0452 · 5.6Incomplete records

Incomplete records basics

0:00Rowan Stationery has customer payment records and supplier bills, but some sales totals are missing. Its owner still needs reliable figures for the year. This video covers reasons for incomplete records, their advantages and disadvantages, statements of affairs, missing figures, financial statements and adjustments. We will also use mark-up, margin and inventory turnover to recover information. A sole trader is a business owned and controlled by one person. Financial statements are summaries that show a business's profit or loss for a period and what it owns and owes at a date.

0:30Double entry means every transaction is recorded as a debit in one account and a credit of the same amount in another. Incomplete records are accounting records that are not kept in full double entry form. Business documents are written or electronic records that provide information about business transactions. An invoice is a document issued by a seller showing goods supplied, their prices and the amount due. A small business might keep invoices and a cash book only.

0:55The cash book records receipts and payments of cash and of money through the bank. Businesses keep different types of accounting records rather than using the full double entry system because their resources differ. An owner may lack the time or skill to maintain complete records. Employing someone with that skill also costs money, so many small traders record only their cash, bank and invoices. The advantages of not maintaining a full set of accounting records are lower cost, simpler recording and less time spent.

1:21A trial balance lists every ledger account balance at a date, with debit balances in one column and credit balances in the other. One disadvantage is that, without complete ledger accounts, no trial balance can be extracted to check the arithmetic. Errors and fraud therefore become harder to find, and calculating the year's result requires reconstruction. Incomplete records also provide less information for decisions, tax calculations and applications for bank finance.

1:46For example, an owner may know how much customers paid without knowing the value of all sales. Some customers still owe money from earlier sales. We must distinguish money received during the year from income earned during that year.

Statements of affairs and capital

1:59Assets are resources owned or controlled by a business that bring future benefit, while liabilities are amounts the business owes to others. Owner's equity, also called capital, is the owner's investment in the business, or the amount the business owes the owner. The accounting equation states that assets equal liabilities plus owner's equity. A statement of affairs lists assets and liabilities at a date to calculate the difference between them.

2:23Subtracting liabilities from assets reveals the owner's capital. Its figures may come from bank statements, invoices, an inventory count and estimates. An opening statement uses the starting date, while a closing statement uses the ending date. Non-current assets are assets held for continuing use in the business rather than for resale. Trade receivables are amounts owed by credit customers who have not yet paid for goods or services. Inventory means goods held for resale.

2:49Trade payables are amounts owed to credit suppliers that the business has not yet paid. Current assets are assets expected to be turned into cash or used up within twelve months, while current liabilities are amounts due for payment within twelve months. Other receivables are current assets, such as amounts due to the business and payments for benefits not yet used. Unpaid expenses and money received before it is earned are grouped as other payables, which are current liabilities.

3:14Rowan Stationery starts with equipment of eight thousand dollars and inventory of three thousand dollars. Customers owe two thousand dollars, and the bank holds one thousand dollars. Prepaid rent contributes another two hundred dollars to current assets. Eight thousand plus three thousand plus two thousand plus one thousand plus two hundred equals fourteen thousand two hundred dollars. Suppliers are owed two thousand five hundred dollars, and unpaid electricity is one hundred dollars.

3:39Adding these gives liabilities of two thousand six hundred dollars. Fourteen thousand two hundred minus two thousand six hundred gives opening capital of eleven thousand six hundred dollars. The equation agrees because fourteen thousand two hundred equals two thousand six hundred plus eleven thousand six hundred dollars. Revenue is the income a business earns from its main activity, such as selling goods or providing services. Expenses are the costs used up in running the business and earning revenue during a period.

4:05Profit for the year is the amount by which revenue exceeds expenses over one financial year. We can calculate this from changes in capital over time, after separating the owner's transactions. Drawings are money or goods taken from the business by its owner for private use. They are not a business expense, so they never reduce the profit for the year. Capital introduced is extra money or other assets that the owner puts into the business.

4:28Drawings reduce owner's equity, while capital introduced increases it. Therefore, closing capital equals opening capital plus profit for the year plus capital introduced minus drawings. Rearrange that relationship to calculate profit or loss for the year from changes in capital over time. Profit for the year equals closing capital minus opening capital plus drawings minus capital introduced. Adding drawings restores capital removed for private use. Subtracting capital introduced removes the increase financed by the owner, so only the year's trading result remains.

