FINANCIAL ACCOUNTING

TOPIC TWO
INCOMPLETE BUSINESS RECORDS AND SINGLE-ENTRY RECORDS
2.1 Introduction
Incomplete records refer to a condition wherein; an establishment is not practising double-entry
bookkeeping. Instead, it is practising an unconventional accounting system, namely, a single-entry system,
to sustain a decreased amount of data about its financial results.

Under a single-entry system, it is reasonable to keep a cash-basis income statement, although not a
balance sheet. It is also feasible that the administrators of a firm, resolve to maintain a double-entry
bookkeeping system, but the accounting records are incomplete

Reasons for Incomplete Records:

• Fraudulent behaviour: Employees may voluntarily confuse or nevermore record some
transactions, that they can flee with the company assets or record extreme degrees of profitability.
• Inadequate systems: There may be an incomplete system of methods and helping authorities in
place that different business transactions are not recorded in the accounting system.
• Loss during the transition: A company may not sufficiently shield its old records when moving to
a new accounting system, and loses a few or all the old records.

Features of Incomplete Records:

The features of incomplete records are as under :
• It is an irregular process of recording transactions.
• Personal transactions of owners might be recorded in the cash book.
• To determine profit or loss or for taking any other data, certain figures can be obtained only from
the original vouchers such as sales or purchase invoice, etc.. Therefore, dependency on original
vouchers is necessary.
• Many companies maintain records according to their preference and requirements, and their
accounts are not relative due to lack of consistency.

The Major Differences in Single Entry Accounting and Double Entry Accounting System
• It can be defined as a system where only one aspect of each transaction is maintained i.e.,
either debit or credit, on the contrary in double method accounting system both these transactions
are recorded, and all the aspects of every transaction are
• Single entry transaction is simple and does not require detailed knowledge in accounts whereas
double entry transaction requires expertise
• Incomplete records are maintained in a single entry system while double entry captures both the
sides and records
• Single entry system maintains cash accounts and personal accounts while double entry system
maintains all kind of account, i.e., real, nominal and personal
• Since small firms do not have the financial capabilities and resources single entry accounting is
suitable on the contrary for large firms it is necessary to have a double entry accounting system
• Frauds and errors are more accessible to identify in double entry accounting system than in the
single entry system
• As compared with the double entry system, a single entry system has no standardization, and there
is no uniformity between the different businesses following the same method. Each business
maintains accounts as per its convenience and requirements.

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2.2 Statement of Affairs

This is really just a balance sheet, but is the name normally used when you are dealing with incomplete
records. When provided with some financial record one can use the records to generate a statement of
Affairs using the concept of the Accounting Equation were;
Asset= Equity +liabilities.
When provided with any of the two parts of the Equation the other parts can be calculated, and statement of
Affaires can be complete.

• Identifying profits when opening and closing capital are known

If you know the capital at the start of a period and the capital at the end of the period, profit is the figure
found by subtracting capital at the start of the period from that at the end of the period.

Let’s look at a business where capital at the end of 20X4 was £20,000. During 20X5 there have been no
drawings, and no extra capital has been brought in by the owner.
At the end of 20X5 the capital was £30,000.

Net profit = £30,000(This year’s capital) − £20,000 (Last year’s capital) = £10,000

If drawings had been £7,000, the profits must have been £17,000:
Last year’s Capital + Profits − Drawings = This year’s Capital
£20,000 + ? − £7,000 = £30,000
We can see that £17,000 profits is the figure needed to complete the formula:
£20,000 + £17,000 − £7,000 = £30,000

• Identifying profits when you only have a list of the opening and closing assets and liabilities
This uses the Accounting equation to find the missing figures, Illustration 2.1 shows the calculation of profit
where insufficient information is available to draft a trading and profit and loss account. The only information
available is about the assets and liabilities.

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Illustration 2.1
H Taylor has not kept proper bookkeeping records, but she has kept notes in diary form of the transactions
of her business. She is able to give you details of her assets and liabilities as at 31 December 20X5 and 31
December 20X6:
At 31 December 20X5
Assets: Van £6,000; Fixtures £1,800; Stock £3,000; Debtors £4,100; Bank £4,800; Cash £200. Liabilities:
Creditors £1,200; Loan from J Ogden £3,500.

At 31 December 20X6
Assets: Van (after depreciation) £5,000; Fixtures (after depreciation) £1,600; Stock £3,800; Debtors £6,200;
Bank £7,500; Cash £300.
Liabilities: Creditors £1,800; Loan from J Ogden £2,000. Drawings during 20X6 were £5,200.

