Week 10 - Accounting for partnerships and Incomplete records Pt2 Flashcards
What are incomplete records in accounting?
Incomplete records refer to situations where a business does not maintain full double-entry accounting records, often only keeping partial or basic financial information.
Why might a small business keep incomplete records?
Lack of accounting knowledge
Time constraints
Cost of hiring an accountant or using software
Belief that detailed records aren’t useful
- Common among sole traders or very small partnerships
What challenges do incomplete records create for accountants?
– Accountants must reconstruct accounts using whatever information is available (e.g. bank statements, invoices, receipts)
– May require estimates or assumptions
– Increases the risk of errors or missing transactions
– Makes it harder to detect fraud or theft
What types of information might still be available in incomplete records?
– Bank statements
– Sales invoices or summaries
– Purchase receipts
– Cheque book stubs
– Personal notes of takings and expenses
What types of documents might incomplete records consist of?
Incomplete records may include:
Cash book / petty cash book
Cash receipts (record of incoming cash)
Bills and invoices (paid and unpaid)
Bank statements
Last year’s statement of financial position (or previous financial statements)
Why might a business have incomplete records?
The business is using a single-entry system instead of full double-entry.
The records are not properly maintained or organised.
A disaster (e.g. fire, flood, or theft) has damaged or destroyed records.
The owner has limited accounting knowledge, especially common in small businesses.
What is a single-entry system?
A single-entry system records only one side of each transaction, typically just cash flow. It does not track assets, liabilities, and capital in full detail. It lacks the checks and balances of double-entry accounting.
What are the limitations of incomplete records?
Difficult to prepare accurate financial statements
Harder to detect errors and fraud
Challenging to track profitability and financial health
Limited use for decision-making and external reporting
Example where revenue and expenses are incomplete
Joe doesn’t keep proper accounting records. His accountant produced a balance sheet for him at 31.12.17 showing the
following:
* Assets = £10,000; Liabilities = £3,500
* During the year, Joe has introduced new capital of £11,000 into the business and has withdrawn £4,000 in drawings for his living expenses.
* The accountant has calculated the following figures for 31.12.18:
* Assets = £12,500; Liabilities = £4,000.
* Calculate the profit for the year.
OB Assets – OB Liabilities = OB Equity
10,000 - 3500 = 6500
CB Assets – CB Liabilities = CB Equity
12,500 - 4000 = 8500
CB Equity = OB Equity + Profit + Capital Introduced – Drawings
Profit = CB Equity – OB Equity – Capital Introduced + Drawings
Profit = 8,500 - 6,500 - 11,000 + 4,000
Profit = -5,000
Joe made a loss of £5,000 during the year.
What is a single-entry system in accounting?
A single-entry system records transactions only in books of prime entry, such as the cash book, but not in ledgers.
There may still be information available on:
Receivables (debtors)
Inventories (stock)
Non-current assets (e.g. equipment, vehicles)
This allows for the preparation of an Income Statement (I/S) and Statement of Financial Position (B/S), even without full ledgers.
What is meant by “books of prime entry”?
Books of prime entry are the first place transactions are recorded. Examples include:
Cash book
Sales and purchases journals
Petty cash book
These are not part of the double-entry system on their own.
What is an “incomplete single entry” system?
This refers to situations where no formal accounting records exist, but other documents are available, such as:
Bank statements
Cheque book stubs
Invoices (sales and purchases)
From these, accountants reconstruct a cash book and use it to create an Income Statement and Balance Sheet
What is the first step when completing accounts from incomplete records?
Prepare opening accounts, especially to determine opening capital, using the previous year’s statement of financial position or available data.
What must be done if no cash book exists?
Reconstruct the cash book using:
Bank statements
Receipts
Cheque stubs
Invoices
This will help track cash inflows and outflows.
How are purchases calculated with incomplete records?
Add up cash purchases and credit purchases
Use invoices and supplier statements
Adjust for opening and closing payables to get total purchases for the period
How can sales be estimated if records are incomplete?
Use cash sales and credit sales info
Analyse bank receipts, till receipts, and customer accounts
If very limited data:
Use gross profit margin or mark-up ratio
Estimate sales based on cost of goods sold
How are accruals and prepayments accounted for in incomplete records?
