to obtain net sales. The figure of net sales is placed on the credit side of Profit and Loss Account. 9.4.3 Preparing summary statement of cash transaction to ascertain missing information Summary of cash transactions record the cash receipts and cash payments. Cash receipts indicates opening balance of cash and receipts on account of cash sales, cash received from debtors, cash collected on maturity of bills receivable and other receipts such as interest, commission and tax refund. The cash payments includes payment to creditors, payment on retirements of bills payables, payments of dues, expenses and taxes. The with-drawals made by the proprietor/ partner is also shown on the payments side along with the closing balance. While preparing a cash book summary one may find a missing figure. In case of bank transactions, a bank overdraft appears on the other side. The balancing figure has to be carefully identified as the missing figure. To ascertain missing information for preparation of final accounts, all the information available should be carefully recorded by simultaneously opening relevant accounts. Then, balance those accounts, which have only one missing information pass transfer entries by making use of connecting items. Particulars Closing Assets (except stock) and Liabilities, Capital. Opening Assets, Liabilities and Capital Purchases (Cash and Credit) Sales (Cash and Credit) Expenses and Revenues Losses and Gains Bills Receivable received Bills Payable accepted Opening and Closing balance of Cash Source of Information Closing Statement of Affairs Opening Statement of Affairs Accounts Payable, Purchases Account, Cash Summary Statement Cash Sales from Cash Summary, Credit Sales from Accounts Receivable Account and Sales Account As per Cash Summary Statement and additional information for outstanding and prepaid expenses From all the accounts and scattered information Bills receivable Account/Account Receivable Account Bills Payable Account/Accounts Payable Account Summary of Cash and bank transactions. Figure 11.2: Detecting the Missing Information

402 Illustration 6 (Preparation of Accounts Receivable Account) From the following information supplied by Excel Enterprises of Ganesh, prepare the accounts receivable account and find out the missing figure, if any. Opening balance of Accounts Receivable as on 1 April 2002 1,00,000 Bills Receivable dishonoured ACCOUNTANCY during the year 10,000 Cheque dishonoured (Bank) 5,000 Cash received from Accounts Receivable 25,000 Cheque received and deposited 10,000 in the bank Discount Allowed 4,500 Bad debts 2,500 Sales Returns 6,000 Closing balance of Accounts 10,000 Receivable as on 31 March 2002 Solution Dr. Accounts Receivable Account Cr. Date Particulars J.F Amount Date Particulars J.F Amount 1 Apr Opening balance of 1,00,000 Cash (received from 25,000 Accounts Receivables Accounts Receivable) Balance b/f 2000 Bills Receivables 10,000 Bank (cheque 10,000 (Dishonoured) received) Bank 5,000 Discount allowed 4,500 (cheque dishonoured) Bad debts 2,500 Sales returns 6,000 Bills receivable 57,000 (Balancing figure being bills receivable issued during the year) Balance c/f 10,000 (Closing balance of of Accounts Receivables) 1,15,000 1,15,000 Illustration 7 (Ascertainment of Credit Sales) From the following information, Calculate the accounts of credit sales Transactions 1.1.2000 31.12.2000 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

ACCOUNTS FROM INCOMPLETE RECORDS 403 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 Dr. Tatal Debtors Account Cr. Date Particulars J.F Amount Date Particulars J.F Amount 2000 2000 1 Jan Balance b/f 30,000 31 Dec Cash 1,48,500 Bills Receivable 7,500 (Collected from (Dishonoured) accounts Sales 1,77,000 receivable) (Balancing figure) Discount 1,500 being credit sales Bills receivable 31,500 1 (Transfer from bills receivable account) Return Inwards 6,000 Bad Debts 4,500 Balance c/f 22,500 2,14,500 2,14,500 Solution Dr. Bills Receivable Account Cr. Date Particulars J.F Amount Date Particulars J.F Amount 2000 2000 1 Jan Balance b/f 9,000 31 Dec Cash 21,000 Accounts Receivable 31,500 Accounts 7,500 Receivable (B/R received) (Dishonoured) (Balancing figure Balance c/f 12,000 being bills receivable during the year) 40,500 40,500

404 ACCOUNTANCY Illustration 8 (Colcutation of Net Sales) From the following information calculate the net sales made during the year. Transactions Amount Debtors on 1.1.2000 61,200 Cash received from debtors 1,82,400 during the year Returns Inward 16,200 Accounts Receivable on 82,800 31.12.2000 Bad Debts 7,200 Cash Sales as per Cash Book 1,69,200 Solution I Calculation of Credit Sales made during the year Dr. Accounts Receivable Account Cr. Date Particulars J.F Amount Date Particulars J.F Amount 2000 2000 1 Jan Balance b/d 31 Dec Cash 1,82,400 (Opening Bal) 61,200 received from Sales 2,27,400 Accounts (Balancing figure) Receivable) being credit sales Return Inwards 16,200 Bad Debts 7,200 Balance c/f 82,800 (Closing Balance) 2,88,600 2,88,600 II Calculation of Net Sales during the year Particulars Amount 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

