Accounts from Incomplete Records

INCOMPLETE RECORDS

Introduction

Very often the small sole proprietorship and partnership businesses do not maintain double entry book keeping system. Sometimes they keep record only of the cash transactions and credit transactions. Sometimes they maintain no record of many transactions. But at the end of the accounting period they want to know the performance and financial position of their businesses. This creates some special problems to the accountants. This study discusses how to complete the accounts from available incomplete records.

The term “Single Entry System” is popularly used to describe the problems of accounts from incomplete records. In fact there is no such system as single entry system. In practice the quack accountants follow some hybrid methods. For some transactions they complete double entries. For some others they just maintain one entry. Still for some others, they even do not pass any entry. This is no system of accounting. Briefly, this may be stated as incomplete records. The task of the accountant is to establish linkage among the available information and to finalise the accounts.

FEATURES

  • It is an inaccurate, unscientific and unsystematic method of recording business transactions.
  • There is generally no record of real and personal accounts and, in most of the cases; a record is kept for cash transactions and personal accounts.
  • Cash book mixes up business and personal transactions of the owners.
  • There is no uniformity in maintaining the records and the system may differ from fir m to firm depending on the requirements and convenience of each firm.
  • Profit under this system is only an estimate and therefore true and correct profits cannot be determined. The same is the case with the financial position in t he absence of a proper balance sheet.

 

TYPES OF INCOMPLETE RECORDS

A scrutiny of many procedures adopted in maintaining records under single entry system brings forth the existence of following three types:

INCOMPLETE RECORDS

PURE SINGLE ENTRY

In this, only personal accounts are maintained with the result that no information is available in respect of cash and bank balances, sale s and purchases, etc. In view of its failure to provide even the basic information regarding cash etc., this method exists only on paper and has no practical application.

SIMPLE SINGLE ENTRY:

In this, only: (a) personal accounts, and (b) cash book are maintained. Although these accounts are kept on the basis of double entry system, postings from cash book are ma de only to personal accounts and no other account is to be found in the ledger. Cash received from debtors or c ash paid to creditors is simply noted on the bills is sued or received as the case may be.

QUASI SINGLE ENTRY:

In this: (a) personal accounts, (b) cash book, and (c) some subsidiary books are maintained. The main subsidiary books kept under this system are Sales book, Purchases book and Bills book. No separate record is maintained for discounts which are entered into the personal accounts. In addition, some scattered information is also available in respect of few important items of expenses like wages, rent, rates, etc. In fact, this is t he method which is generally adopted as a substitute for double entry system.

 

ASCERTAINMENT OF PROFIT B Y CAPITAL COMPARISON

This method is also known as Net Worth method or Statement of Affairs Method.

If detailed information regarding revenue and expenses is not known, it becomes difficult to prepare profit and loss account. Instead collecting information about assets and liabilities, it is easier to prepare balance sheet at two different points of time. So, while preparing accounts from incomplete records, if sufficient information is not available, it is better to follow the method of capital comparison to arrive at the profit figure.

Methods of capital comparison

Capital is increased if there is profit, while capital is reduced if there is loss. However, if the proprietor/partners made fresh investments in the business, capital is increased; if they make withdrawal capital is reduced. So while determining the profit capital comparison, the following rules should be followed.

 

Capital at the end

Add: Drawings                                                              xxx

Less: Fresh capital introduced                                      xxx

Capital in the beginning                                       xxx

Profit                                                                                    xxx

 

It is clear from the above discussion that to follow the capital comparison method one should know the opening capital and closing capital. This should be determined preparing statement of affairs at the two respective points of time. Capital always equals assets minus liabilities.

Thus preparation of statement of affairs will require listing up of assets and liabilities and their amount. The accountant utilizes the following sources for the purpose of finding out the assets and liabilities of a business enterprise:

  1. Cash book for cash balance
  2. Bank pass book for bank balance
  • Personal ledger for debtors and creditors
  1. Stock actual counting and valuation.
  2. As regards fixed assets, he prepares a list of them. The proprietor would help him disclosing the original cost and date of purchase. After deducting reasonable amount of depreciation, the written down or depreciated value would be included in the Statement of Affairs.