5:00Capital comparison gives the overall result, but it does not explain individual sales or expenses. Cost of sales is the cost of inventory sold during a period, and gross profit is revenue minus cost of sales. To prepare detailed financial statements, we calculate sales, purchases, gross profit, trade receivables and trade payables and other figures from incomplete information.

Reconstructing credit sales and purchases

5:22Each calculation follows a movement relationship, so the amount outstanding at the end depends on what existed initially, what was added and what was removed. Discount allowed is an expense because the business accepts less from its customer. Irrecoverable debts are amounts owed by customers that the business considers uncollectable. Both reduce amounts owed without producing customer payments. A total trade receivables account summarises the amounts owed by all credit customers.

5:48Credit sales are the missing figure that makes this account balance. Rowan Stationery's total trade receivables account opens with a debit balance brought down of two thousand dollars. The credit side shows bank receipts of twenty-seven thousand, discount allowed of six hundred, irrecoverable debts of four hundred and a balance carried down of five thousand dollars. Twenty-seven thousand plus six hundred plus four hundred plus five thousand equals thirty-three thousand dollars.

6:09The debit side must also total thirty-three thousand dollars. Thirty-three thousand minus two thousand leaves the missing credit sales of thirty-one thousand dollars on the debit side. The opening balance is a debit because customers owed that money when the year began. Receipts, discount allowed and irrecoverable debts are credits, because each one reduces what customers owe. Customers still owe five thousand dollars at the year end, so that balance is carried down on the credit side and brought down next year.

6:35Adding cash sales of nine thousand dollars to the credit sales gives total sales revenue of forty thousand dollars. If closing trade receivables were the missing figure, the same account would find them instead. Purchases records the cost of goods bought for resale and normally has a debit balance. Discount received is income because the business settles its liability for less than the amount owed. Payments and discount received both reduce amounts owed to suppliers.

6:58A total trade payables account summarises the amounts owed to all credit suppliers. Credit purchases are the missing figure that makes this account balance. Rowan Stationery's total trade payables account opens with a credit balance brought down of two thousand five hundred dollars. Supplier payments of eighteen thousand dollars and discount received of three hundred dollars are debits, because each reduces the amount owed. The balance carried down of forty-five hundred dollars also sits on the debit side.

7:22Eighteen thousand dollars plus three hundred dollars plus forty-five hundred dollars equals twenty-two thousand eight hundred dollars. The credit side must also total twenty-two thousand eight hundred dollars. Twenty-two thousand eight hundred minus two thousand five hundred leaves credit purchases of twenty thousand three hundred dollars. Cash purchases of seventeen hundred dollars bring total purchases to twenty-two thousand dollars. The closing balance is brought down as a credit at the start of next year, because the business still owes that amount.

7:49Sales returns are goods returned by customers to the business. Purchases returns are goods returned by the business to suppliers. When reconstructing gross credit transactions, add the relevant returns alongside other reductions in amounts outstanding. Then deduct returns when calculating net sales revenue or net purchases for the financial statements.

Adjusting costs and expenses

8:08Cost of sales links purchases with the inventory held. Opening inventory is the value of goods held for resale at the start of a financial period. The goods remaining at its end are called closing inventory. Opening inventory plus net purchases minus closing inventory gives cost of sales, because unsold goods remain assets. Carriage inwards is the cost of transporting purchased goods into the business. Add it when calculating cost of sales, because it contributes to bringing goods into the business.

8:35Goods taken by the owner are drawings at cost. Remove their cost from purchases used in the trading calculation and include it in total drawings. Missing expenses also require reconstruction because payment dates and usage dates can differ. An accrued expense is a cost of the current year that is still unpaid at the year end. A prepaid expense is a cost paid in advance that belongs to a future period.

8:56Expense equals cash paid plus closing accrual minus opening accrual plus opening prepayment minus closing prepayment. Rent paid was three thousand six hundred dollars, and closing prepaid rent is five hundred dollars. Three thousand six hundred plus opening prepaid rent of two hundred minus five hundred gives rent expense of three thousand three hundred dollars. Electricity paid was eleven hundred dollars, with three hundred dollars still unpaid. Eleven hundred plus three hundred minus opening unpaid electricity of one hundred gives electricity expense of thirteen hundred dollars.