ACCOUNTS FROM INCOMPLETE RECORDS 405 9.5 Preparation of Final Accounts Let us now take up few comprehensive illustrations and study how complete final accounts can be prepared from incomplete records. Illustration 9 Roshan Washing House did not keep his book of accounts under double entry system. From the following information available from his records, prepare Profit and Loss account for the year ending 31-3-2000 and a balance sheet as on that date, depreciating the washing equipment @ 10%. Receipts Amount Payments Amount 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 receivables Drawings 8,000 Balance c/f 28,000 (Closing balance) 78,000 78,000 Other Information 31.3.2000 31.3.2001 Accounts Receivable 9,000 12,000 Accounts Payable 14,400 6,800 Stock of Materials 10,000 16,000 Washing Equipment 40,000 40,000 Furniture 3,000 3,000 Discount allowed during the year 1,400 Discount Received during the year 1,700 Solution Dr. Accounts Receivable Account Cr. Date Particulars J.F Amount Date Particulars J.F Amount 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

406 ACCOUNTANCY Dr. Accounts Payable Account Cr. Date Particulars J.F Amount Date Particulars J.F Amount Cash 20,000 Balance b/f 14,400 Discount 1,700 (Opening) Received Credit Purchase 14,100 Balance c/f (Closing) 6,800 (Balancing Figure) 28,500 28,500 Statement of Affairs as on 1-4-2000 Particulars Amount Particulars Amount Accounts Payable 14,400 Washing Equipment 40,000 Owner s Equity 55,600 Furniture 3,000 (Balancing Figure) Stock of Material 10,000 Accounts Receivable 9,000 Cash 8,000 70,000 70,000 Dr. Profit and Loss Account for the year ending 31-3-2000 Cr. Particulars Amount Amount Particulars Amount Amount Opening Stock 10,000 Sales: Purchases: Cash 40,000 Cash 14,000 Credit 34,400 74,400 Credit 14,100 28,100 Cartage 2,000 Closing Stock 16,000 Gross Profit c/f 50,300 90,400 90,400 Sundry Expenses 6,000 Gross profit b/f Discount Allowed 1,400 Discount Received 50,300 Depreciation on 4,000 washing equipment 1,700 Net Profit transferred to 40,600 Capital a/c 52,000 52,000

ACCOUNTS FROM INCOMPLETE RECORDS 407 Balance Sheet as on 1-3-2001 Liabilities Amount Assets Amount Owner Equity 55,600 Washing equipment 40,000 Add: Net Profit 40,600 Less: Depreciation 4,000 36,000 96,200 Furniture 3,000 Less: Drawings 8,000 88,200 Stock of materials 16,000 Accounts 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 Incomplete Records: Incomplete records refer to lack of accounting records according to the double entry system. Degree of incompleteness may vary from highly disorganized records to organized but still not complete. Difference between Statement of Affairs and Balance Sheet: A Statement of Affairs is a statement showing various assets and liabilities of a firm on date, with difference between the two sided denoting owner s equity. Since the records are incomplete, the values of assets and liabilities are normally estimates based on information available. They are not the balances taken from properly maintained ledger like in the case of Balance Sheet. The balance sheet is derived from a set of books maintained on the basis of double entry system. Computation of Profit and Loss from Incomplete Records: The statement of affairs is used to 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 of affairs are prepared to find out opening and closing equity amounts. To the difference between the closing and opening equity, any sum withdrawn from business are added back and any additional capital introduced during the year are deducted. To find out Profit and Loss made for the period. Preparation of Profit and Loss Account and Balance Sheet: When cash summary of a firm is available along with information about personal accounts of creditors and customers, an attempt can be made to prepare the Profit and Loss Account and Balance Sheet. Missing figures about purchases, sales, debtors, and creditors can be obtained by preparing performa accounts of debtors, creditors, bills receivables and bills payable using the logic of double entry system. Once a Profit and Loss Account and Balance Sheet are prepared, it will be possible for the firm to start a complete accounting system for future.