Solution:
You need to put all these figures into a format that will enable you to identify the profit. Firstly, you need to
draw up a Statement of Affairs as at 31 December 20X5.
From the accounting equation, you know that capital is the difference between the assets and liabilities.

H Taylor Statement of Affairs as at 31 December 20X5

£ £
Fixed assets
Van 6,000
Fixtures 1,800
7,800
Current assets
Stock 3,000
Debtors 4,100
Bank 4,800
Cash 200
12,100
Less Current liabilities
Creditors ( 1,200)
Net current assets 10,900
18,700
Less: Long-term liability
Loan from J Ogden ( 3,500)
Net assets 15,200
Financed by:
Capital (Note 1) 15,200
Note 1: the accounting equation tells you that this must be the figure to use.
You now draw up a second statement of affairs, this time as at the end of 20X6. The formula of Opening
Capital + Profit − Drawings = Closing Capital is then used to deduce the figure of profit.

H Taylor Statement of Affairs as at 31 December 20X6

£ £
Fixed assets
Van 5,000
Fixtures 1,600
6,600

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Current assets
Stock 3,800
Debtors 6,200
Bank 7,500
Cash 300
17,800
Less Current liabilities
Creditors ( 1,800)
Net current assets 16,000
22,600
Less: Long-term liability
Loan from J Ogden ( 2,000)
Net assets 20,600

Financed by:
Capital
Balance at 1.1.20X6 15,200
Add Net profit (C) ?____
(B) ?
Less Drawings ( 5,200)
(A) _____?____
Deduction of net profit:
Opening Capital + Net Profit − Drawings = Closing Capital. Finding the missing figures (A), (B) and (C) by
deduction:
(A) is the same as the total of the top half of the balance sheet, i.e. £20,600;
(B) is therefore £20,600 + £5,200 = £25,800;
(C) is therefore £25,800 − £15,200 = £10,600.
To check:

Capital
Balance at 1.1.20X6 15,200
Add Net profit (C) 10,600
(B) 25,800
Less Drawings ( 5,200)
(A) 20,600

2.3 Using Accounting Ratios and Control Accounts with incomplete records.

If we know what the relationship between sales revenue, cost and profit is we can use this information to
help us to deduce missing information. Ratios express the relationship between financial statement iterms
and some of these ratios include margins and mark-ups, these are key in an incomplete records question.
• Margin
A ‘margin’ is the percentage of sales revenue that profit represents. I think of it as ‘margin on sales’ as you
would multiply the percentage margin by the sales revenue.

o Using margin to identify cost

If sales are £100 and your margin on sales is 10%, then you must have made a profit of £100 x 10% = £10.
We can use this information to deduce that our costs must be the sales revenue less the profit which is £90!
Alternatively you can think of it this way: if profit is 10% of sales then costs must be 90% of sales and £100
x 90% = £90 cost.

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o Using margin to identify sales

If you know that your margin on sales is 30% then your costs will be 70% of sales. If you know that your
costs are £140 (and that this is 70% of sales) then you can deduce that sales must be £140/70% (or
£140/0.7) giving £200!

• Mark-up
A ‘mark-up’ is the percentage of cost that profit represents. I think of it as ‘mark-up on cost’ as you would
multiply the percentage mark-up by the cost.

o Using mark-up to identify sales

If cost is £500 and the mark-up is 10% then the profit will be £50. Sales must be the cost plus the
profit which is £550! Another way to look at this is that since we add the mark-up of 10% to the cost, the
sales will be 110% of the cost and £500 x 110% (or £500 x 1.1) is £550.

o Using mark-up to identify cost

With a mark-up of 20% you know that sales will be 120% of (or 1.2 times) cost. If sales were £360 then we
can deduce that cost must have been £360/1.2 = £300!

Using control accounts in an incomplete records question

If we know some of figures that would sit in a control account we can often establish a missing figure using
a ‘balancing figure’ approach.

• Sales ledger control account (SLCA)

If we know that the opening balance on the SLCA is £100 owed to the business, that cash receipts from
credit customers in the period were £500 and that the closing balance on the SLCA was £120 then we can
deduce the value of credit sales made by balancing off the ledger account:

Sales ledger control account (SLCA)

£ £
Opening balance (known) 100 Receipts (known) 500
Credit sales (BF) 520
Closing balance (known) 120
620 620
.

So we can deduce that the incomplete record, credit sales (receivables), must have been £520.