After obtaining all necessary information about assets and liabilities, the next task of the accountants is to prepare statement of affairs at two different points of time.

The design of the statement of affairs is just like balance sheet as given below:

 

Statement of affairs as on………………………….

Liabilities Sh. Assets Sh.
Capital (Bal. Fig.)

Loans, Bank overdraft

Sundry creditors

Bills payable

Outstanding expenses

 

xxx

xxx

xxx

xxx

xxx

 

 

 

xxx

xxx

Building

Machinery

Furniture

Stock

Sundry debtors

Bills receivable

Loans and advances

Cash and bank

Prepaid expenses

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

 

Now from the statement of affairs prepared for two different dates, opening and closing capital balances can be obtained.

Difference between Statement of Affairs and Balance Sheet

Basis Statement of affairs Balance sheet          
Reliability It is prepared on the basis of transactions partly recorded on the basis of double entry book keeping and partly on the basis of single basis.  Most of the assets are recorded on the basis of estimates, assumptions, information gathered from memory rather than records. It  is  based  on  transactions recorded strictly on the basis of double entry book keeping; each item in the balance sheet can be verified          from    the subsidiary books      and

Hence the balance sheet is not Only reliable, but dependable.

Capital In this statement, capital is merely a balancing figure being excess of assets over capital. Hence assets need not be equal to liabilities. Capital  is  derived  from  the capital  account  in  the  ledger and  therefore  the  total  of assets  side  will  always  be equal to the total of liabilities side.
Omission Since this statement is prepared on   the   basis   of   incomplete records,  it  is  very  difficult,  to locate the assets and liabilities, if they are omitted from the books There is no possibility of omission of any item of asset and liability since all items are properly recorded. Moreover, it is easy to locate the missing items since the balance sheet will not agree.
Basis of

Valuation

The   valuation   of   assets   is generally done in an arbitrary manner; therefore no method of valuation is disclosed. The valuation of assets is done on scientific basis that is original cost in the case of new assets and depreciated amount on the basis of cost minus depreciation to date for used assets.  Any change in the method of valuation is properly disclosed.
Objects The  object  of  preparing  this statement  in  the  calculation  of capital  figures  in  the  beginning and at the end of the accounting period respectively. The object of preparing the balance sheet is to ascertain the financial position on a particular date.

 

 

PREPARATION OF STATEMENT OF AFFAIRS AND DETERMINATION OF PROFIT

Figures of assets and liabilities should be collected for preparation of statement of affairs. Given below an example:

Illustration 1

Assets and Liabilities of Mr. SomeaKenya as on 31-12-2016 and 31-12-2017 are as follows:

31/12/2016 31/12/2017
Assets

Building

Furniture

Stock

Sundry debtors

Cash at bank

Cash in hand

Liabilities

Loans

Sundry creditors

 

100,000

50,000

120,000

40,000

70.000

1,200

 

100,000

40,000

 

270,000

90,000

85,000

3, 200

 

80,000

70, 000

 

Decided to depreciate building 2.5% and furniture 10% One life insurance policy of the Proprietor was matured during the period and the amount sh.40,000 is retained in the business.  Proprietor took sh. 2,000 p.m. for meeting family expenses.

Prepare Statement of Affairs.

Solution

 Statement of Affairs as on 31-12-2016 and 31-12-2017

Liabilities 31/12/2016 31/12/2017 Assets 31/12/2016 31/12/2017
Capital

(Bal. Fig.)

