Incomplete Records
These notes explain how a business can reconstruct profit, capital, sales, purchases and financial position when a full double-entry system has not been kept. The chapter builds from statements of affairs to missing figure calculations, mark-up, gross margin and inventory turnover.
Topic 1: What Incomplete Records Mean
Incomplete records are often used by small businesses that have not maintained a full double-entry system.
1. What are Incomplete Records?
Some small businesses do not maintain a complete double-entry system. They may keep only basic records such as a cash book, bank statements, invoices, cheques, and records of amounts owed by customers and to suppliers.
Even without a complete set of accounts, the business still needs to calculate profit or loss, capital, sales, purchases, trade receivables, trade payables and its financial position.
2. Disadvantages of Incomplete Records
- Profit may be difficult to calculate accurately.
- Errors and fraud are harder to detect.
- Trade receivables and trade payables are harder to monitor.
- Financial statements cannot easily be prepared.
- Comparisons between years are more difficult.
- Business decisions become harder.
- Obtaining finance from banks or investors may be more difficult.
- Documents may be difficult to trace in a dispute.
3. Statement of Affairs
A statement of affairs is similar to a statement of financial position. It lists assets, liabilities and capital.
| Statement of financial position | Statement of affairs |
|---|---|
| Prepared from complete double-entry records. | Prepared from incomplete records. |
4. Calculating Capital
Machinery = $20,000
Inventory = $5,000
Trade receivables = $4,000
Bank = $2,000
Total assets = $31,000
Trade payables = $6,000
Capital = $31,000 − $6,000 = $25,000
Topic 2: Calculating Profit from Capital
Profit can be found by comparing opening capital with closing capital and adjusting for drawings and new capital.
5. Calculating Profit from Changes in Capital
Opening capital = $40,000
Closing capital = $52,000
Profit = $52,000 − $40,000 = $12,000
6. Drawings and Additional Capital
If the owner has made drawings or introduced additional capital, these must be adjusted.
Opening capital = $50,000
Closing capital = $65,000
Drawings = $8,000
Additional capital introduced = $5,000
Profit = $65,000 − $50,000 + $8,000 − $5,000 = $18,000
7. Using Opening and Closing Statements of Affairs
- Prepare an opening statement of affairs to find opening capital.
- Prepare a closing statement of affairs to find closing capital.
- Adjust for drawings and additional capital.
- Calculate profit or loss.
Topic 3: Finding Missing Sales and Purchases
Total trade receivables and payables accounts are used to find missing credit sales, credit purchases and closing balances.
8. Calculating Missing Sales
Money received from customers does not necessarily equal sales. Some money collected may relate to last year’s trade receivables, and some current-year customers may still owe money at the year end.
A total trade receivables account can therefore be prepared. The missing figure may be credit sales.
9. Simple Credit Sales Formula
Opening trade receivables = $1,500
Cash received from customers = $8,560
Cheque receipts = $3,360
Discount allowed = $750
Closing trade receivables = $4,600
Receipts = $8,560 + $3,360 = $11,920
Credit sales = $11,920 + $4,600 − $1,500 + $750 = $15,770
If cash sales = $2,500, total sales = $15,770 + $2,500 = $18,270
10. Important Sales Distinction
Cash received from trade receivables
Money received from customers who previously bought goods on credit. This goes into the total trade receivables account.
Cash sales
Goods sold immediately for cash. These are added afterwards when calculating total sales.
11. Calculating Missing Purchases
Payments made to suppliers do not necessarily equal purchases. Some payments may relate to suppliers from the previous year, while some current purchases may still be unpaid.
A total trade payables account can therefore be used to find credit purchases.
12. Simple Credit Purchases Formula
Opening trade payables = $4,500
Payments = $7,300
Closing trade payables = $3,600
Discounts received = $30
Credit purchases = $7,300 + $3,600 − $4,500 + $30 = $6,430
If cash purchases also exist: Total Purchases = Credit Purchases + Cash Purchases
Topic 4: Preparing Financial Statements from Incomplete Records
Once missing figures are reconstructed, a normal income statement and statement of financial position can be prepared.
13. Calculating Gross Profit
Once sales and purchases are known, a normal trading account can be prepared.
Sales = $3,900
Opening inventory = $4,000
Purchases = $3,000
Closing inventory = $3,450
Cost of sales = $4,000 + $3,000 − $3,450 = $3,550
Gross profit = $3,900 − $3,550 = $350
14. Finding Closing Trade Receivables or Payables
The same accounts can work backwards. A total trade receivables account can find credit sales or closing trade receivables. A total trade payables account can find credit purchases or closing trade payables. The unknown amount becomes the balancing figure.
15. Calculating Drawings or Cash Sales
Sometimes the cash account is incomplete. The balancing figure may represent drawings if money has left the business, or a receipt such as cash sales or money from a customer if money has entered the business.
16. Calculating Expenses and Income
Expenses must still be adjusted for accruals and prepayments. Income must also be adjusted so that only the amount belonging to the current financial year is included. This follows the matching principle.
