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.

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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.

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. Limitations Records of Incomplete

9.2.1

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

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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. Accounts from Incomplete Records

accounting records in proper order. 9.3.1 Ascertainment of Profit or Loss by preparing the Statement of Affairs

9.3

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

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 owners 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 owners equity. This can be also expressed in the form of accounting equation as follows:
Assets = Liabilities + Owners Equity

The above equation is rearranged to ascertain the owners equity as followsOwners Equity = Assets Liabilities

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 owners equity during the accounting period. Preparing profit and loss account and balance sheet by putting the

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, owners 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 owners equity at two points, i.e. opening and closing, represents the increase or decrease

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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 owners 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 owners equity at the beginning (opening owners equity) and at the end of the period (closing owners equity). Step 2 Subtract the opening balance of owners equity from closing balance of owners equity. Here, there may be two situations: (i) The change in owners equity may be positive, i.e., excess of closing owners equity over opening owners equity. (ii) The change in owners equity may be negative, i.e., excess of opening owners equity over closing owners 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

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) = O1 O0 + d I
where; O0 = A0 L0 O1 = A1 L1 O0 = Owner Equity at the beginning A0 = Assets at the beginning L0 = Liability at the beginning O1 = Owners Equity at the end A1 = Assets at the end L1 = Liability at the end I D = Introduction or addition to the capital during the period = Withdrawals during the period

O = Change in owners equity

Illustration 1 (Preparation of Statement of Profit) Calculate the profit or loss from the following data: Withdrawals by the proprietor during the year Rs. 30,000. Capital at the beginning of the year i.e., 1 Jan. 2001 Rs.1,20,000. Capital at the end of the year i.e., 31 Dec 2001 Rs. 2,00,000. Capital brought in by the proprietor during the year Rs. 50,000.

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Solution Statement of Profit for the year ended 31-12-2001

Particulars Owners equity as on 31 December (O1) Less : Owners equity as on 1 January (O0) Change in owners equity ( o) Add : Drawings (D) Less : Additional capital introduced (I) Profit made during the year (P) Amount Rs. 2,00,000 1,20,000 80,000 30,000 1,10,000 50,000 60,000

Illustration 2 (Preparation of Closing Statement of Affairs) Bharat started his readymade garments business on January 1, 2001 with a capital of Rs. 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
Solution I. Statement of Affairs Method

the year, he introduced fresh capital of Rs. 15,000. He withdrew Rs. 10,000 for his personal use. On Dec 31, 2001 his position was as follows: Accounts payable Rs.90,000; Accounts Receivable Rs.1,25,600; Stock Rs. 24,750; Cash at Bank Rs. 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.

Books of Bharat Statement of Affairs as on 31.12.2001

Liabilities Accounts Payable Owners Equity Amount Rs. 90,000 85,330 1,75,330 Assets Cash at Bank Accounts Receivable Stock Amount Rs. 24,980 1,25,600 24,750 1,75,330

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Statement of Profit for year ending 31-12-2001

Particulars Amount Rs. 85,330 50,000 35,330 10,000 45,330 15,000 30,330

Owners equity as on 31 December (O1) Less : Owners equity as on 1 January (O0) Change in owners equity (0 ) Add : Drawings (D) Less : Additional capital introduced (I) Profit made during the year (P)

II. Equations Method

O1 = A 1- L1 O0 = A1 - L1 P = O 1 - O0 + D I where : O1 A1 L1 O0 A0 L0 D I P = Closing Capital as on 31.12.2001 = Assets as on 31.12.2001 = Liability as on 31.12.2001 = Opening Capital as on 1.1.2001 = Assets as on 1.1.2001 = Liability as on 1.1.2001 = Drawings during the year 2001 = Introduction of additional capital during the year = Profit and Loss for the year
(1) (2) (3)

Calculation of Owners equity as on 31.12.2001 O1 = A1 - L 1 O1 = Rs. 1,75,330 90,000 Owners equity

