Incomplete Records

Incomplete Records For many small businesses, they do not maintain a full set of double-entry books. All they keep are just invoices and bank statement. The preparation of the profit and loss account and balance sheet in circumstances where the bookkeeping records are inadequate or incomplete.

Reason for incomplete record Lack of accounting experience to maintain records. Cash misappropriated by the assistant. Goods stolen or lost by fire.

Trading and profit and loss account

Trading and Profit and Loss Account T. Lee for the year ended $ $ Sales (1) x Less: COGS Opening stock x Add: Purchase(2) x Less: closing stock x x Gross Profit (3) x Add: Discount received (4) x x Less: Expenses (5) Rent x Light x x

Working 1: Sales = Cash Sales + Credit Sale NEXT

Cash Sales Cash Sales  may be found in cash book Cash book may be prepared to update the cash book and reconcile the cash book balance with the bank statement balance. to identify any missing figures e.g.: cash sales, sundry expenses, cash drawings and cash misappropriated. NEXT

Credit Sales Credit Sales  to be found in Total Debtors Account  to use accounting ratio BACK

Working 2: Purchases = Cash Purchases + Credit Purchases NEXT

Cash/Credit purchases Cash Purchases  may be found in cash book. Credit Purchases  Total Creditors Account  to use accounting ratio BACK

Working 3: Gross Profit To use ratios such as mark-up and margin to find gross profit figures Then use gross profit figures to find missing figures. (e.g.: purchases, cost of good sold, closing stock, etc.) NEXT

Introduction of accounting ratios Mark-up Margin NEXT

Mark-up: Refer to profit which expressed as a fraction or percentage of the cost price. Margin; Refer to profit which expressed as a fraction or percentage of the selling price. NEXT

Mark-up = Profit (P) Cost of Goods Sold (C) Margin = Profit (P) Sales (S) X 100% X 100% NEXT

Relationship of 2 ratios

Sales = Cost + Profit S = C + P Mark-up  Margin Margin  Mark-up P P ? C S P P P =>   C C+P S P P ?   S C P P P  =>  NEXT C+P C S

Example 1 Mark-up is 20%, what is margin? Mark-up: 20  Margin: 20 100 100+20 NEXT

Example 2 Margin is 25%, what is mark-up? Margin: 25  Mark-up: 25 100 75 BACK

Working 4: Income earned = Cash received + Prepaid last year – Accrued last year –Prepaid this year + Accrued this year BACK

Working 5: Expenses incurred = Cash paid + Prepaid last year – Accrued last year – Prepaid this year + Accrued this year BACK

Balance Sheets

Balance Sheet Net Profit = Closing capital – Opening capital + Drawings – Capital introduced Opening capital Balance = Opening assets – Opening liabilities Sometimes, statement of Affairs need to be prepared in order to find out the opening capital balance.

Example Balance Sheet at 31 June 19-1 (extracts) Stock $2000 Debtors $2000 Creditors $ 1000 During this period: $ Receipts from debtors 6000 Cash Sales 1000 Payment to creditors 4000 Payment to Rent 500 At 30 June 19-2: Debtors $1000 Creditors $1000 Mark-up 20% Accrued at 30 June 19-2 $200 Prepare final accounts for the year ended 30 June 19-2.

Trading and profit and loss account for the year ended 30 June 19-2 $ $ Sales (Working 1) 6000 Less: COGS Opening stock 2000 Add: Purchase (Working 2) 4000 6000 Less: closing stock 1000 5000 Gross profit (Working 3) 1000 Less: Expenses Rent (500 + 200) 700 Net Profit 300

Sales = Cash Sales + Credit Sales = 1000 + 5000 = $6000 Working 1 Total Debtors Bal b/d 1000 Cash 6000 Sales (bal. fig.) 5000 Bal c/d 1000 7000 7000 Sales = Cash Sales + Credit Sales = 1000 + 5000 = $6000 BACK

Sales = Cash Purchases + Credit Purchases = 0 + 4000 = $4000 Working 2 Total Creditors Cash 4000 Bal b/d 1000 Bal c/d 1000 Purchase (bal.fig.) 4000 5000 5000 Sales = Cash Purchases + Credit Purchases = 0 + 4000 = $4000 BACK

Mark-up  Margin 20  20 100+20 Sales = Cost + Profit 100 Working 3 Mark-up  Margin 20  20 Sales = Cost + Profit 6000 = x + 6000 * 20/120 6000 = x + 1000 x = 5000 100+20 100 BACK

Further Example

Stock loss Stock loss (e.g. $1000) without insurance claim Dr. Profit and loss $1000 Cr. Trading $1000 Stock loss (e.g. $1000) with insurance claim (e.g. $800) Dr. Bank $800 Dr Profit and loss $200 Cr Trading $1000 (net loss)

Balance Sheet at 31 June 19-1 (extracts) Stock $23750 Debtors $16000 Creditors $11520 During this period: $ Receipts from debtors 61000 Cash Sales 17220 Payment to creditors 59630 Payment to expenses 4000 At 30 June 19-2: Debtors $18780 Creditors $14210 The firm achieves a mark-up of 25% on all cost. The warehouse has burned down and all the stock was destroyed. The insurance company gives $15000 for compensation for stock loss.

Trading and Profit for the year ended 30 June 19-2 $ $ Sales (17220+61000+18780-16000) 81000 Less: COGS Opening stock 23750 Add: Purchase (59630+14210-11520) 62320 86070 Less: Fire loss (21270) 64800 [2] Gross profit (81000 * 25/125) 16200 [1] Less: Expenses Expenses 4000 Fire loss (21270-15000) 6270 10270 Net Profit 5930 [3]