9:28Opening prepaid rent belongs to this year, so we add it to the expense. Closing prepaid rent belongs to next year and remains an asset. For electricity, the closing unpaid amount belongs to this year and remains a liability. The opening unpaid amount belonged to the previous year, so its payment is excluded from this year's expense. Depreciation is the loss in value of a non-current asset over its useful life.

9:51It is an estimate that is charged as an expense in each year of use. Accumulated depreciation is the running total of depreciation charged on an asset since it was acquired. Carrying amount is the asset's cost less its accumulated depreciation. Equipment has annual depreciation of sixteen hundred dollars, with no additions or disposals. Eight thousand minus sixteen hundred gives a closing carrying amount of six thousand four hundred dollars.

10:13An allowance for irrecoverable debts is an estimate of trade receivables that may not be paid. Five per cent of five thousand dollars is two hundred and fifty dollars, so receivables after the allowance are four thousand seven hundred and fifty dollars. This business had no opening allowance, so the whole new allowance becomes an expense. Where an allowance already exists, the change affects the year's result. Closing inventory must also use the lower of cost and net realisable value for each item.

10:40Net realisable value is the expected selling price minus costs to complete and sell the goods. Other income is income from activities other than the main one, such as rent received or discount received. Accrued income is an amount earned in the current year but not yet received at the year end. Prepaid income is an amount received in advance for a period after the year end. Add earned but unreceived income as other receivables, and show unearned amounts received as other payables.

Preparing financial statements

11:06The statement of profit or loss is the financial statement that shows the revenue, expenses and profit or loss for a period. Rowan Stationery's correctly valued closing inventory is four thousand dollars, after any write-down to net realisable value. We can now combine the reconstructed figures and year-end adjustments in their appropriate positions. Revenue is forty thousand dollars, and opening inventory plus purchases is three thousand plus twenty-two thousand dollars.

11:31Goods available for sale therefore total twenty-five thousand dollars. Subtract closing inventory of four thousand dollars to obtain cost of sales of twenty-one thousand dollars. Forty thousand minus twenty-one thousand gives gross profit of nineteen thousand dollars, with discount received of three hundred dollars added separately. Expenses are rent of three thousand three hundred dollars, electricity of thirteen hundred dollars and wages of five thousand four hundred dollars. Add depreciation of sixteen hundred dollars, irrecoverable debts of four hundred dollars, discount allowed of six hundred dollars and the allowance increase of two hundred and fifty dollars.

12:03Three thousand three hundred plus thirteen hundred plus five thousand four hundred is ten thousand dollars. Ten thousand plus sixteen hundred plus four hundred plus six hundred plus two hundred and fifty equals twelve thousand eight hundred and fifty dollars. Nineteen thousand plus three hundred minus twelve thousand eight hundred and fifty gives profit for the year of six thousand four hundred and fifty dollars. A statement of financial position shows assets, liabilities and owner's equity at a particular date.

12:29Rowan Stationery's year-end bank amount is five thousand seven hundred dollars. Capital introduced during the year was two thousand dollars, and drawings were three thousand five hundred dollars. These owner's transactions affect capital, while the statement of profit or loss reports the trading result. Current assets are inventory of four thousand dollars and receivables after allowance of four thousand seven hundred and fifty dollars. Prepaid rent of five hundred dollars and the bank amount join them.

12:53Four thousand plus four thousand seven hundred and fifty plus five hundred plus five thousand seven hundred equals fourteen thousand nine hundred and fifty dollars. Add equipment of six thousand four hundred dollars. Total assets are twenty-one thousand three hundred and fifty dollars. Eleven thousand six hundred plus six thousand four hundred and fifty plus two thousand minus three thousand five hundred gives closing capital of sixteen thousand five hundred and fifty dollars.

13:17Trade payables of four thousand five hundred plus unpaid electricity of three hundred give liabilities of four thousand eight hundred dollars. Capital plus liabilities totals twenty-one thousand three hundred and fifty dollars. The equation agrees because twenty-one thousand three hundred and fifty equals four thousand eight hundred plus sixteen thousand five hundred and fifty dollars. The closing statement of affairs gives the same capital from assets minus liabilities. Twenty-one thousand three hundred and fifty minus four thousand eight hundred equals sixteen thousand five hundred and fifty dollars.

