Chapter  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 1 INCOMPLETE RECORDS LEARNING OUTCOME:  TO PREPARE ACCOUNTING RECORDS AND REPORTS FROM INCOMPLETE OR SINGLE-ENTRY ACCOUNTING SYSTEMS AND CONVERT THEM TO DOUBLE-ENTRY SYSTEMS 3

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 2 KEY TERMS  analysis method  comparison method  double-entry  incomplete records  reconstruction  single-entry  statement to ascertain profit

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 3 REASONS FOR INADEQUATE BUSINESS RECORDS  Lack of accounting knowledge  Main concentration on primary activity  Lack of knowledge on legislative requirements for accounting record  Hiding cash transactions for tax avoidance  Confusing business and personal banking transactions  Lost accounting records e.g. via theft or fire

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 4 SOURCES OF INFORMATION  Bank records  Accounts receivable  Accounts payable  Business Activity Statements  Instalment Activity Statements  Insurance companies  Finance or banking organisations  The previous accountant

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 5 ADVANTAGES OF DOUBLE- ENTRY ACCOUNTING  Balancing control (debits = credits)  All transactions are recorded  Easier to detect fraudulent practices and errors  Records are kept of business assets  Liabilities are known  Profit and loss calculated on regular basis

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 6 ADVANTAGES OF DOUBLE- ENTRY ACCOUNTING  Budget comparisons can be made  Ratios, business trends, sales forecasts and management information easily determined  Easy to comply with legislative requirements such as GST, income tax and company law

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 7 CALCULATING PROFIT AND LOSSES  THE COMPARISON METHOD ÙUsed when there is very little business information available ÙMany assumptions need to be made ÙComparison is made between the closing Statements of Financial Position for two financial years to determine changes in the owner’s equity during that period ÙThe comparison is called ‘Statement to Ascertain Profit’

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 8 STATEMENT TO ASCERTAIN PROFIT  Use information from two consecutive years to determine net assets for each year NET ASSETS = OWNER’S EQUITY  Verify net profit using comparison method Verification of net profit using comparisons of capital Capital at end$555,000 Less: Capital at beginning$500,000 Net change$55,000 Add: Drawings$8,000 Less: Additional capital$20,000 Net profit$43,000

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 9 CALCULATING PROFIT AND LOSSES  THE ANALYSIS METHOD ÙRevenue and expense accounting are reconstructed to obtain missing data ÙExamples are: xAccounts receivable account to ascertain credit sales xAccounts payable account to ascertain credit purchases xDepreciation and accumulated depreciation and disposal of assets xBalance day adjustments (accruals and prepayments)

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 10 CALCULATION OF CREDIT SALES  Illustration 3F (page 63)

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 11 CALCULATION OF CREDIT PURCHASES  Illustration 3G (page 64)

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 12 SUMMARY: Analysis method Accounts receivable  Credit sales  Closing balance Statement to ascertain profit Statement of Financial Position Net profit Opening general journal entry Accounts payable  Credit purchases  Closing balance Accumulated depreciation  Depreciation  Closing balance Inventories  Opening/closing balances  Closing balance