Rent paid = $5,000
Opening prepaid rent = $200
Closing prepaid rent = $300
Rent expense = $5,000 + $200 − $300 = $4,900
17. Finding Closing Cash or Bank
If the business knows the opening balance, total receipts and total payments, the closing cash or bank balance can be calculated as the balancing figure.
Opening cash = $3,500
Cash receipts = $3,800
Cash payments = $5,780
Closing cash = $3,500 + $3,800 − $5,780 = $1,520
18. Preparing Financial Statements from Incomplete Records
- Prepare opening statement of affairs.
- Find opening capital.
- Prepare cash/bank accounts if necessary.
- Prepare total trade receivables account.
- Prepare total trade payables account.
- Calculate missing sales and purchases.
- Adjust income and expenses.
- Prepare income statement.
- Prepare statement of financial position.
19. Year-End Adjustments
Financial statements prepared from incomplete records still require normal adjustments, including depreciation, accruals, prepayments and provision for doubtful debts. The treatment is the same as for businesses with complete records.
Topic 5: Mark-Up, Gross Margin and Inventory Turnover
These ratios are often used to estimate missing figures when records are incomplete.
20. Mark-Up
Mark-up measures gross profit as a percentage of cost of sales.
Sales = $40,000
Cost of sales = $25,000
Gross profit = $40,000 − $25,000 = $15,000
Mark-up = $15,000 ÷ $25,000 × 100 = 60%
21. Gross Margin
Gross margin measures gross profit as a percentage of sales.
Gross profit = $15,000
Sales = $40,000
Gross margin = $15,000 ÷ $40,000 × 100 = 37.5%
22. Mark-Up vs Gross Margin
| Mark-Up | Gross Margin |
|---|---|
| Gross Profit ÷ Cost of Sales × 100 | Gross Profit ÷ Sales × 100 |
| Based on cost | Based on sales |
Goods cost = $100; sold for = $125; gross profit = $25
Mark-up = $25 ÷ $100 × 100 = 25%
Gross margin = $25 ÷ $125 × 100 = 20%
23. Converting Mark-Up to Margin
A 25% mark-up is the same as 1/4. Therefore, gross margin is:
24. Using Mark-Up to Find Missing Figures
Sales = $22,000
Mark-up = 10%
10% mark-up means gross profit is 1/10 of cost. Therefore: Cost : GP : Sales = 10 : 1 : 11
Gross profit = 1/11 × $22,000 = $2,000
Cost of sales = $22,000 − $2,000 = $20,000
If opening inventory = $4,000 and closing inventory = $3,500, purchases = $20,000 + $3,500 − $4,000 = $19,500
25. Rate of Inventory Turnover
The rate of inventory turnover measures how many times inventory is sold and replaced during the year.
Opening inventory = $2,000
Closing inventory = $4,000
Cost of sales = $30,000
Average inventory = ($2,000 + $4,000) ÷ 2 = $3,000
Inventory turnover = $30,000 ÷ $3,000 = 10 times
26. Using Inventory Turnover to Find Missing Figures
Opening inventory = $2,400
Closing inventory = $2,800
Inventory turnover = 10 times
Average inventory = ($2,400 + $2,800) ÷ 2 = $2,600
Cost of sales = 10 × $2,600 = $26,000
If gross margin is also given, this information can be used to calculate gross profit, sales and purchases.
27. Finding Missing Closing Inventory
Mark-up or gross margin can be used to estimate closing inventory when records have been lost because of events such as fire, theft or natural disaster.
Opening inventory = $500
Purchases = $3,000
Sales = $5,000
Gross margin = 50%
Gross profit = 50% × $5,000 = $2,500
Cost of sales = $5,000 − $2,500 = $2,500
Closing inventory = $500 + $3,000 − $2,500 = $1,000
Estimated inventory destroyed = $1,000
Quick Formula Guide
| Calculation | Formula |
|---|---|
| Capital | Assets − Liabilities |
| Profit | Closing capital − Opening capital + Drawings − Capital introduced |
| Total sales | Cash sales + Credit sales |
| Simple credit sales | Receipts + Closing TR − Opening TR + Discounts allowed |
| Total purchases | Cash purchases + Credit purchases |
| Simple credit purchases | Payments + Closing TP − Opening TP + Discounts received |
| Cost of sales | Opening inventory + Purchases − Closing inventory |
| Gross profit | Sales − Cost of sales |
| Mark-up | Gross profit ÷ Cost of sales × 100 |
| Gross margin | Gross profit ÷ Sales × 100 |
| Average inventory | (Opening inventory + Closing inventory) ÷ 2 |
| Inventory turnover | Cost of sales ÷ Average inventory |
Remember
Assets − Liabilities = Capital
Closing Capital − Opening Capital + Drawings − New Capital
Used mainly to find credit sales or closing trade receivables.
Used mainly to find credit purchases or closing trade payables.