Rs. 85,330

Ascertaining Profit or Loss during the year P = O 1 - O0 + D I = (85,330 50,000) + 10,000 15,000 = 35,330 + 10,000 15,000 = 45,330 15,000 Profit = Rs. 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 Rs. 5,00,000; Building Rs. 2,00,000; Stock of press material Rs. 50,000; Cash at bank Rs. 65,600; Cash in Hand Rs.7,980; Dues from customers Rs.20,350; Payments due to Accounts Payable Rs.75,340; and Wages pending to workers Rs.5,000. He withdrew Rs. 8,000 every month for meeting his expenses. He had

O = Change in owners equity Calculation of Assets as on 31.12.2001 Rs. Cash at Bank Account Receivable Stock Assets (A1) Calculation of Liabilities as on 31.12.2001 Accounts Payable Liability (L1) Rs. 90,000 90,000 24,980 1,25,600 24,750 1,75,330

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also introduced Rs. 15,000 during the year as additional capital. On 31 March 2001 his position was as follows: Press Rs. 5,25,000; Building Rs. 2,00,000; Stock of press material Rs. 55,000; Cash at Bank Rs. 40,380; Cash in hand Rs.15,340; Dues from Customer Rs.17,210; Payments due to accounts payable Rs. 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 Accounts Payable Wages pending Change in Owners equity 1.4.2000 Rs. 75,340 5,000 7,63,590 31.3.2001 65,680 7,87,250 Assets Rs. Printing Press Building Stock of press Material Dues from customers Cash at bank Cash in hand 8,43,930 8,52,930 1.4.2000 Rs. 5,00,000 2,00,000 50,000 20,350 65,600 7,980 8,43,930 31.3.2001 Rs. 5,25,000 2,00,000 55,000 17,210 40,380 15,340 8,52,930

Statement of Profit for year ending 31-3-2000

Particulars Owners equity as on 31 Dec. (O1) Less : Owners equity as on 1 Jan.(O0) Change in owners equity (D0 ) Add : Drawings (D) 8000 x 12 Less : Additional capital introduced (I) Profit made during the year (P) Amount Rs. 7,87,250 7,63,590 23,660 96,000 1,19,660 15,000 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

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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. 9.4.1 Ascertainment of Missing Information about Credit Purchases and Payables

Credit purchases and Accounts Payables (creditors and bill payables) are inter-

connected. 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.

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Dr.
Particulars

Total Creditors Account

Amount Rs. **** **** Particulars

Cr.
Amount Rs. **** **** **** ****

Cash (Paid) Bank (Cheques issued) Bills Receivable (Endorsed) Bills Payable (Bills accepted) Discount received Purchases returns Closing Balance

Opening balance Bank (Cheques dishonoured) Bills payable (Bills dishonoured) Credit Purchases

**** **** **** **** *****

*****

Bills Payable Account Dr

Particulars Bank (bills matured)

Cr
Amount Rs. **** **** **** **** *****

Particulars Opening Balance Creditors (Bills accepted)

Amount Rs. **** ****

Creditors

(Bills dishonoured) Closing balance

*****

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 Cheques paid through bank Bills endorsed Rs. 15,000 Rs. 10,000 Rs 14,500

Bills accepted during the year Discount received Purchases returns Opening balance of accounts payable as on 1 April 2002 Cheques dishonoured Bills dishonoured (bills payable) Balance of accounts payable as on 31 March 2003

Rs. 35,000 Rs. 5,000 Rs. 2,500 Rs. 15,000 Rs. 8,000 Rs. 10,000 Rs. 25,000

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Solution Dr.
Date Particulars Cash (paid) Bank (cheques dishonored) Bills Receivable (Bill endorsed) Bills Payable Discount received Purchases returns Closing Balance

M/s Linsa Traders Accounts Payable Account

J.F Amount Rs. 15,000 10,000 14,500 35,000 5,000 2,500 25,000 1,07,000 Date Particulars Balance b/f Bank (cheques issued) Bills payable (bills dishonoured) Purchases (Credit) (Balancing figure) J.F

