Chapter 16 - Incomplete records Flashcards
What are incomplete records?
Any method of recording transactions that are not based on the double entry model.
How to calculate profits when there are insufficient records to enable an income statement to be prepared?
it can be calculated when the Assets and liabilities are known at both the beginning of the year and the end of the year using the net assets equation.
It is based on two principles,
01 Capital = Assets - Liabilities
02 Profit increases capital; losses reduce capital
What is the net assets equation?
Assets - Liabilities = Capital
Alternatively,
Opening capital + additional capital + profit - drawings = Closing capital
What’s a statement of affairs and its format?
It is a list of business assets and liabilities listed at a point in time, usually prepared to calculate the capital.
It starts with listing the assets and then deducting the liabilities to arrive at the capital.
How do you find profit using the net assets equation?
Profit = Closing capital - opening capital - additional capital + drawings
How do you account for prepaid and accrued expenses/income
Accrued expenses are a liability DR. Expense account CR. Accrual Prepaid expenses are a current asset DR. Prepayment CR. Expense account
How do you account for prepaid and accrued income?
Accrued income is an asset DR. Accrued income ( sofp ) Cr. Income account ( I/S) Prepaid income is a liability DR. Income account ( I/S) Cr . Prepaid income ( sofp)
What accounting principles will be violated if inventory is valued at selling price?
Realisation - profit will be realised at the beginning of the year even when no sale has taken. place
Matching - The profit has not been matched to the time the sale took place
Prudence - The profit will be overstated when it is uncertain whether the goods will be sold
What are the principles of valuing inventory ?
Inventory must be valued at a lower, of cost and net realizable value.
The net realizable value is calculated as follows,
Selling price expected - Cost incurred to put them into a saleable condition.
Therefore inventory will be valued based on the lower figure between cost and net realizable value
What is margin?
It is the gross profit valued as a percentage of the selling price.
What is markup?
It is the gross profit valued as a percentage of cost of sales.
What is the general rule that outlines the close relationship between margin and markup?
When margin is a/b, markup would be a/b-a
When markup is a/b, margin is a/b+a
How do you convert a fraction to a percentage?
Multiply the numerator of the fraction by 100 and then divide it by the denominator.
How to calculate the value of stolen goods?
Step 01, prepare debtors’ and creditors’ control accounts to find out the value of purchases and sales.
Step 02 Then calculate gross profit with the margin percentage.
Step 03 Prepare the trading section by using the information obtained from steps 01 and 02.
Step 04 Find the cost of sales using the sales and gross profit figure.
Step 05 Find the closing inventory using the cost of sales figure. Deduct cost of goods available for sale from cost of sales
Step 06 Deduct the value of goods remaining after theft from closing inventory.
What are the pros of keeping full accounting records?
- It allows the financial statements to be prepared quickly
- it helps guard against errors and possible fraud by employees.
- The accuracy can be improved
- It will be easier to facilitate legal requirements for certain accounting records. Such as taxes and allowances for social security and pensions.
