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The assets and liabilities are usually listed in a Statement of Affairs. This would have been called a Balance Sheet if it had been drawn up from a set of double entry records. The only way the profit for the year can be found is by comparing the opening and closing capital with the capital shown in the closing statement of affairs.
The assets and liabilities are usually listed in a Statement of Affairs. This would have been called a Balance Sheet if it had been drawn up from a set of double entry records. The only way the profit for the year can be found is by comparing the opening and closing capital with the capital shown in the closing statement of affairs.
The assets and liabilities are usually listed in a Statement of Affairs. This would have been called a Balance Sheet if it had been drawn up from a set of double entry records. The only way the profit for the year can be found is by comparing the opening and closing capital with the capital shown in the closing statement of affairs.
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK
15- Incomplete records
Sometimes business, especially small businesses, do not maintain a full set of double entry records. Consequently, no trial balance will be produced and a complete set of final accounts cannot be prepared without further analysis of the records that do exist. So how can the financial statements be prepared if the bookkeeping records are inadequate or incomplete?
Where the only records available are the assets and liabilities at the beginning of the year and at the end of the year, it is not possible to prepare a trading and profit and loss account. The assets and liabilities are usually listed in a Statement of Affairs. This would have been called a Balance Sheet if it had been drawn up from a set of double entry records. Statement of Affairs can be prepared horizontally or vertically.
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK Four basic techniques used for incomplete records 1. Construction of opening & closing balance sheets or capital 2. Construction of a cash and / or bank summary 3. Construction of sales and purchase figures.usually done via control accounts 4. Use of gross / net profit percentage
Give me four reasons why capital might change. 1. 2. 3. 4. Construction of opening & closing balance sheets or capital Introduction of extra capital Withdrawal of capital Profit earned by the business Loss suffered by the business
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK
1 DISTINCTION BETWEEN INCOMPLETE AND LIMITED ACCOUNTING RECORDS Incomplete accounting records records which the trader has not fully completed or where no records at all have been kept of transactions. Limited accounting records :records kept by a trader of certain transactions but additional information is required to prepare financial statements.
The only way the profit for the year can be found is by comparing capital shown in the opening statement of affairs with the capital shown in the closing statement of affairs
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK PROFIT OR LOSS = THE INCREASE OR DECREASE IN CAPITAL. We can calculate profit when we have details of the opening and closing capital. Activity 1 The opening capital of Edna Clouds at 1 Jan 2005 was 2,000. At 31 December 2005 the capital figure was 8,500. How much profit has been earned during the year?
Opening capital 2,000 Closing capital 8,500 Profit (must be) 6,500
Closing capital - Opening capital = Profit It may be that the owner has made drawings during the years, which will account for some of the difference in the capital figures
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK Opening capital 16,000 Capital introduced 4,000 Withdrawals - 8,000 12,000 Closing capital 30,000 Profit (must be) 18,000
Opening capital 32,000 Withdrawals -12,000 20,000 Closing capital 18,000 Loss (must be) - 2,000
Closing capital - Opening capital + Drawing = Profit If the owner the owner has introduced more capital during the years, this will also account for some of the difference in the capital
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK
We can calculate profit when we have details of the opening and closing capital and have details of capital introduced and withdrawn during the year. Activity 2 The opening capital of Ivy Cladwall at 1 Jan 2005 was 16,000. On 1 July 2005 she introduced further capital of 4,000 and during the year withdrew a total of 8,000. At 31 December 2005 the capital figure was 30,000. How much profit has been earned during the year?
Closing capital - Opening capital + Drawing Capital introduced = Profit Calculating the profit from the change in the capital is far from satisfactory, as is does not provide any information about sales, purchases, expenses and gross profit.
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK This method of calculating profit is unsatisfactory and should only be done in exceptional circumstances. A full set of financial statements should be drawn up from the available information.
Calculation of sales The amount actually received from debtors is not necessarily equal to the credit sales. Some of the money received relates to the amount owing at the start of the year, for sales made in the previous year. In addition the debtors have not yet paid for some of the goods sold on credit to them during the current financial year.
