Accouting for organisations with incomplete records Flashcards
when will a business be said to have incomplete records?
if it does not have a full set of books and ledger accounts
for what reasons will a business ahve incomplete records?
- books or ledgers have been accidentally detroyed
- small businesses may decide that their businesse income is not big enough to justify a system
- may be cash based (dont buy or sell on credit)
- might not have time or resources needed for double entry
- may be a non-profit organisation
why do accounts need to be produced from incomplete records?
as business oweners are required by inland revenue to provide a record of their earnings for tax assessment
what system are businesses with incomplete records likely to use?
single entry systems
what is the single entry system?
recording all payments, recipts and other transactions in one cash book with no matching enteries in other books
what is the 4-stage method to calculate profit or loss from incomplete records?
stage 1: prepare an opening statement of affairs
stage 2: prepare a cash account and/ or bank account
stage3: prepare adjustment accounts
stage 4: prepare final accounts
how do you calculate capital using the accounting equation?
capital= assets- liabilities
how can profit be determined with incomplete records?
if opening and closing capital are known
the difference between the amounts represents profit or loss for the year
what is a statement of affairs?
list of all a firms assets and all the liabilities at a point in time
assets and liabilities are not split into fixed or current
what is the main use of a statement of affairs?
can be used by the firm to calculate any missing capital balance for the opening or closing balance then any changes in capital balance must relate to profit or loss
why must you be careful when trying to calculate the profit by examining changes in the capital?
possible new capital has been injected into the form over the period concerned
drawings may explain a fall in capital
what adjustments should be made when calcuating profit from capital?
subtract any injections in capital- remove effect of extra capital
add any withdrawals of capital- remove effct of redued capital
add back any drawings- to remove the effect of withdrawals on capital
what does the usefullness of a statement of affairs depend on?
the accuracy of the information used in their preparation
what can often occur when calculating rofit using opening and closing captal amounts? (Limitation)
lapses in memory and mistakes often occur
what can a cashbook summary be used for?
find missing figures such as closing bank balance or the total of drawings
what will a cash book summary generally show?
opening and closing bank and cash balances
amount of all receipts and payments regardless of whether they relate to capitalor revenue
record of all amounts recieved and paid during the year irrespective of the time periods which they relate
if a firm doesnt have a cash book can a cash book summary still be created?
yes from bank statements, paying in slips and cheque counterfoils
however some information may not be available (cah drawings sometimes missing)
what is needed to produce a set of accounts for a business? (incomplete records)
totals of cash
total of credit sales and purchases
what can be used to find a total of credit sales and purchases?
control accounts
what formula can be used to calculate total credit sales?
credit sales for the year= receivables at end of the year + recipts from receivables - receivables at end of year
What is the formula for credit purchases?
credit purchases for year= payables end of year+ payment to payables-payables at start of year
What do you do to expenses from during the year?
Add cash payments made during the year
What do you do to accruals at the start if the year?
Minus
What do you do to accruals at the end of the year?
Add them