Loans

Sundry Creditors

 

241,200

 

100,000

40,000

 

_______

381,200

440,700

 

80,000

70,000

 

_______

590,700

Building

Furniture

Stock

Sundry Debtors

Cash at bank

Cash in hand

 

100,000

50,000

120,000

40,000

70,000

1,200

381,200

97,500

45,000

270,000

90,000

85,000

3,200

590,700

 

Illustration 2

Take figures in illustration1. Find out profit of Mr. SomeaKenya

Solution

Determination of Profit applying the method of the Capital comparison

  Sh.
Capital Balance as on 31-12-2017

Less : Fresh capital introduced

 

Add : Drawings (2000 x12)

 

Less : Capital Balance as on 31-12-2016

Profit

440,700

(40,000)

400,700

24,000

424,700

(241.200)

183,500

 

Note:

  • Closing capital is increased due to fresh capital introduction, so it is deducted.
  • Closing capital was reduced due to withdrawal proprietor; so it is added back.

Illustration 3

A and B are in Partnership having Profit sharing ratio 2:1. The following information is available about their assets and liabilities:

31/3/2017 31/3/2018
Furniture

Advances

Creditors

Debtors

Stock

Loan

Cash at Bank

120,000

70,000

32,000

40,000

60,000

80,000

50,000

 

50,000

30,000

45,000

74,750

 

140,000

The partners are entitled to salary @ sh.2,000 p.m. They contributed proportionate capital. Interest is paid @ 6% on capital and charged @ 10% on drawings.

Drawings of A and B

A B
Sh. Sh.
April 30

May 31

June 30

Sept. 30

Dec. 31

Feb. 28

2,000

4,000

2,000

2,000

6,000

8,000

 

On 30th June, they took C as 1/3rd partner who contributed sh.75,000. C is entitled to share of 9 months’ profit. The new profit ratio becomes 1:1:1. A withdrew his proportionate share. Depreciate furniture @ 10% p.a., new purchases sh 10,000 may be depreciated for 1/4th of a year.

Current account as on 31/3/2017: A sh. 5.000 (Cr.), B fsh.2,000 (Dr.)

Prepare Statement of Profit, Current Accounts of partners and Statement of Affairs as on 31/3/2018.

Solution

Statement of Affairs

As on 31/3/2017 and 31/3/2018

Liabilities 31/3/2017 31/3/2018 Assets 31/3/2017 31/3/2018
  Sh. Sh.   Sh. Sh.
Capital A/c’s

A

B

C

Loan

Creditors

 

Current A/c’s

A

B

C

 

150,000

75,000

80,000

32,000

 

 

5,000

______

342,000

 

75,000

75,000

75,000

30,000

 

 

74,036*

48,322*

50,142*

427,500

Furniture

Advances

Stock

Debtors

Cash at bank

Current A/c

B

120,000

70,000

60,000

40,000

50,000

 

2,000

 

 

 

_______

342,000

117,750

50,000

74,750

45,000

140,000

 

 

 

 

_______

427,500

*see current accounts

      Notes

(i)

 

 

 

(ii)

 

 

 

 

 

(iii)

Depreciation on Furniiure

10% on sh 120,000

10% on sh 10,000 for 1/4 year

 

Furniture as on 31/3/2018

Balance as on 31/3/2017

Add: new purchase

 

Less: Depreciation

 

Total of Current Accounts as on 31/3/2018

Total of Assets

Less : Fixed Capital + Liabilities

12,000

250

12,250

 

120,000

10,000

130,000

(12,250)

117,750

 

427,500

(255,000)

172,500

 This is after adding salary, interest on capital and deducting drawings and interest on drawings.