• Purchase ledger control account

If we know that the opening balance on the PLCA is £250 owed by the business, that cash payments to
credit suppliers were £700 and that the closing balance on the PLCA was £280 then we can deduce that the
value of credit purchases must be:

Purchases ledger control account (PLCA)

£ £
Opening balance (known) 250
Payments (known) 700

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Credit purchases (BF) 730

Closing balance (known) 280
980 980

Credit purchases must be £730.

Using cost of sales with incomplete records question

Cost of sales (COS) consists of three key elements. It is calculated by adding

(1) opening inventory
(2) to purchases and
(3) then deducting closing inventory
If we know what the COS figure is, and we also know two of the elements that make up COS, we should be
able to deduce the third.

Let’s say that COS is £5,000, and that we know that

(1) opening inventory was £1,000 and
(2) that purchases were £5,200, but we don’t know the value of closing inventory
(3)?
Taking opening inventory plus purchases would give £1,000 + £5,200 = £6,200 so to get back to COS of
£5,000 we must be deducting closing inventory of £1,200!
Here’s an incomplete records question for you to try.

QN: At 1 January a business has inventory of £10,000 and trade payables of £40,000. During the year the
business made sales of £400,000 and achieved a profit margin of 25%. They paid credit suppliers a total of
£290,000 and at the end of the year trade payables were £65,000. On the 31 December a fire in the
warehouse destroyed all units of inventory. Can you help Sherlock Holmes to identify the value of the
inventory destroyed?

2.4 Re-constructs final accounts (financial statements).

The following example shows the various stages of drawing up financial statements from a single entry set
of records.

Illustration 2.2
The accountant has found the following details of transactions for J Frank’s shop for the year ended 31
December 20X5.

(a) The sales are mostly on credit. No record of sales has been kept, but £61,500 has been received
from persons to whom goods have been sold − £48,000 by cheque and £13,500 in cash.
(b) Amount paid by cheque to suppliers during the year = £31,600.
(c) Expenses paid during the year: by cheque: Rent £3,800; General Expenses £310; by cash:
Rent £400.
(d) J Frank took £250 cash per week (for 52 weeks) as drawings.
(e) Other information is available:

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At 31.12.20X4 At 31.12.20X5
£ £
Debtors 5,500 6,600
Creditors for goods 1,600 2,600
Rent owing – 350
Bank balance 5,650 17,940
Cash balance 320 420
Stock 6,360 6,800

(f ) The only fixed asset consists of fixtures which were valued at 31 December 20X4 at £3,300.
These are to be depreciated at 10 per cent per annum.

We shall now prepare the financial statements in five stages.

Stage 1
Draw up a Statement of Affairs on the closing day of the earlier accounting period:

J Frank Statement of Affairs as at 31 December 20X4

£ £
Fixed assets
Fixtures 3,300
Current assets
Stock 6,360
Debtors 5,500
Bank 5,650
Cash 320
17,830
Less Current liabilities
Creditors ( 1,600)
Net current assets 16,230
19,530
Financed by:
Capital (difference) 19,530
All of these opening figures are then taken into account when drawing up the financial statements
for 20X5.

Stage 2
Prepare a cash and bank summary, showing the totals of each separate item, plus opening and
closing balances.

Cash Bank Cash Bank

Balances 320 5,650 Suppliers 31,600
31.12.20X4
Receipts from 13,500 48,000 Rent 400 3,800
debtors
General Expenses 310
Drawings 13,000
Balances 420 17,940
31.12.20X5
13,820 53,650 13,820 53,650

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Stage 3
Calculate the figures for purchases and sales to be shown in the trading account. Remember that the
figures needed are the same as those which would have been found if double entry records had been kept.

Purchases: In double entry, ‘purchases’ are the goods that have been bought in the period irrespective of
whether they have been paid for or not during the period. The figure of payments to suppliers must,
therefore, be adjusted to find the figure for purchases.
£
Paid during the year 31,600
Less Payments made, but which were for goods purchased in a previous year
(creditors at 31.12.20X4) ( 1,600)
30,000
Add Purchases made in this year for which payment has not yet been made
(creditors at 31.12.20X5) 2,600
Goods bought in this year, i.e. purchases 32,600

The same answer could have been obtained if the information had been shown in the form of a total
creditors account, the figure for purchases being the amount required to make the account totals agree.
Total Creditors
Cash paid to suppliers 31,600 Balances b/d 1,600
Balances c/d 2,600 Purchases (missing figure) 32,600
34,200. 34,200

Sales: The sales figure will only equal receipts where all the sales are for cash. Therefore, the receipts
figures need adjusting to find sales. This can only be done by constructing a total debtors account, the sales
figure being the one needed to make the totals agree.