Cr.
Amount Rs. 15,000 8,000 10,000 74,000

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 Opening Balance of Creditors Solution Dr.
Date Particulars Bills Payable Bills issued during the year) J.F

Closing Balance of Bills Payable Closing Balance of Creditors Bills Payable honoured by firm during the year Returns outwards Cash Purchases Cash paid to Creditors

21,000 12,000 26,700 3,600 77,400 90,600

Rs. 15,000 18,000

Total Creditors Account

Amount Rs. 32,7001 Date Particulars Opening Balance J.F

Cr.
Amount Rs. 18,000

Credit Purchases (Balancing figure) Returns outward Cash (Bills honoured) Closing balance 3,600 90,600 12,000 1,38,900

1,20,9002

1,38,900

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Solution Dr.
Date Particulars Cash (Bills honoured) Closing balance J.F

Bills Payable Account

Amount Rs. 26,700 21,000 Date Particulars Opening balance Total Creditors (Balancing figure) Bills issued during the year J.F

Cr.
Amount Rs. 15,000 32,7001

47,700

47,000

Calculation of Net Purchases

Particulars Cash Purchases Add: Credit Purchases Total Purchases Less: Returns Outward Net Purchases Amount Rs. 77,400 1,20,9002 1,98,300 3,600 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:

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Total Debtors Dr.

Particulars Amount Rs. **** **** Particulars Amount Rs. **** **** **** **** **** **** **** ****

Cr.

Opening Balance Bills Receivables (Dishonoured) Bank (Cheque dishonoured)

Cash (received) Bank (Cheque received) Discount allowed Bad debts Sales returns Bills Receivable (bills received) Closing Balance

*****

Bills Receivable Dr.

Particulars Amount Rs. Particulars Amount Rs. **** **** **** **** **** *****

Opening Balance Debtors (bills received)

**** ****

*****

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.

Cr.

Cash (bills honoured) Bank and Discount (Bills discounted) Debtors (Bills Retained & Dishonored) Accounts Payable (endorsed to creditors) Closing Balance

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

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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
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

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.

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

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ACCOUNTANCY during the year Cheque dishonoured (Bank) Cash received from Accounts Receivable Cheque received and deposited in the bank Discount Allowed Bad debts Sales Returns Closing balance of Accounts Receivable as on 31 March 2002 10,000 5,000 25,000 10,000 4,500 2,500 6,000 10,000

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.
Rs. Opening balance of Accounts Receivable as on 1 April 2002 Bills Receivable dishonoured 1,00,000

Solution Dr.
Date 1 Apr Particulars Opening balance of Accounts Receivables Balance b/f Bills Receivables (Dishonoured) Bank (cheque dishonoured)

Accounts Receivable Account

J.F Amount Rs. 1,00,000 Date Particulars Cash (received from Accounts Receivable) Bank (cheque received) Discount allowed Bad debts Sales returns Bills receivable (Balancing figure being bills receivable issued during the year) Balance c/f (Closing balance of of Accounts Receivables) J.F

Cr.
Amount Rs. 25,000

2000

10,000 5,000

10,000 4,500 2,500 6,000 57,000

10,000

1,15,000

1,15,000

Illustration 7 (Ascertainment of Credit Sales) From the following information, Calculate the accounts of credit sales
Transactions Balance of Debtors Balance of Bill Receivables Transactions made during the year: Cash received from customers during the year 1.1.2000 Rs. 30,000 9,000 31.12.2000 Rs. 22,500 12,000 1,48,500

ACCOUNTS FROM INCOMPLETE RECORDS Discount allowed Returns Inwards Cash Received against Bills Bad Debts Bills Receivable (Dishonoured)

403

1,500 6,000 21,000 4,500 7,500

Solution I. Calculation of credit sales during the year Dr.

