Incomplete Records (A&B) Flashcards
What advice would you give to the owner of a business that keeps incomplete records?
In order to prepare accurate financial statements and not rely on estimates, the owner should:
- keep day books
- keep a detailed cash book and general ledger
- adhere to the double entry principle when preparing accounts
The owner could hire an accountant to keep detailed books of first entry and ledgers.
What is meant by the accruals concept?
Accruals concept - matches expenses and gains to a specific period
All expenses incurred and income gained in a particular period must be included in the accounts of that period regardless of whether they are paid/received or not
E.g. electricity due
Why are financial statements not prepared on a cash basis?
Financial statements are prepared on an accrual rather than on a cash basis
If Financial Statements are not prepared on an accruals basis profits and assets will be overstated or understated for the period covered by the statements because expenses and income included or excluded may refer to a past or future period
What information is available if the double entry system is used?
- trial balance
- total sales figure (credit & cash)
- total purchases figure (credit & cash)
- bank balance
- capital and drawings
- bad debts
- expenses due and prepaid
What is meant by the ‘net worth’ method for incomplete record?
Th net worth of a business is equal to the total assets less outside liabilities
Taking capital introduced and drawings into account, changes in net worth from one date to another can be associated with the profit or loss for that period
What are disadvantages of using the net worth method when preparing accounts?
- a full trading profit and loss account is not prepared
- detailed figures for analysis purposes are not provided
- unreliable as it uses a lot of estimates
- revenue earned and expenses incurred are not shown