(iv)

 

 

 

 

 

 

(v)

Interest on Capital

A :       on        50,000         @ 6% for 3 months

on        75,000                      @ 6% for 9 months

 

B :       on        75,000                      @ 6% for 1 year

C:        on        75,000                      @ 6% for 9 months

 

Interest on Drawings                     

A :       on        2,000           @ 10% for 11 months

on        4,000           @ 10% for 9 months

on        2,000           @ 10% for 3 months

 

8 :        on        2,000           @ 10% for 10 months

on        6,000           @ 10% for 6 months

on                    8,000  @ 10% for 1 month

2,250

3,375

5,625

4,500

3,375

7,875

 

183

300

50

533

167

300

67

534

Allocation of Profit

3 months Profit

9 months Profit

A : 2/3 x sh.28,767 + 1/3 x 86,300

B : 1 /3 x sh. 115,067

C: 1/3 x sh. 86,300

115,067

28,767

86,300

 

 

 

 

47,944

38,356

28,767

115,067

 

Current Accounts

A B C A B C
To Balance b/d

To Drawings

To Interest on -drawings

To Balance c/d

8,000

 

 

533

74,036

82,569

2,000

16,000

 

 

534

48,322

66,856

 

50,142

50,142

By Balance b/d

By Salary

By Interest on -capital

By Share of -Profit

5,000

24,000

 

5,625

 

47,944

82,569

24,000

 

4,500

 

38,356

66,856

18,000

 

3,375

 

28,767

50,142

 

Statement of Profit

  Sh.
Current Account Balances as on 31/3/2018

Less: Salary A      2,000 x 12    = 24,000

B      2,000 x 12    = 24,000

C      2,000 x 9      = 18,000

Less: Interest on Capital     A        5,625

B           4,500

C           3,375

Add: Drawings                      A         8,000

B           16.000

Add: Interest on Drawings  A        533

B           534

 

Less: Current A/c Balances as on 31/3/2017  (5,000 – 2,000)

 

172,500

 

 

(66,000)

 

 

(13,500)

 

24,000

 

1,067

118,067

(3,000)

115,067

 

TECHNIQUES OF OBTAINING COMPLETE ACCOUNTING INFORMATION

When books of accounts are incomplete, it is essential in the first instance to complete double entry in respect of all transactions. The whole accounting process should be carefully followed and Trial Balance should be drawn up.

The techniques to used are:-

  • General techniques
  • Derivation of information from cash book
  • Analysis of sales and purchases ledger
  • Distinction between Business expenses and drawings
  • Identifying fresh investment proprietors or partners

 General Techniques

Where the accounts of a business are incomplete, it is advisable to convert them first to the double entry system and then to draw up the Profit and Loss Account the balance sheet, instead of determining the amount of profit/loss preparing the statement of affairs, As books  of accounts of different firms being incomplete in varying degrees, it is not possible to suggest a formula which could uniformly be applied for preparing final accounts therefrom, As a general rule, it is essential first to start the ledger accounts with the opening balances of  assets, liabilities and the capital. Afterwards, each book of original entry should be separately dealt with, so as to complete the double entry posting into the ledger such entries have not been posted. For example, If only personal accounts have been posted from the cash Book, debits and credits pertaining to nominal accounts and real accounts that are not posted should be posted into the ledger. If there are Discount Columns in the Cash Book, the totals of discounts paid and received should be posted to Discounts Allowed and Discounts Received Accounts respectively, for completing the double entry.

Afterwards, the other subsidiary books, i.e., Purchases Day Book, Sales Day Book, Return Book and Bills Receivable and Payable, etc. should be totalled up and their totals posted into the ledger to the debit or credit of the appropriate nominal or real accounts, the personal aspect of the transactions having been posted already.

When an Accountant is engaged in posting the unposted items from the Cash Book and other subsidiary books, he may be confronted with a number of problems. The manner in which some of them may be dealt with is described below:

  1. In the Cash Book, there might be entered several receipts which have no connection with the business but which belong to the proprietor, e.g., interest collected on his private investment, legacies received him, amount contributed the proprietor from his private resources, etc. All those amounts should be credited to his capital account. Also the Cash Book may contain entries in respect of payments for proprietor’s purchases made the business. All such items should be debited to his capital account.
  2. Amounts belonging to the business after collection may have been directly utilised for acquiring business assets or for meeting certain expenses instead of being deposited into the Cash Book. On the other hand, the proprietor may have met some of the business expenses from his private resources. In that case, the appropriate asset or expense account should be debited and the source which had provided funds credited.
  3. If cash is short, because the proprietor had withdrawn amount without any entry having been made in the cash book the proprietor’s capital account should be debited. In fact, it will be necessary to debit or credit the proprietor’s capital account in respect of all unidentified amounts which cannot be adjusted otherwise.
  4. Where the benefit of an item of an expense is received both the proprietor and business, then it should be allocated between them on some equitable basis e.g. rent of premises when the proprietor lives in the same premises, should be allocated on the basis of the area occupied him for residence.
  5. The schedules of sundry debtors and creditors, extracted from respective ledgers maintained for the purpose should be examined to find out if, mistake, an item of revenue or expense has found its way therein. Having done so and, if necessary after eliminating such amounts, the schedules should be totalled and the total debited to Sundry Debtors Account in the ledger. Similarly, the total of schedules of sundry creditors should be credited to Sundry Creditors Account. One should note that since Sales Account, Purchase Account and other nominal accounts having already been written up on the basis of Day Books, it is not necessary to adjust them further. It is expected that the opening balances in these accounts would have been adjusted recovery or payment and the receipt from debtors and the payment to creditors correctly posted to the accounts instead of having been recorded as Sales or Purchases. If however, it has been done, these balances would require to be adjusted transfer to Sales or. Purchases Accounts or to Bad Debts or Discount Account, as the case may be.

In the end, it will be possible to extract a Trial Balance. Students are advised always to do so as it will disclose any mistakes committed in making adjustments.

 Derivation of Information from Cash Book

The analysis of cash as well as bank receipts and payments, should be extensive but under significant heads, so that various Items of income and expenditure can be posted therefrom into the ledger. However before posting the information into the ledger the same should be collected in the form of an account, the specimen whereof is shown below:

Cash and Bank Summary Account for the year ended

  Cash Bank   Cash Bank
  Sh. Sh.   Sh. Sh.
To Balance in hand

(opening)

To Sales

To Collection from

debtors

 

590

 

6,500

 

 

 

 

 

 

 

____

7,090

7,400

 

 

 

10,000

 

 

 

 

 

______

17,400

By Expenses

(Sundry payments)

By Purchases

By Sundry creditors

By Drawings

By Petty expenses

By Rent

By Electricity and water

By Repairs

By Wages

By Balance in Hand

 

3,000

 

100

1,500

800

350

350

 

990

7,090

 

 

6,000

5,000

 

1,000

 

 

1,000

4,400

17,400

The important point about incomplete records is that much of the information may not be readily available and that the relevant information has to be ascertained. A good point is to prepare Cash and Bank Summary (if not available in proper form with both sides tallied). The cash and bank balance at the end should be reconciled with the cash and bank books. Having done so, the various items detailed on the Summary Statements, should be posted into the ledger.

It is quite likely that some of the missing information will then be available. Consider the following about a firm relating to 2012.

Sh.
Cash Balance on 1st Jan., 2012

Bank overdraft on 1st Jan.,2012

Cash purchases

Collection from Sundry debtors

Sale of old furniture

Purchase of Machinery

Payment of Sundry creditors

Expenses

Fresh Capital brought in

Drawings

Cash Balance on 31st Dec., 2012

Bank balance on 31st Dec., 2012

250

5,400

3,000

45,600

750

12,000

26,370

8,450

5,000

3,230

310

1,180

 

Now prepare the cash and Bank Summary.

Cash and Bank Summary

Dr.     Cr.
  Sh.   Sh.
Cash Balance as on 1-1-2012 250 Bank overdraft 5,400
Collection from Sundry debtors 45,600 Cash purchases 3,000
Sale of old furniture 750 Purchase of Machinery 12,000
Fresh Capital brought in 5,000 Payment to Sundry creditors 26,370
Balancing figure 8,340 Expenses 8,450
Drawings 3,230
Cash balance on 31-12-2012 310
Bank balance on 31-12-2012 1,180
59,940 59,940

See that debit side is short sh. 8,340. What may be the possible source of cash inflow?