Date 2000 1 Jan Particulars Balance b/f Bills Receivable (Dishonoured) Sales (Balancing figure) being credit sales J.F

Tatal Debtors Account

Amount Rs. 30,000 7,500 1,77,000 Date 2000 Particulars J.F

Cr.
Amount Rs. 1,48,500

31 Dec Cash (Collected from accounts receivable) Discount Bills receivable (Transfer from bills receivable account) Return Inwards Bad Debts Balance c/f

1,500 31,5001

6,000 4,500 22,500 2,14,500

2,14,500

Solution Dr.
Date 2000 1 Jan Particulars Balance b/f Accounts Receivable (B/R received) (Balancing figure being bills receivable during the year) 40,500

Bills Receivable Account

J.F Amount Rs. 9,000 31,500 Date 2000 Particulars J.F

Cr.
Amount Rs. 21,000 7,500

31 Dec Cash Accounts Receivable (Dishonoured) Balance c/f

12,000

40,500

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Illustration 8 (Colcutation of Net Sales) From the following information calculate the net sales made during the year.
Transactions Debtors on 1.1.2000 Cash received from debtors during the year Returns Inward Accounts Receivable on 31.12.2000 Bad Debts Cash Sales as per Cash Book Amount Rs. 61,200 1,82,400 16,200 82,800 7,200 1,69,200

Solution I Dr.
Date 2000 1 Jan Particulars Balance b/d (Opening Bal) Sales (Balancing figure) being credit sales

Calculation of Credit Sales made during the year Accounts Receivable Account
J.F Amount Rs. 61,200 2,27,400 Date 2000 Particulars J.F

Cr.
Amount Rs. 1,82,400

31 Dec Cash received from Accounts Receivable) Return Inwards Bad Debts Balance c/f (Closing Balance)

16,200 7,200 82,800 2,88,600

2,88,600

II Calculation of Net Sales during the year

Particulars Cash Sales as per cash book Add: Credit Sales Sales Less: Returns Inwards Net Sales Amount Rs. 1,69,200 2,27,400 3,96,600 16,200 3,80,400

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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
Receipts Balance b/f (Opening Balance) Cash Sales Received from accounts receivables 8,000 40,000 30,000 Amount Rs.

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%.

Payments Cash Purchases Paid to Creditors Sundry Expenses Cartage Drawings Balance c/f (Closing balance)

Amount Rs. 14,000 20,000 6,000 2,000 8,000 28,000 78,000

78,000

Other Information
31.3.2000 Rs. Accounts Receivable Accounts Payable Stock of Materials Washing Equipment Furniture Discount allowed during the year Discount Received during the year 9,000 14,400 10,000 40,000 3,000 31.3.2001 Rs. 12,000 6,800 16,000 40,000 3,000 1,400 1,700

Solution Dr.
Date Particulars Balance b/f (Opning) Credit Sales (Balancing Figure)

Accounts Receivable Account

J.F Amount Rs. 9,000 34,400 Date Particulars Cash Discount Allowed Balance c/f (Closing) J.F

Cr.
Amount Rs. 30,000 1,400 12,000 43,400

43,400

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Dr.
Date Particulars Cash Discount Received Balance c/f (Closing)

Accounts Payable Account

J.F Amount Rs. 20,000 1,700 6,800 28,500 Date Particulars Balance b/f (Opening) Credit Purchase (Balancing Figure) J.F

Cr.
Amount Rs. 14,400 14,100

28,500

Statement of Affairs as on 1-4-2000

Particulars Accounts Payable Owners Equity (Balancing Figure) Amount Rs. 14,400 55,600 Particulars Washing Equipment Furniture Stock of Material Accounts Receivable Cash Amount Rs. 40,000 3,000 10,000 9,000 8,000 70,000

70,000

Dr.
Particulars Opening Stock Purchases: Cash Credit Cartage Gross Profit c/f

Profit and Loss Account for the year ending 31-3-2000

Amount Rs. Amount Rs. 10,000 14,000 14,100 Particulars Sales: Cash Credit Closing Stock Amount Rs. 40,000 34,400

Cr.
Amount Rs.