The credit sales for the year may be calculated:- Receipt from debtor X X - Less debtors at 1 Oct (OPEN BALANCE ) X X X X + Plus debtors at 31 Sept (CLOSE BALANCE) X X Credit sales for the year XX
Note: remember total sales for the year are the credit sales + cash sales
Calculation of Purchases The amount actually paid to creditors is not necessarily equal to the credit purchases. Some of the money paid relates to the amount owing at the start of the year, for purchases made in the previous year. In addition the
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK creditors have not yet been paid for some of the goods purchased on credit from them during the current financial year. The credit purchases for the year may be calculated:- Payments to creditors X X - Less creditors at 1 Oct (OPEN BALANCE ) X X X X + Plus creditors at 31 Sept (CLOSE BALANCE) X X Credit purchases for the year XX Note: remember total purchases for the year are the credit purchases + cash purchases
Construction of sales and purchase figures.usually done via control accounts Construct a control account Control accounts essentially contain 4 items.. 1. Opening debtors 2. Closing debtors 3. Credit sales 4. Receipts from debtors If we know 3 items , we can calculate the fourth!!
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK Construction of sales and purchases Donald does not keep proper accounting records. He knows that his opening debtors were 500 and his closing debtors were 400. He has already reconstructed his bank account and knows that receipts from debtors were 2,200. He needs to calculate his sales
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK Detail Detail Bal b/d 500 Bank receipts 2200 Sales 2100 Bal c/d 400 2600 2600 Debtors control Construction of debtors control account to calculate sales
Calculation of closing Bank Balance The bank balance at end of the year is calculated by preparing a summary of the bank account. The opening balance is shown, together with the total amount received and the total amount paid ant the account is then balanced Construction of a cash or bank summary If we know the opening and closing bank account balances we might be able to calculate a missing figure for sales receipts or purchases
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK Construction of a cash or bank summary example Donald does not keep proper accounting records. His bank statements show that his opening bank balance was 100 and his closing bank balance was 400. He knows that his payments to suppliers were 1,200 and he took drawings of 700 (paid by cheque) but he has no idea of his receipts from debtors?
Date Detail Date Detail Bal b/d 100 Creditors 1200 Debtors 2200 Drawings 700 Bal c/d 400 2300 2300 T Account Construction of an opening cash or bank summary example We now know our receipts from debtors, which might be the sales figure Or could help us calculate the sales figure
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK
Mark-up, margin, and stock turnover It is sometimes necessary to use percentages to calculate missing information Mark-up and margin The margin is the gross profit measured as a percentage of the selling price. The mark-up is the gross profit measured as a percentage of the cost price. This is the amount added to the cost price to determine the selling price. Example: The sales of a business for July were 50,000. The cost of goods sold was 40,000. Calculate (I) the mark-up (ii) the margin. (i) Mark-up = Gross Profit X 100 = 10,000 X 100 = 25% Cost of Sales 1 40,000 1
(ii) Margin = Gross Profit X 100 = 10,000 X 100 = 20% Sales 1 50,000 1 These calculations can be used to calculate a missing figure in a trading account
Use of gross / net profit percentage Missing figures can also be calculated using gross or net profit percentages If we know that gross profit is 20% of sales, we can calculate the cost of sales if we know our sales figure. If we know cost of sales and our opening and closing stock, we can easily calculate purchases
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK Use of gross / net profit percentage example Duck has sales of 100. He knows that his gross profit percentage is 20% of sales. His opening stock was 20 and his closing stock was 25. What is Ducks purchases? 1. C.O.S is 80% of 100 = 80 2. 20 + purchases? - 25 = 80 3. Purchases = 85
---To convert mark-up to margin( where figures are percentages): Margin=mark-up/(mark-up+100) ---To convert margin to mark-up Mark-up=margin/(100-margin) ---Uses of margin and mark-up
Rate of stock turnover
MOHAMMED ABDUL RAHMAN 0502143725 - 01223344379 GOOD LUCK This is the number of times a business replace its stock in a given period 1- = Cost of goods sold Average stock Cost of goods sold Average stock Example: a business provide the following information for the year ended 30 Sep 20-4 Stock 1 Oct 20-4 6,800 Stock 30 Sep 20-5 6,000 Mark-up 25% Rate of turnover 5 times a year 2- Average stock = 6,800 + 6,000 = 6,400 2 3- Rate of turnover = 5 = Cost of goods sold = Cost of goods sold Average stock 6,400 Therefore Cost of goods sold = 5 X 6,400 = 32,000 4- Mark-up = 25% Therefore gross profit = 25% X 32,000 = 8,000