May be cash sales.

Analysis of Sales Ledger and Purchase Ledger

Sales Ledger: It would disclose information pertaining to the opening balance of the debtors, the goods sold to them on credit during the year, bills receivable dishonoured, if any; cash received from them in the accounting period, discount, rebate or any other concession allowed to them, receipts of bills receivable, returns inwards, bad debts written off and transfers. Journal entries must be made debiting or crediting the impersonal accounts concerned with contra credit or debit given to total debtors account.

Analysis of Sales Ledger of the year

Op. Sales Bills Total Cash Dis- Bills Sales Bad Total Balance
Customer Balance Disho- noured Debits Reed. counts Alld. Reed. Returns Debts Credit (cl.)

 

From the aforementioned, it will be possible to build up information about sales and other accounts which can then be posted in totals, if so desired. It would also be possible to prepare Total Debtors

Account in the following form:

Total Debtors Account (assumed figures)

Sh. Sh.
Opening balance

Sales

Bills dishonored

Interest

 

5,000

38,000

280

100

_____

43,380

Cash/Bank

Discount

Bills receivable

Bad debts

Closing balance

10,000

500

20,000

280

12,600

43,380

It is evident that any single amount comprised in the total Debtors Account can be ascertained if the other figures are provided. For instance, if the information about sales is not available it could be ascertained as a balancing figure, i.e., in the total Debtors Account given above, if all other figures are given sales would be ? 38,000.

Purchases Ledger: Generally speaking, a Purchases Ledger is not as commonly in existence as the Debtors Ledger for it is convenient to make entries in respect of outstanding liabilities at the time they are paid rather than when they are incurred. The information is available in respect of opening balance of the creditors, goods purchased on credit, bills payable dishonored; cash paid to the creditors during the year, discount and other concessions obtained, returns outwards and transfers. Here also, journal entries must be made debiting or crediting the respective impersonal accounts. Contra credit or debit being given to total creditor’s account.

If a proper record of return to creditors, discount allowed them etc., has not been kept, it will not be possible to write up the Total Creditors A/c. In such a case, net credit purchase will be ascertained as follows:

Cash paid to Creditors including on account of Bills

Payable during the period                                                                        xxx

Closing balance of Creditors and Bills Payable                                      xxx

                                                                                                      Total   xxx

Less: Opening balance of Creditors and Bills Payable

Net credit purchase during the period

 

Alternatively

Cash paid to creditors during the period                                                         xxx

Add: Bills Payable issued to them                                                         xxx

                                                                                                 Total     xxx

Closing balance of Creditors

Less: Opening balance of creditors                                                      xxxx

Credit Purchases during the period                                                     xxx

 

The information may also be put in the form of an account, just like the Total Debtors Account.

Nominal Accounts: It is quite likely that the total expenditure shown balance of nominal account may contain items of expenditure which do not relate to the year for which accounts are being prepared and, also, there may exist certain items of expenditure incurred but not paid, which have not been included therein. On that account, each and every account should be adjusted in the manner shown below (figures assumed):

Cash and Particulars Amount Bank Payment Paid out of Accrued Total Private Fund Pre

Payment

Expenses for the period
1 2 3 4 5 6 7
Rent & Rates

Salaries

 

2,200

4,500

300

500

100

1,000

2,600

6,000

150

250

2,450

5,750

Total Private Fund

Only the amount entered as “expenses for the period” should be posted to the respective nominal accounts. A similar adjustment of nominal accounts in respect of revenue receipt should be made.