74,400 16,000 90,400

28,100 2,000 50,300 90,400

Sundry Expenses Discount Allowed Depreciation on washing equipment Net Profit transferred to Capital a/c

6,000 1,400

Gross profit b/f Discount Received 50,300 1,700

4,000 40,600 52,000 52,000

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Balance Sheet as on 1-3-2001

Liabilities Owner Equity Add: Net Profit Less: Drawings Accounts Payable 55,600 40,600 96,200 8,000 Amount Rs. Assets Washing equipment Less: Depreciation Furniture Stock of materials Accounts Receivable Cash 40,000 4,000 Amount Rs. 36,000 3,000 16,000 12,000 28,000 95,000

88,200 6,800

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 owners 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.

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

(i) (ii) (iii) (iv) (d) (i) (ii) (iii) (iv) (e) (i) (ii) (iii) (iv)

Credit Sales is obtained from: Bills Receivables Accounts Receivables Accounts Payable Cash Summary Credit purchases can be obtained from: Statement of Affair Bank Bills Receivable 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) (i) (ii) (iii) (iv) Discount received from accounts payable may be obtained from Cash statement Bills Receivables Accounts Receivables Accounts Payables

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409

2. Fill in the blanks (a) (b) (c) (d) (e) 3. (a) To find out the profit, closing capital is to be adjusted by ________________ drawings and _____________________ introduction of fresh capital. If closing owners equity is Rs 1,000; opening owners equity is Rs. 500; profit is Rs 700, then there must be a ___________________________ of Rs 200 during the year. Credit purchase can be ascertained as the balancing figure in the _____________________. The amount received from debtors can be traced from ___________________. Increase in owners equity at the end of the period represents ________________. Calculate the following amounts Calculate value of Opening Stock Purchases Sales Closing Stock Gross Profit @ 331/3% on Sales. (b) Calculate the amount of closing stock Opening Stock Purchases Sales 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 Rs. Purchases Sales Closing Stock 74,000 75,000 1997 Rs. 68,500 90,000 Rs. 17,500 Rs. 37,500 Rs. 60,000 Rs. 17,500 Rs. 45,000 Rs. 13,000

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 Account Receivables Account Payables 1.1.98 Rs. 31,800 24,000 31.12.98 Rs. 26,500 16,000

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ACCOUNTANCY

Bills Payable Bills Receivable Stock in Trade Transaction during the year: Discount allowed Discount received Bills Payable discharge Bills Receivable collected Return Inwards Return Outward Bad Debts B/R Dishonoured Cash paid to Creditors Cash received from Debtor Cash Sales Cash Purchased

21,000 8,800 10,000

29,000 7,000 ?

1,000 800 35,600 20,900 8,700 4800 2,800 1,800 1,20,000 69,000 40,900 1,03,200

Uniform Sales Price of goods being cost plus 25 per cent Short Answer Questions 5. 6. 7. 8. What are incomplete records? What are the possible reasons for maintaining incomplete records? Differentiate between a Statement of Affairs and a Balance Sheet? What practical difficulties are encountered by a trader due to the incompleteness of accounting records?

Long Answers Questions 9. 10. 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? 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? Describe the procedure of ascertaining credit sales, collection from accounts receivables, payments to accounts payable closing balance and bills receivable. Explain how the following may be ascertained from incomplete records: (a) Opening owners equity and closing owners equity (b) Credit sales and credit purchases (b) Payments to creditors and collection from debtors (c) Closing balance of cash

11. 12.