Review bills paid:
In advance (prepayments)
Outstanding at year-end (accruals)
Adjust the expenses in the Income Statement accordingly.
How are assets treated in incomplete records?
Use asset values to calculate depreciation
If an asset is sold:
Calculate profit or loss on disposal
Adjust non-current assets accordingly
What do we check for receivables in incomplete records?
Estimate closing trade receivables
Check for bad debts or doubtful debts
Adjust in the Income Statement as an expense
What adjustments should be made for drawings, dividends, or new capital?
Identify owner’s drawings (cash or goods taken out)
Note any dividends (for companies)
Record any new capital or loans introduced during the year
What is the final step after reconstructing records?
Prepare financial statements:
Income Statement (profit/loss for the period)
Statement of Financial Position (assets, liabilities, and capital)
Steps for completing incomplete records (Overall)
Prepare opening accounts to work out e.g. opening capital (if not already prepared)
* Prepare a cash book/account (if there isn’t one)
* Calculate purchases looking at cash and credit payments
* Calculate sales by looking at cash and credit receipts
– You may need to use ratios etc to calculate percentage profit where information is very incomplete.
* Look at bills which have been paid in advance or not paid at year end for accruals and prepayments
* Use asset values to calculate depreciation, profit on sale etc
* Look at receivables to calculate bad debts etc
* Check if any drawings/dividends have been paid and any more
capital/loans introduced
* Prepare financial statements
Look at veterinary products example
What is the formula to calculate credit sales from cash receipts?
Credit sales = CB trade receivables – OB trade receivables + Cash received
from trade receivables
How do you calculate credit sales using the process of deduction?
Use the Receivables (Debtors) Account:
Credit Sales = Closing Receivables – Opening Receivables + Cash Received from Customers
Or, rearranged from T-account:
Credit Sales = Cash Received + Closing Receivables – Opening Receivables
What items are needed to calculate credit sales from incomplete records?
Opening receivables (from last year’s balance sheet)
Cash received from receivables (from the cash book or bank statement)
Closing receivables (usually given or estimated)
Why are cash sales ignored when calculating credit sales this way?
Because the Receivables Account only tracks credit transactions—cash sales are received immediately and do not affect receivables.
Example: Use the following to calculate credit sales
OB receivables: £1,000
Cash received: £2,500
CB receivables: £700
Using the formula:
Credit Sales = 2,500 (cash received) + 700 (closing balance) – 1,000 (opening balance)
Credit Sales = £2,200
Trade Receivables Account look like for the above example:
Dr (Receivables a/c)
Opening Balance: £1,000
Credit Sales: £2,200
Total: £3,200
Cr
Cash received: £2,500
Closing Balance: £700
Total: £3,200
What are the two main steps to calculate Cost of Goods Sold (COGS)?
Calculate purchases using the Trade Payables (Creditors) Account
Calculate COGS using the Inventory (Stock) Account
How do you calculate purchases on credit using trade payables?
Use the formula:
CB trade payables = OB trade payables + Purchases on credit – cash paid on
credit purchases
Rearrange:
Purchases on Credit = Cash Paid on Credit Purchases + Closing Balance of Payables – Opening Balance of Payables
How does the Trade Payables T account look when calculating purchases on credit?
Dr (Trade Payables)
Cash Paid (from cash book)
Balance b/d (Closing Balance)
Cr (Trade Payables)
Opening Balance (OB)
Purchases on Credit (???)
Balance c/f (Closing Balance)
What is the basic formula for Cost of Goods Sold (COGS)?
COGS = Opening Inventory + Purchases – Closing Inventory
How do you calculate COGS from purchases?
COGS can be calculated using the Inventory Account:
COGS = Opening Inventory + Purchases (from creditors) – Closing Inventory
Note: Purchases come from your trade creditors, which have already been calculated.
How does the Inventory T-account look when calculating COGS?
Dr (Inventory)
Opening Balance (OB) Cost of
Purchases (from creditors)
Balance C/F (Closing Balance)
Cr (Inventory)
Cost of Goods Sold (COGS)
Closing Balance (CB)
.