Let us continue with the example given in derivation of Information from Cash Book. Given some other information, how to compute credit purchase and credit sale is discussed below:

Opening balance (1-1-2012)

Stock

Sundry creditors

Sundry debtors

Closing Balance (31-12-2012)

Stock

Sundry creditors

Sundry debtors

Discount received during 2012

Discount allowed

Sh.

20,000

12,300

15,000

 

15,000

13,800

25,600

1,130

1,870

What are the purchases for 2012? Let us prepare the Sundry Creditors Account.

Sundry Creditors Account

             Sh. Sh.
To Cash

To Discount

To Balance c/d (closing)

26,370

1,130

13,800

41,300

By Balance b/d

(opening)

By Purchases (balancing figure)

 

12,300

 

29,000

41,300

 

The credit purchases are Sh. 29,000; cash purchases are sh 3,000: hence total purchases are sh 32,000.

Likewise prepare the Sundry Debtors Account:

Sundry Debtors Account

To Balance b/d (balancing figure)

To Credit sales

15,000

58,070

______

73,070

By Cash By Discount By Balance c/d 45,600

1,870

25,600

73,070

So total sales = credit sales + cash sales

= 58,070 + 8,340 = 66,410

 

Distinction between Business Expenses and Drawings

It has been already stated that often the distinction is not made between business expenses and drawings. While completing accounts from incomplete records, it is necessary to scan the business transactions carefully to identify the existence of drawings.

The main items of drawings are:

  • Rent of premises commonly used for residential as well as business purposes ;
  • Common electricity and telephone bills;
  • Life insurance premiums of proprietor/partners paid from business cash ;
  • Household expenses met from business cash ;
  • Private loan paid to friends and relatives out of business cash ;
  • Personal gifts made to any friends and relatives out of business cash ;
  • Goods or services taken from the business for personal consumption ;
  • Cash withdrawals to meet family expenses.

So it is necessary to scan the summary of cash transactions, business resources and their utilisation to assess the nature of drawings and its amount.

Fresh Investment proprietors / partners

Like drawings, often fresh investments made proprietors’ partners are not readily identifiable. It becomes necessary to scan the business transactions carefully. Apart from direct cash investment, fresh investments may take the following shape:

  • Money collected and put in the business on maturity of Life Insurance Policy of the proprietors;
  • Interest and dividend of personal investment of the proprietors collected and put in the business;
  • Income from non-business property collected and put in the business.

Unless these items are properly identified and segregated, business income will be inflated and proper statement of affairs cannot be prepared.

Illustration

The following information relates to the business of Mr. Shiv Kumar, who requests you to prepare a Trading and Profit & Loss Account for the year ended 31st March, 2013 and a Balance Sheet as on that date:

(a)

  Balance as on 31st March, 2012 Balance as on 31st March, 2013
Building 320,000 360,000
Furniture 60,000 68,000
Motorcar 80,000 80,000
Stocks 40,000
Bills payable 28,000 16,000
Cash and bank balances 180,000 104,000
Sundry debtors 160,000
Bills receivable 32,000 28,000
Sundry creditors 120,000

(b) Cash transactions during the year included the following besides certain other items:

sh sh
Sale of old papers and miscellaneous income

Miscellaneous Trade expenses (including salaries etc.)

Collection from debtors

 

20,000

 

80,000

200,000

Cash purchases

Payment to creditors

Cash sales

48,000

184,000

80,000

 

(c) Other information:

  • Bills receivable drawn during the year amount to sh. 20,000 and Bills payable accepted sh. 16,000.
  • Some items of old furniture, whose written down value on 31st March, 2012 was sh 20,000 was sold on 30th September, 2012 for sh 8,000. Depreciation is to be provided on Building and Furniture @ 10% p.a. and on Motorcar @ 20% p.a. Depreciation on sale of furniture to be provided for 6 months and for additions to Building for whole year.
  • Of the Debtors, a sum of sh 8.000 should be written off as Bad Debt and a reserve for doubtful debts is to be provided @ 2%.
  • SomeaKenya has been maintaining a steady gross profit rate of 30% on turnover.
  • Outstanding salary on 31st March, 2012 was sh 8,000 and on 31st March, 2013 was f 10,000 on 31st March, 2012. Profit and Loss Account had a credit balance of sh. 40,000.
  • 20% of total sales and total purchases are to be treated as for cash.
  • Additions in Furniture Account took place in the beginning of the year and there was no opening provision for doubtful debts.