408 ACCOUNTANCY EXERCISES Objective Type Questions 1. Multiple Choice Questions (a) Incomplete records are generally found in use by (i) Small Traders (ii) Society (iii) Company (iv) Government (b) When Closing Owner s Equity is greater than Opening Owner s Equity, it denotes (i) Profit (ii) Loss (iii) Profit, if there is no introduction of fresh capital (iv) No profit no loss (c) If owner s equity in the beginning is Rs 21,000. Fresh capital introduced during the year is 7,000. Amount withdrawn during the year is 13,000, then the closing owner s equity will be: (i) 27,000 (ii) 15,000 (iii) 41,000 (iv) 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

ACCOUNTS FROM INCOMPLETE RECORDS 409 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 owner s equity is Rs 1,000; opening owner s equity is 500; profit is Rs 700, 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 owner s equity at the end of the period represents. 3. Calculate the following amounts (a) Calculate value of Opening Stock Purchases 17,500 Sales 45,000 Closing Stock 13,000 Gross Profit @ 33 1/3 % on Sales. (b) Calculate the amount of closing stock Opening Stock 17,500 Purchases 37,500 Sales 60,000 Gross Profit @ 25% on Cost. (c ) Mr. Anshul started a business on 1.1.96 without maintaining proper accounts. On personal Inquiries and scruting of other papers the following information is obtained. 1996 1997 Purchases 74,000 68,500 Sales 75,000 90,000 Closing Stock 30,000 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 Purchases and Closing Stock in Trade. Particulars 1.1.98 31.12.98 Account Receivables 31,800 26,500 Account Payables 24,000 16,000

410 ACCOUNTANCY 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 of accounting records? Long Answers Questions 9. What is meant by a Statement of Affairs? How can the Profit or Loss of a trader be ascertained with the help of a Statement of Affairs? 10. Is it possible to prepare the Profit and Loss Account and the Balance Sheet from 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 owner s equity and closing owner s equity (b) Credit sales and credit purchases (b) Payments to creditors and collection from debtors (c) Closing balance of cash

ACCOUNTS FROM INCOMPLETE RECORDS 411 13. Jeevan Lal owns a tailoring shop. He does not maintain complete double entry books of accounts. From the following information, help Jeevan Lal to prepare Statement of Affairs and Profit earned during the year ending 31 December 2001. Particulars Amount () Amount () 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 entry books of accounts. From the following details determine the Profit for the year and Statement of Affairs at the end of the year. Rs 10,000 (cost) furniture was sold for Rs 50,000 on 1 January 2001; 10% depreciation is to be charged on furniture. Mr Kishan has drawn Rs 10,000 per month. An amount of Rs 20,000 was invested by Mr Kishan in 2001. Particulars 1 Jan 2001 31 Dec 2001 () () 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 31 December 2001 as per bank statement. Rs 20,000 cheques drawn in December, 2001 have not been encashed within the year. 15. The following figures are available with Suresh who keeps his books on Single Entry System

412 ACCOUNTANCY Particulars 1-1-98 31-12-98 () () 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 10,000 Cash Paid against Acceptance 14,300 Payment made to Creditors 14,700 Discount allowed to Customers 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 following information for the year 31 March 2001. Summary of Cash Book Dr. Cr Particulars Amount Particulars Amount Balance at Bank 43,500 Ranjan s Drawings 1,55,200 Accounts Receivables 3,84,000 Accounts Payable 2,71,000 Bills Payable 93,000 Accounts Receivable 1,20,000 Wages 3,20,000 realised Salaries 1,65,000 Commission 15,000 Rent and taxes 44,000 receives Insurance 8,000 Cash sales 4,86,000 Carriage 12,000 Balance c/d Advertising 13,300 10,82,000 10,82,000

ACCOUNTS FROM INCOMPLETE RECORDS 413 Particulars of other assets and liabilities Particulars Amount Amount 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 6,000 Machinery 1,20,000 1,20,000 A provision of Rs 14,500 is required for doubtful debts and depreciation at 15% is written off on machinery and furniture. Rs 30,000 is outstanding for wages and 12,000 for salaries. Insurance has been paid to the extent of 2,500. Legal expenses outstanding are 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 with Balance Sheet on that date. Summary statement of transactions Particulars Amount Particulars Amount 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 1,50,000 expenses Accounts payable paid

414 ACCOUNTANCY Further details are: Particulars Amount Amount Particulars Amount Amount 1 April 31 1 April 31 March 2001 March 2001 2002 2002 Stock 90,000 1,02,200 Furniture 10,000 10,000 Accounts 80,000 55,000 Payable Office 1,50,000 1,50,000 premises Debtors 3,00,000 3,00,000 Provide 5% interest on Kishore s Capital balance as on 1 April 2001. Provide Rs 15,000 for doubtful debts, 5% depreciation on all fixed assets, 5% group incentive commission to staff has to be provided for on net profit after meeting all expenses and commissions. 18. Babulal,keeps a cash book, carbon copies of the customers statements, which are marked 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 : Particulars Amount Particulars Amount Debt due by 2,32,430 Rent rates and taxes 10,200 customers 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 4,800 5,600 Particulars 1 July 30 Particulars 1 July 30 June 2001 June 2001 2002 2002 Balance at 18,200 Crediors 16,320 Bank Rent 11,460 1,750 Till float 300 Trade 1,500 960 on imprest expenses 3,200 system Delivery van 740 Debtors 12,620 14,790 Stock 17,400 19,250