Total Debtors
Balances b/d 5,500 Receipts: Cash 13,500
Sales (missing figure) 62,600 Cheque 48,000
68,100 Balances c/d 6,600
68,100

Stage 4
Expenses. Where there are no accruals or prepayments either at the beginning or end of the accounting
period, then expenses paid will equal expenses used up during the period. These figures will be charged to
the trading and profit and loss account.
On the other hand, where such prepayments or accruals exist, an expense account should be drawn up for
that particular item. When all known items are entered, the missing figure will be the expenses to be
charged for the accounting period. In this case, only the rent account needs to be drawn up.

Rent
Bank 3, 800 Profit and loss (missing figure) 4,550
Cash 400
Accrued c/d 350
4,550 4,550

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Stage 5
Now draw up the financial statements.

J Frank Trading and Profit and Loss Account for the year ending 31 December 20X5
£ £
Sales (stage 3) 62,600
Less Cost of goods sold:
Stock at 1.1.20X5 6,360
Add Purchases (stage 3) 32,600
38,960
Less Stock at 31.12.20X5 ( 6,800)
(32,160)
Gross profit 30,440
Less Expenses:
Rent (stage 4) 4,550
General expenses 310
Depreciation: Fixtures 330
( 5,190)
Net profit 25,250

J Frank Trading Balance Sheet as at 31 December 20X5

£ £ £
Fixed assets
Fixtures at 1.1.20X5 3,300
Less Depreciation ( 330)
2,970
Current assets
Stock 6,800
Debtors 6,600
Bank 17,940
Cash 420
31,760
Less Current liabilities
Creditors 2,600
Rent owing 350
( 2,950)
28,810
Net current assets 31,780

Financed by:
Capital
Balance 1.1.20X5 (per Opening Statement of Affairs) 19,530
Add Net profit 25,250
44,780
Less Drawings 13,000
31,780
Reading Tasks
Read on the Incomplete records and missing figures (from page 430 of 433 in Frank
Wood {Business Accounting 1} Tenth Edition )

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REVIEW QUESTION FOR TOPIC TWO

Question One
F Lee started in business on 1 January 20X2 with £35,000 in a bank account. Unfortunately, he did not keep
proper books of account. He is forced to submit a calculation of profit for the year ended 31 December 20X5
to the Inspector of Taxes. He ascertains that at 31 December 20X2 he had stock valued at cost £6,200, a
van which had cost £6,400 during the year and which had depreciated during the year by £1,600, debtors of
£15,200, expenses prepaid of £310, a bank balance of £33,490, a cash balance £270, trade creditors
£7,100, and expenses owing £640. His drawings were: cash £400 per week for 50 weeks, cheque
payments £870. Draw up statements to show the profit or loss for the year.

Question Two
B Barnes is a dealer who has not kept proper books of account. At 31 October 20X3 his
state of affairs was as follows:
£
Cash 210
Bank balance 4,700
Fixtures 2,800
Stock 18,200
Debtors 26,600
Creditors 12,700
Van (at valuation) 6,800
During the year to 31 October 20X4 his drawings amounted to £32,200. Winnings from the Lottery
of £7,600 were put into the business. Extra fixtures were bought for £900.

At 31 August 20X4 his assets and liabilities were: Cash £190; Bank overdraft £1,810; Stock £23,900;
Creditors for goods £9,100; Creditors for expenses £320; Fixtures to be depreciated £370; Van to be valued
at £5,440; Debtors £29,400; Prepaid expenses £460.

Required
Draw up a statement showing the profit and loss made by Barnes for the year ended 31 October
20X4.

Question Three
The following is a summary of Jane’s bank account for the year ended 31 December 20X2:

Balance 1.1.20X2. 4,100 Payments to creditors for goods 67,360

Receipts from debtors 91,190 Rent 3,950
Balance 31.12.20X2 6,300 Insurance 1,470
Sundry expenses 610
Drawings 28,200
101,590 101,590

All of the business takings have been paid into the bank with the exception of £17,400. Out of this,
Jane has paid wages of £11,260, drawings of £1,200 and purchase of goods £4,940.

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The following additional information is available:

31.12.20X1 31.12.20X2
Stock 10,800 12,200
Creditors for goods 12,700 14,100
Debtors for goods 21,200 19,800
Insurance prepaid 420 440
Rent owing 390 –
Fixtures at valuation 1,800 1,600

You are to draw up a set of financial statements for the year ended 31 December 20X2. Show all of
your workings.

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