incomplete records. for many small businesses, they do not maintain a full set of double-entry...

Incomplete Records

Incomplete Records

For many small businesses, they do not maintain a full set of double-entry books.All they keep are just invoices and bank statement.The preparation of the profit and loss account and balance sheet in circumstances where the bookkeeping records are inadequate or incomplete.

Reason for incomplete record

Lack of accounting experience to maintain records.

Cash misappropriated by the assistant.

Goods stolen or lost by fire.

Trading and profit and loss account

T. LeeTrading and Profit and Loss Account

for the year ended$ $

Sales (1) x

Less: COGS

Opening stock x

Add: Purchase(2) x

Less: closing stock x x

Gross Profit (3) x

Add: Discount received (4) x

x

Less: Expenses (5)

Rent x

Light x x

x

Sales = Cash Sales + Credit Sale

NEXT

Working 1:

Cash SalesCash Sales may be found in cash book

NEXT

Cash book may be prepared

to update the cash book and reconcile the cash book balance with the bank statement balance.

to identify any missing figures e.g.: cash sales, sundry expenses, cash drawings and cash misappropriated.

Credit Sales

Credit Sales to be found in Total Debtors

Account

to use accounting ratio

BACK

Purchases = Cash Purchases + Credit Purchases

Working 2:

NEXT

Cash/Credit purchases

Cash Purchases may be found in cash book.

Credit Purchases Total Creditors Account

to use accounting ratio

BACK

Gross Profit• To use ratios such as mark-up and

margin to find gross profit figures• Then use gross profit figures to find

missing figures. (e.g.: purchases, cost of good sold, closing stock, etc.)

NEXT

Working 3:

Introduction of accounting ratios1. Mark-up

2. Margin

NEXT

Mark-up:Refer to profit which expressed as a

fraction or percentage of the cost price.

Margin;Refer to profit which expressed as a

fraction or percentage of the selling price.

NEXT

Mark-up = Profit (P)

Cost of Goods Sold (C)

Margin = Profit (P)

Sales (S)

NEXT

X 100%

X 100%

Relationship of 2 ratios

Sales = Cost + Profit

S = C + PMark-up Margin

Margin Mark-up

NEXT

C? P

SP

=> C

P

SP

C+PP

SP

? CP

SP=>

CP

C+PP

Example 1

Mark-up is 20%, what is margin?

Mark-up: 20 Margin: 20

NEXT

100 100+20

Example 2

Margin is 25%, what is mark-up?

Margin: 25 Mark-up: 25

BACK

100 75

Income earned

= Cash received + Prepaid last year – Accrued last year –Prepaid this year + Accrued this year

BACK

Working 4:

Expenses incurred

= Cash paid + Prepaid last year – Accrued last year – Prepaid this year + Accrued this year

BACK

Working 5:

Balance Sheets

Balance Sheet

Net Profit = Closing capital – Opening capital +

Drawings – Capital introducedOpening capital Balance = Opening assets – Opening liabilities

Sometimes, statement of Affairs need to be prepared in order to find out the opening capital balance.

ExampleBalance Sheet at 31 June 19-1 (extracts)

Stock $2000Debtors $2000Creditors $ 1000

During this period: $Receipts from debtors 6000Cash Sales 1000Payment to creditors 4000Payment to Rent 500At 30 June 19-2: Debtors $1000

Creditors $1000 Mark-up 20% Accrued at 30 June 19-2 $200

Prepare final accounts for the year ended 30 June 19-2.

Sales (Working 1) 6000

Less: COGS

Opening stock 2000Add: Purchase (Working 2) 4000

6000Less: closing stock 1000 5000

Gross profit (Working 3) 1000

Less: ExpensesRent (500 + 200) 700

Net Profit 300

Trading and profit and loss account for the year ended 30 June 19-2 $ $

Total Debtors

Working 1

Sales = Cash Sales + Credit Sales

= 1000 + 5000

= $6000BACK

Bal b/d 1000

Sales (bal. fig.) 50007000

Cash 6000

Bal c/d 10007000

Total Creditors

Working 2

Sales = Cash Purchases + Credit Purchases

= 0 + 4000

= $4000BACK

Cash 4000

Bal c/d 1000

5000

Bal b/d 1000

Purchase (bal.fig.) 4000

5000

Mark-up Margin

20 20

Sales = Cost + Profit

6000 = x + 6000 * 20/120

6000 = x + 1000

x = 5000

Working 3

BACK

100 100+20

Further Example

Stock loss

Stock loss (e.g. $1000) without insurance claim Dr. Profit and loss $1000 Cr. Trading $1000

Stock loss (e.g. $1000) with insurance claim (e.g. $800) Dr. Bank $800 Dr Profit and loss $200 Cr Trading $1000

(net loss)

Balance Sheet at 31 June 19-1 (extracts)Stock $23750Debtors $16000Creditors $11520

During this period: $Receipts from debtors 61000Cash Sales 17220Payment to creditors 59630Payment to expenses 4000At 30 June 19-2: Debtors $18780

Creditors $14210The firm achieves a mark-up of 25% on all cost.The warehouse has burned down and all the stock

was destroyed.The insurance company gives $15000 for

compensation for stock loss.

Trading and Profit for the year ended 30 June 19-2 $ $

Sales (17220+61000+18780-16000) 81000

Less: COGS

Opening stock 23750

Add: Purchase (59630+14210-11520) 62320

86070

Less: Fire loss (21270) 64800 [2]

Gross profit (81000 * 25/125) 16200 [1]

Less: Expenses

Expenses 4000

Fire loss (21270-15000) 6270 10270

Net Profit 5930

[3]