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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 Cash in Hand Bank Overdraft Stock in trade Sundry Creditors Sundry Debtors Bills receivables Furniture and fittings Machinery Building Bills Payables Motor Vehicles Unpaid Expenses Amount (Rs.) 20,000 70,000 9.25.000 65,000 80,000 20,000 12,500 1,00,000 1,25,000 10,000 2,000 Amount (Rs.) 25,000 45,000 1,07,500 55,000 75,000 12,500 10,000 90,000 1,22,500 15,000 60,000 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 Stock Accounts Receivable Cash Bank Accounts Payable Out standing expenses Furniture

1 Jan 2001 (Rs.) 4,00,000 3,00,000 20,000 1,00,000 1,50,000 50,000 30,000

31 Dec 2001 (Rs.) 6,00,000 4,00,000 10,000 (overdraft) 5,000 2,50,000 80,000 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

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ACCOUNTANCY

Particulars Sundry Creditors Sundry Debtors Bills Receivable Bills Payable Cash in Hand or at Bank

1-1-98 (Rs.) 3,600 3,900 2,500 1,600 7,000

31-12-98 (Rs.) 3,800 4,500 3,400 2,300 1,200

Additional Information is given below: Cash Received against Bills Cash Paid against Acceptance Payment made to Creditors Discount allowed to Customers Rs. 10,000 Rs. 14,300 Rs. 14,700 Rs. 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.
Particulars Balance at Bank Accounts Receivables Accounts Receivable realised Commission receives Cash sales Balance c/d Amount Rs. 43,500 3,84,000 1,20,000 15,000 4,86,000 10,82,000 Particulars Ranjans Drawings Accounts Payable Bills Payable Wages Salaries Rent and taxes Insurance Carriage Advertising

Cr
Amount Rs. 1,55,200 2,71,000 93,000 3,20,000 1,65,000 44,000 8,000 12,000 13,300 10,82,000

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413

Particulars of other assets and liabilities

Particulars Amount Rs. April 1 2000 Stock in hand Accounts receivable Accounts payable Bills receivable Bills payable Furniture Machinery 1,87,000 1,20,000 90,000 40,000 10,000 6,000 1,20,000 Amount Rs. March 31 2001 23,400 1,40,000 15,000 50,000 12,000 6,000 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 Rs.12,000 for salaries. Insurance has been paid to the extent of Rs. 2,500. Legal expenses outstanding are Rs. 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 Intrest charges Personal withrawals Staff salaries Other business expenses Accounts payable paid Amount Rs. 1,000 20,000 85,000 79,000 1,50,000 Particulars Balance at bank as on 31 March 2001 Cash in hand as on 31 March 2001 Accounts receivable Cash sales Amount Rs. 24,250 750 2,50,000 1,50,000

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ACCOUNTANCY

Further details are:

Particulars Amount Rs. 1 April 2001 Stock Accounts Payable Debtors 90,000 80,000 Amount Rs. 31 March 2002 1,02,200 55,000 Furniture Office premises 3,00,000 3,00,000 Particulars Amount Rs. 1 April 2001 10,000 1,50,000 Amount Rs. 31 March 2002 10,000 1,50,000

Provide 5% interest on Kishores 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 :
Amount Rs. 2,32,430 1,94,070 18,230 24,190 Particulars Rent rates and taxes Trade expenses Purchase of a delivery van Cash drawn for personal use Amount Rs. 10,200 15,360 4,800 5,600 15,360 4,800 5,600

Particulars Debt due by customers collected Creditors accounts for goods paid Cash purchases Wages

Particulars

1 July 2001 300

30 June 2002 18,200

Particulars

1 July 2001

30 June 2002 16,320 1,750 960 3,200

Balance at Bank Till float on imprest system Debtors Stock

Crediors Rent Trade expenses Delivery van

11,460 1,500 740

12,620 17,400

14,790 19,250

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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 Rs. 45,000 as capital. She maintains books on single entry system. On 31 March 2002, books revealed the following information: Account Payable Rs. 25,000 Furniture and Fittings Rs. 50,000 Stock of ready-made garments Rs. 40,000 Accounts Receivables Rs. 45,000 Cash Rs. 10,000 Drawings Rs. 750 per month Additional Capital introduced: Rs. 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 Rs. 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 Rs. 10,000 40,000 N.A. 10,00,000 2,80,000

31 Dec 2001 Rs. 10,000 90,000 80,000 3,50,000 N.A.

Cash in hand Cash at bank Accounts receivable Stock of goods

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ACCOUNTANCY

Analysis of the bank pass book reveals the following information:

Particulars Payment to accounts payables Business expenses Receipts from accounts receivables Loan from Ajhit(taken on 1 Jan 2000 @ 10% p.a) Deposit in the bank Amount Rs. 7,00,000 1,20,000 7,50,000 1,00,000 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 Cash at Bank Stock Account Receivables Furniture Account Payables Out standing salary Other Transactions: Rates and Taxes Postage Stamps Salary Creditor Debtors Conveyance Bad Debts Discount Received Discount Allowed Purchase return Sales Return 6,400 7,200 46,000 6,24,000 7,84,000 4,000 4,000 2,400 6,400 8,000 16,000 31 Dec 1999(Rs.) 32,000 2,24,000 4,00,000 8,000 1,76,000 40,000 31 Dec 2000(Rs.) 48,000 1,76,000 3,60,000 8,000 1,92,000 6,400

22. Mr. S. Senapati Started business as a provision merchant on Jan 1 1996. He opened a bank account for the business with Rs. 25,000 and immediately spend Rs 12,500 on fixtures and fittings. The only records kept were of cash Sales which amounted to Rs. 37,500 in 1996 and Rs. 45,000 in 1997. There were no Credit Sales. The following facts were ascertained.

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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: Rs. Purchases (Rs.37, 000 on related to 1996) Rent and rates Salaries Advertising Other expenses 63,750 5,100 11,000 1,400 2,880

(2) The value of the stock on 31 December 1997 was Rs.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 Advertising Other expenses (light, heat, telephone, etc.) (4) Amounts paid in advance at 31 December 1997 were: Rates Other Expenses (insurance ) (5) All business expenses arose equally in two periods. (6) Goods were taken from stock for private consumption, the estimated cost being Rs. 500 in 1996 and Rs 7,50 in 1997. (7) Private Drawings amounting Rs. 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) (b) The Trading and Profit and Loss Account of each of the years 1996 and 1997; and The Balance Sheet as on 31 December 1997. Rs. 7,500 500 170 Rs. 100 50

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 From Cash Sales From Saxena as additional Capital on 1 April 1993 Total Cash Receipts Rs. 41,000 37,000 10,000 88,000

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ACCOUNTANCY

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

Rs. 24,000 16,200 5,400 8,100 6,500 4,000 7,800 72,000 31 Dec. 1993 Rs. ? ? ? 16,100 9,500

Adjustments

ANSWERS 1. (a) (b) (c) (d) (e) (f ) (a) (b) (c ) (d) (e) i ii i ii iv i Adding, Subtracting Drawing Accounts Payables Cash Summary Profit

2.

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419

3.

Opening owners equity Closing owners equity Profit Opening owners equity Closing owners equity Credit Sales Credit Purchase Opening owners equity Closing owners equity Profit during the year Balance Sheet Net profit Gross Profit Net Profit Balance Sheet Gross Profit Net Profit Balance Sheet Gross Profit Net Profit Balance Sheet Gross Profit Net Profit Balance Sheet Gross Profit Net Profit Balance Sheet

Rs. 3,03,000 Rs. 3,86,000 Rs. 83,000 Rs. 6,50,000 Rs. 6,30,000 Rs. 10,800 Rs. 29,200 Rs. Rs. Rs. Rs. 4,16,500 4,22,200 1,60,900 5,31,700

4. 5. 6.

7. 8.

Rs. 52,848 Rs. 45,800 Rs. 18,170 Rs. 55,740 Rs. 3,67,200 Rs. 1,54,000 Rs. 4,70,000 Rs. 3,10,000 Rs. 1,40,000 Rs. 5,60,000 Rs. 64,000 Rs. 29,200 Rs. 5,73,200 Rs. 12,500 Rs. 15,000 Rs. 800 Rs. 3,300 Rs. 31,650 Rs. 28,900 Rs. 5,984 Rs. 62,634

9.

10.

11.

12.

13.

Gross Profit Net Profit Balance Sheet