Solution

Trading and Profit and Loss Account of Mr. SomeaKenya

For the year ended 31st March, 2013

To Opening stock

(Balancing figure)

To Purchases

To Gross profit c/d

@ 30% on sales

 

To Miscellaneous expenses

( 80,000 – 8,000 + 10,000)

 

To Depreciation:

Building  36,000

Furniture  7,800

(? 6,800+ 1,000)

Motor Car  16,000

To Loss on sale of furniture

To Bad debts 8,000

To Provision for doubtful debts

 

80,000

240,000

 

120,000

440,000

 

82,000

 

 

 

 

 

59,800

11,000

8,000

5,040

165,840

By Sales

By Closing stock

 

 

 

 

By Gross profit b/d

By Miscellaneous receipts

By Net loss transferred to

Capital A/c

 

400,000

40,000

 

 

______

440,000

120,000

20,000

 

25,840

 

 

 

 

 

 

______

165,840

 

Working Notes:

(i)        Sundry Debtors Account

To Balance b/d

To Sales A/c

160,000

320,000

 

______

480,000

By  Cash/Bank A/c

By  Bills Receivable A/c

By  Bad debts A/c

By  Balance c/d (bal. fig.)

 

200,000

20,000

8,000

252,000

480,000

 

(ii) Sundry Creditors Account

Sh Sh
To Cash/Bank A/c

To Bills Payable A/c

To Balance c/d (bal. fig.)

 

184,000

16,000

112,000

312,000

By Balance b/d

By Purchases A/c

 

120,000

192,000

______

312,000

(ii) Bills Receivable Account

Sh. Sh.
To Balance b/d

To Sundry Debtors A/c

 

32,000

20,000

52,000

By Cash/ Bank A/c (bal. fig.)

By Balance c/d

24,000

28,000

52,000

(iii) Bills Payable Account

Sh. sh
To Cash/Bank A/c (bal. fig.)

To Balance c/d

 

28,000

16,000

44,000

By Balance b/d

By Sundry Creditors A/c

28,000

16,000

44,000

(iv)  Furniture Account

  Sh.   Sh.
To Balance b/d

To Bank A/c

60,000

28,000

 

 

_____

88,000

By Bank/Cash A/c

By Depreciation A/c

By Profit and loss A/c (loss on sale)

By Depreciation A/c

By Balance c/d

8,000

1,000

11,000

6,800

61,200

88,000

(iv) Cash/Bank Account

Sh. Sh.
To Balance b/d

To Miscellaneous receipts A/c

To Sundry debtors A/c

To Sales A/c

To Furniture A/c (sale)

To Bills receivable A/c

180,000

20,000

200,000

80,000

8,000

24,000

______

512,000

By Misc. trade expenses A/c

By Purchases A/c

By Furniture A/c (bal. fig.)

By Sundry creditors A/c

By Bills payable A/c

By Building A/c

By Balance c/d

80,000

48,000

28,000

184,000

28,000

40,000

104,000

512,000

(iv)

Opening Balance Sheet of Mr. SomeaKenya

As on 1st March 2013

Liabilities Sh. Assets Sh.
Capital (balancing figure)

Profit and loss A/c

Sundry Creditors

Bills Payable

Outstanding salary

716,000

40,000

120,000

28,000

8,000

 

______

912,000

Building

Furniture

Motor car

Stock in trade

Sundry Debtors

Bills Receivable

Cash in hand and at bank

320,000

60,000

80,000

80,000

160,000

32,000

180,000

912,000

 

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