Accounts from Incomplete Records — Study Notes

1. Introduction

Many small businesses such as shops, traders and professionals do not maintain complete double entry books of account. They keep only a cash book, some personal accounts and records of a few transactions, and the rest of the information has to be gathered from incomplete evidence. This system of keeping accounts is called single entry system or accounting from incomplete records. It is not a system in the true sense, because it is incomplete, unscientific and unorganised. Yet, the profit or loss and the financial position of such businesses can be computed by using certain techniques based on the accounting equation.

Under incomplete records, the net profit can be found by two methods: the statement of affairs method, which compares the capital at the beginning and at the end of the year, and the conversion method, in which the missing accounts such as purchases, sales and expenses are computed. This chapter explains both methods in detail, along with the preparation of the statement of affairs.

2. Features of Incomplete Records

The main features of single entry or incomplete records are:

1. It is followed by small businesses like sole proprietors and small firms.
2. Only cash transactions and personal accounts are generally recorded.
3. Real accounts such as assets and nominal accounts such as expenses are not maintained properly.
4. The double entry principle is not followed completely.
5. The trial balance cannot be prepared directly from the books.
6. Ascertaining the true profit and financial position becomes difficult.
7. Frauds and errors are difficult to detect.

3. Advantages and Disadvantages of Incomplete Records

The advantages are that it is simple, economical and convenient for small businesses, and it does not require specialised accounting knowledge. However, its disadvantages are that it is unscientific and incomplete, the trial balance cannot be prepared, the true profit cannot be easily known, the comparison of results becomes difficult, and the possibility of errors and frauds is greater.

4. The Statement of Affairs Method

Under this method, the capital of the business is computed at the beginning and at the end of the accounting period using the statement of affairs, which is like a Balance Sheet. The capital is found as:

$$Capital = Assets - Liabilities$$

The net profit is then computed using the formula:

$$Closing \ Capital = Opening \ Capital + Additional \ Capital + Profit - Drawings$$

Rearranging the formula:

$$Profit = Closing \ Capital + Drawings - Opening \ Capital - Additional \ Capital$$

Worked Example

A business has assets of Rs 2,00,000 and liabilities of Rs 50,000 at the end of the year.

Closing capital = 2,00,000 - 50,000 = Rs 1,50,000

If the opening capital was Rs 1,00,000, the proprietor introduced Rs 20,000 additional capital during the year and withdrew Rs 30,000 as drawings, then:

Profit = 1,50,000 + 30,000 - 1,00,000 - 20,000 = Rs 60,000

5. The Conversion Method

The conversion method converts the incomplete records into a proper double entry system by computing the missing figures. The important computations are:

Computation of Total Purchases

$$Total \ Purchases = Credit \ Purchases + Cash \ Purchases$$

$$Credit \ Purchases = Payment \ to \ Creditors + Closing \ Creditors - Opening \ Creditors$$

Computation of Total Sales

$$Total \ Sales = Credit \ Sales + Cash \ Sales$$

$$Credit \ Sales = Receipt \ from \ Debtors + Closing \ Debtors - Opening \ Debtors$$

Computation of Missing Information

The total creditors and total debtors accounts are prepared to find the missing figures. Similarly, the cash book is analysed to find the total cash sales and cash purchases.

6. Ascertaining the Profit

After finding the missing figures such as purchases, sales and expenses, the Trading and Profit and Loss Account can be prepared to ascertain the true profit. The closing stock is valued as usual. Alternatively, the statement of affairs method gives the profit directly without preparing the final accounts.

7. Statement of Affairs vs Balance Sheet

A statement of affairs is prepared from the available information of the incomplete records and is similar to a Balance Sheet, but it is not derived from a trial balance. A Balance Sheet is prepared after the trial balance agrees and is based on the complete double entry system. The statement of affairs may not present a fully accurate position because some items may be based on estimates.

8. Points to Remember

1. The formula for profit under incomplete records is based on the change in capital.
2. Additional capital and drawings must be adjusted in the formula.
3. Drawings include cash and goods withdrawn by the proprietor.
4. If the business has made a loss, the formula gives a negative result.
5. The statement of affairs method is simple but the conversion method gives a more accurate result.

Quick Revision Tables

Table 1: Key Formulas of Incomplete Records

Table 2: Statement of Affairs vs Balance Sheet

Table 3: Features of Incomplete Records

Mind Map

Important Diagrams (SVG)

Diagram 1: Computation of Profit from Incomplete Records

Diagram 2: Finding Missing Figures - Debtors and Creditors

Common Mistakes

1. Students forget to add drawings in the profit formula and get an incorrect profit figure.
2. Additional capital is added instead of being deducted in the formula Profit = Closing Capital + Drawings - Opening Capital - Additional Capital.
3. A loss is written as a negative profit and treated as a positive figure in the capital.
4. Goods withdrawn by the proprietor are not included in drawings while computing the profit.
5. Credit purchases are calculated without considering opening and closing creditors.
6. The statement of affairs is treated as a fully accurate Balance Sheet, while it is only an approximate statement.
7. Cash sales are confused with credit sales while computing the total sales from the debtors account.

Exam Tips

1. Write the formula in the exact order: Profit = Closing Capital + Drawings - Opening Capital - Additional Capital.
2. Prepare a statement of affairs at the beginning and at the end to find the two capitals.
3. Show the total debtors and total creditors accounts in T form to compute the missing figures.
4. State the advantages and disadvantages of incomplete records in point form.
5. If the opening capital is missing, compute it from the opening assets and liabilities given.
6. Mention that the conversion method is more accurate than the statement of affairs method.
7. Practise a full example covering credit sales, credit purchases and the final profit.

Conclusion

Accounts from incomplete records are maintained by small businesses that cannot afford a full double entry system. The profit of such businesses can be ascertained through the statement of affairs method using the change in capital, or through the conversion method which computes the missing figures of purchases, sales and expenses. Although the single entry system is simple and economical, it is unscientific and leaves the true financial position uncertain. A sound understanding of these techniques enables the accountant to convert incomplete information into reliable statements of profit and financial position.