Given the following, how do you calculate COGS:
Opening inventory: £1,500
Purchases (from creditors): £20,300
Closing inventory: £1,800
Using the COGS formula:
COGS = 1,500 + 20,300 – 1,800
COGS = £20,000
How is the Inventory T-account structured when calculating COGS?
Dr (Inventory)
Opening Balance (OB)
Purchases (from creditors)
Balance C/F (Closing Balance)
Cr (Inventory)
Costs of Goods Sold (COGS)
Closing Balance (CB)
.
What is required for the Balance Sheet (B/S) for PPE?
The following values are required:
Cost: The original value of the PPE, including purchases and any improvements
Accumulated Depreciation: Total depreciation recorded up to the balance sheet date
Net Book Value: The cost minus the accumulated depreciation
Net Book Value = Cost – Accumulated Depreciation
What is required for the Income Statement (I/S) for PPE?
For the Income Statement, you need:
Depreciation expense for the year
This is the total depreciation on the motor vehicles and equipment for the period.
Depreciation Expense = Depreciation of Van + Depreciation of Equipment (if any)
How is Rent Expense calculated for the Income Statement (I/S)?
CB prepayment = OB prepayment + cash paid - Rent expense
Rearrange:
Rent Expense = Opening Prepayment + Cash Paid – Closing Prepayment
What information do you need to calculate Rent Expense?
Opening Prepayment: Rent that was paid in advance from last year.
Cash Paid: The actual rent paid during the current year.
Closing Prepayment: The amount of rent paid in advance at the end of the current year.
Why is Rent Expense adjusted by prepayments for both I/S and B/S?
In the Income Statement: Rent Expense reflects the actual cost of rent for the period, adjusting for any prepaid amounts.
In the Balance Sheet: The closing prepayment represents the amount of rent paid in advance, which is an asset.
How is the Rental T-account structured when calculating Expense for I/S?
Dr (Rental)
Opening Balance
Cash paid in yr
Cr (Rental)
Expense for I/S (???)
Closing Balance
Calculating Veterinary Products expenses for
I/S and prepayments for B/S:
Prepayment:
- Rent paid on 31 August 2018 covers period to 31 August 2019. The amount is in the cash book £3,200
- At 28/02/2019, 6 months of this rent has been “used” and 6 months relates to
the next financial year
- Prepayment is therefore 6/12 x £3,000 =
- This is the amount shown in the B/S for 28/02/2019 (Closing balance)
- Opening balance is from previous year’s B/S: 1,400
Rent expense = OB prepayment + cash paid – CB prepayment
How is Electricity Expense calculated for the Income Statement (I/S)?
CB accrual = OB accrual + Electricity expense – cash paid
Rearrange:
Electricity Expense = Closing Accrual – Opening Accrual + Cash Paid
What information is required to calculate Electricity Expense?
Opening Accrual: The amount of electricity expense accrued (owed) at the start of the year.
Cash Paid: The amount of electricity paid for during the year.
Closing Accrual: The amount of electricity expense accrued (owed) at the end of the year.
Example: Calculate Electricity Expense
Opening Accrual (OB): £2,000
Cash Paid: £10,000
Closing Accrual (CB): £1,500
Electricity Expense = 1,500 – 2,000 + 10,000 = £9,500
This would be recorded as the electricity expense in the Income Statement.
How is the Electricity T-account structured when calculating Expense for I/S?
Dr (Electricity)
Cash paid
Closing Balance
Cr (Electricity)
Opening Balance
Expense for I/S (???)
What is the formula for calculating Total Sales?
Total Sales = Cash Sales + Credit Sales
How do you calculate Current Assets for the Balance Sheet?
The Current Assets include:
Inventory (Closing balance)
Trade receivables (Closing balance)
Prepayment (closing balance of rent, electricity, etc.)
How do you calculate Current Liabilities for the Balance Sheet?
The Current Liabilities include:
Trade payables (Closing balance)
Accruals (Closing balance)
Bank overdraft (if applicable)
What is the formula to calculate Non-Current Liabilities?
Closing Bank Loan = Opening Bank Loan + New Bank Loans – Loan Repayments
What is the formula for calculating Closing Equity Capital?
CB Equity Capital = OB Equity Capital + New Equity Introduced + Profit for the Year – Drawings