13:46Sixteen thousand five hundred and fifty minus eleven thousand six hundred plus three thousand five hundred minus two thousand equals six thousand four hundred and fifty dollars. This independently confirms the statement of profit or loss result. A loss is the amount by which expenses exceed revenue for a period. In the following year, opening capital is last year's closing capital of sixteen thousand five hundred and fifty dollars. Closing capital is fourteen thousand six hundred and fifty dollars, drawings are two thousand three hundred dollars, and capital introduced is four thousand six hundred dollars.

14:17Fourteen thousand six hundred and fifty minus sixteen thousand five hundred and fifty plus two thousand three hundred minus four thousand six hundred equals minus four thousand two hundred dollars. The negative result represents a loss for the year of four thousand two hundred dollars.

Ratios and exam technique

14:31Mark-up is gross profit as a percentage of cost of sales, while margin is gross profit as a percentage of revenue. Their denominators differ because one compares the surplus with cost, while the other compares it with selling income. Always identify which percentage is given before using it to find a missing amount. For a separate batch, cost of sales is twelve hundred dollars and mark-up is fifty per cent.

14:52Fifty per cent of twelve hundred gives gross profit of six hundred dollars. Revenue is twelve hundred plus six hundred, which is eighteen hundred dollars. Six hundred divided by eighteen hundred is one third, so a fifty per cent mark-up equals a margin of thirty-three and one third per cent. Another batch has revenue of seven thousand five hundred dollars and a margin of twenty per cent. Twenty per cent of seven thousand five hundred gives gross profit of fifteen hundred dollars.

15:16Cost of sales is therefore seven thousand five hundred minus fifteen hundred, which is six thousand dollars. Working backwards from cost needs the share of revenue that cost represents. With a twenty per cent margin, cost of sales is eighty per cent of revenue. A batch costing five thousand six hundred dollars therefore sells for five thousand six hundred divided by eighty, times one hundred. That gives revenue of seven thousand dollars and gross profit of fourteen hundred dollars.

15:41The rate of inventory turnover measures how many times average inventory is sold and replaced during a period. Calculate it as cost of sales divided by average inventory. Average inventory usually equals opening inventory plus closing inventory, divided by two. Rearranging allows turnover information to supply missing cost of sales or average inventory. Suppose opening inventory is sixteen hundred dollars and closing inventory is three thousand two hundred dollars. Sixteen hundred plus three thousand two hundred is four thousand eight hundred, and half of that gives average inventory of two thousand four hundred dollars.

16:13With turnover of five times, cost of sales is five times two thousand four hundred, which is twelve thousand dollars. Purchases are the missing figure in this exercise. Cost of sales plus closing inventory minus opening inventory gives purchases. Twelve thousand plus three thousand two hundred minus sixteen hundred equals thirteen thousand six hundred dollars. A mark-up of twenty-five per cent then gives gross profit of three thousand dollars and revenue of fifteen thousand dollars.

16:39Three thousand divided by fifteen thousand is one fifth, so this mark-up equals a margin of twenty per cent. Credit sales and credit purchases come from the total trade receivables and trade payables accounts, with every discount and irrecoverable debt included. Each expense equals cash paid adjusted for accruals and prepayments. Apply mark-up to cost of sales and margin to revenue. When finding profit from changes in capital, add back drawings and deduct capital introduced.

17:04Paper One contains forty multiple-choice questions, while Paper Two contains five compulsory structured questions. Calculate means work out from given figures, and prepare means present information in a suitable format. Explain means give reasons, why and how, supported by evidence. Show reconstruction workings separately, then place the resulting figures in the appropriate financial statement. An exam-style question might ask you to explain one advantage and one disadvantage of Rowan Stationery's incomplete records.

17:33Keeping fewer records reduces the time spent recording transactions. However, missing sales totals make calculating the year's result harder because the owner must reconstruct credit sales. Each sentence names a point and its consequence for Rowan Stationery, which is what earns the explanation marks. Incomplete records require reconstruction, but the accounting relationships remain unchanged. Statements of affairs find capital from assets minus liabilities, while adjusted capital movements reveal the year's result.

17:59Customer and supplier movements recover missing transactions, and period adjustments distinguish payments from expenses. Mark-up, margin and inventory turnover supply further missing figures for the financial statements.