ACCOUNTS FROM INCOMPLETE RECORDS 415 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 1 April 2001 with 45,000 as capital. She maintains books on single entry system. On 31 March 2002, books revealed the following information: Account Payable 25,000 Furniture and Fittings 50,000 Stock of ready-made garments 40,000 Accounts Receivables 45,000 Cash 10,000 Drawings 750 per month Additional Capital introduced: 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 31 March 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 10,000 on hand and deposit the balance in the bank. The inventories for for the year ended 31 December 2001 are lost. However, he informs you that he has sold goods invariably at a price which yields him a profit of 33.33 % on cost. From the following information supplied to you, prepare Profit and Loss Account and a Balance Sheet for the year ended 31 December 2001. Assets and Liabilities 1 Jan 2001 31 Dec 2001 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 3,50,000 2,80,000 N.A.

416 ACCOUNTANCY Analysis of the bank pass book reveals the following information: Particulars Amount 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() 31 Dec 2000() 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 1 1996. He opened a bank account for the business with 25,000 and immediately spend Rs 12,500 on fixtures and fittings. The only records kept were of cash Sales which amounted to 37,500 in 1996 and 45,000 in 1997. There were no Credit Sales. The following facts were ascertained.

ACCOUNTS FROM INCOMPLETE RECORDS 417 (1) All expenses of the business had been met by cheque, and an analysis of the bank pass book showed the following payments in 1996 and 1997: Purchases (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 15, 000. No stock was taken on 31 December 1996,but a uniform rate of gross profit may be assumed. (3) Liabilities outstanding and on 31 December 1997, were : Purchases 7,500 Advertising 500 Other expenses (light, heat, telephone, etc.) 170 (4) Amounts paid in advance at 31 December 1997 were: Rates 100 Other 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 500 in 1996 and Rs 7,50 in 1997. (7) Private Drawings amounting 6,620 were met out of cash received and balance was banked. (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 Cash Book for the year ended 31 December 1993, is as follows: Cash Receipts: From Accounts Receivables 41,000 From Cash Sales 37,000 From Saxena as additional Capital on 1 April 1993 10,000 Total Cash Receipts 88,000

418 ACCOUNTANCY Cash Payments: Cash Purchases 24,000 Paid to Accounts Payables 16,200 Productive Expenses 5,400 Salary Paid 8,100 Sundry Expenses 6,500 New Furniture purchased 4,000 Private Payments 7,800 Total Cash Payments 72,000 Assets and Liabilities as on: 31 Dec. 1992 31 Dec. 1993 Accounts Receivables 12,000? Accounts Payables 6,200? Cash 8,000? Stock 20,200 16,100 Furniture 6,000 9,500 Other Information s (1) Credit Sales during the year were 48,000 (2) Sales Returns 2,600 (3) Credit Purchases during the year were 20,000 (4) Discount allowed to Debtors 200 (5) Discount received from creditors 300 (6) Bad Debts written off during the year were 1,200 Adjustments (1) Write off further bad debts 1,000 (2) Provide 5% for doubtful debts and 2% for discount on Accounts Receivables (3) Allow interest on Capital @ 10% per annum 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 ANSWERS

ACCOUNTS FROM INCOMPLETE RECORDS 419 3. Opening owner s equity 3,03,000 Closing owner s equity 3,86,000 Profit 83,000 4. Opening owner s equity 6,50,000 Closing owner s equity 6,30,000 5. Credit Sales 10,800 Credit Purchase 29,200 6. Opening owner s equity 4,16,500 Closing owner s equity 4,22,200 Profit during the year 1,60,900 Balance Sheet 5,31,700 7. Net profit 52,848 8. Gross Profit 45,800 Net Profit 18,170 Balance Sheet 55,740 9. Gross Profit 3,67,200 Net Profit 1,54,000 Balance Sheet 4,70,000 10. Gross Profit 3,10,000 Net Profit 1,40,000 Balance Sheet 5,60,000 11. Gross Profit 64,000 Net Profit 29,200 Balance Sheet 5,73,200 12. Gross Profit 12,500 15,000 Net Profit 800 3,300 Balance Sheet 31,650 13. Gross Profit 28,900 Net Profit 5,984 Balance Sheet 62,634