Accounts from Incomplete Records

1. Introduction
2. Types
3. Ascertainment of Profit by Capital Comparison
4. Techniques of obtaining complete Accounting Information

Very often small sole proprietorship and partnership businesses do not maintain double entry book keeping system. They keep a record of the cash transactions and credit transactions only. But at the end of the accounting period, they will want to know the performance and financial position of their businesses. This creates some special problems to the accountants. This chapter discusses how to complete the accounts from available incomplete records and addresses the problems faced in a single entry system.

The term “Single Entry System” is popularly used to describe the problems of accounts from incomplete records. In practice, quack accountants follow some hybrid methods. For some transactions they complete double entries and for some others they complete just one aspect of the transaction. In fact, for some other transactions, they even do not pass any entry. Briefly, this may be stated as incomplete records. The task of the accountant is to establish link among the available information and to finalize these accounts.

• It is an inaccurate, unscientific and unsystematic method of recording business transactions.
• There is generally no record of real and nominal 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 firm to firm depending on the requirements and convenience of each firm.
• Profit under this system is only an estimate based on available information and therefore true and correct profits cannot be determined. The same is the case with the financial position in the absence of a proper balance sheet.

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

1. 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, sales 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.
2. 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 made only to personal accounts with no other account to be found in the ledger. Cash received from debtors or cash paid to creditors is simply noted on the bills issued or received as the case may be.
3. 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 the method which is generally adopted as a substitute for double entry system.

 

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 by 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/loss for the current year.

Closing capital increases if there is profit, while it reduces if there is loss incurred during the year. However, if the proprietor/partners make fresh investments in the business, capital increases; and any withdrawal made by them, decreases the capital. The following points shall be considered while computing the profit/loss under capital comparison method-

Particulars	Amount
Capital at the end (a)	xxx
Add: Drawings	xxx
Less: Fresh capital introduced	xxx
Capital at the beginning (b)	xxx
Profit (a-b)	xxx

ALTERNATIVELY

Profit/Loss can also be ascertained as balancing figure by preparing capital account as follows:

Particulars	Dr. Amount	Particulars	Cr. Amount
To drawings	xxx	By Balance b/d	xxx
To Net Loss (Bal Fig)	xxx	By additional capital	xxx
To Blance c/d	xxx	By Net Profit (Bal Fig.)	xxx
	xxx		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 by preparing statement of affairs at the two respective points of time. Capital = Assets(-) liabilities.

 

Thus, the 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
3. Personal ledger for debtors and creditors
4. Inventory by actual counting and valuation.
5. As regards fixed assets, he prepares a list of them. The proprietor would help him by disclosing the original cost and date of purchase. After deducting reasonable amount of depreciation, the written down value would be included in the Statement of Affairs.

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

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

Liabilities	Amount	Assets	Amount
Capital (Bal. Fig.)	xxx	Building	xxx
Loans, Bank overdraft	xxx	Machinery	xxx
Sundry creditors	xxx	Furniture	xxx
Bills Payable	xxx	Inventory	xxx
Outstanding expenses	xxx	Sundry debtors	xxx
		Bills receivable	xxx
		Loans and advances	xxx
		Cash and Bank	xxx
		Prepaid expenses	xxx
	xxx		xxx

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

 

Basis	Statement of affairs	Balance sheet
Source	It is prepared on the basis of transactions partly recorded under the double entry book keeping and partly under the single entry. Most of the assets are recorded based on the estimates, assumptions, information gathered from memory rather from the 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 relevant subsidiary books, ledger and documentary evidences.
Capital	In this statement, capital is merely a balancing figure being excess of assets over liabilities. 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 from incomplete records, it is very difficult, to identify and record those assets and liabilities, if 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, fixed assets are shown at the original costs less depreciation till date. Any change in the method of valuation is properly disclosed.
Objective	The objective of preparing this statement is to identify the capital figures in the beginning and at the end of the accounting period respectively.	The objective of preparing the balance sheet is to ascertain the financial position on a particular date.

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4. TECHNIQUES OF OBTAINING COMPLETE ACCOUNTING INFORMATION

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

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 and the Balance Sheet, instead of determining the amount of profit/loss by 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 to first 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 by posting into the ledger all entries which 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, Purchase Return Book, Sales Return Book, Bills Receivable and Bills Payable, etc. should be totaled up and their totals posted into the ledger to the debit or credit of the appropriate nominal or real accounts, as the personal aspect of the transactions have 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 can be several receipt entries which have no connection with the business but which belong to the proprietor, e.g., interest collected on his private investment, legacies received by him, amount contributed by 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 and his personal expenses. All such items should be taken to his capital account on the debit side.
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 recorded in 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 of obtaining funds to be 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 anywhere else.
4. Where the benefit of an item of an expense is received both by the proprietor and business, then it should be allocated between the two 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 by him for residence.

In the end, it will be possible to draw a Trial Balance. Students are advised to prepare a Trial balance as it will bring out any mistakes committed while making the above adjustments.

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 (assumed figure)

Particulars	Cash	Bank	Particulars	Cash	Bank
To Balance in hand (opening)	590	7,400	By Expenses (Sundry Payments)	3,000
To Sales	6,500		By Purchases	100	6,000
To Collection from Debtors		10,000	By sundry creditors		5,000
			By Drawings	1,500
			By Petty expenses	800
			By Rent		1,000
			By Electricity and water	350
			By Repairs	350
			By Wages		1,000
			By Balance in hand	990	4,400
	7,090	17,400		7,090	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.

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

• Op. Customer Balance
• Sales
• Bills Dishonored
• Total Debits
• Cash Recd.
• Discounts Allowed
• Bills Received
• Sales Returns
• Bad Debts
• Total Credit
• Balance (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:

Proforma of Total Debtors Account (assumed figures)

Particulars	Dr. Amount	Particulars	Cr. Amount
To Opening balance	5,000	By Cash/Bank	10,000
To Sales	38,000	By Discount	500
To Bill dishonoured	280	By Bills receivable	20,000
To Interest	100	By Bad debts	280
		By Closing balance	12,600
	43,380		43,380

In can be seen from the above format that, if any one figure is not given it can be found out easily as the balancing figure. It can be opening balance, credit sales, cash collected or closing balance etc. For instance, if the information about sales is not available it could be ascertained as the balancing figure, i.e., in the total Debtors Account given above, if all other figures are given, amount of sales on credit basis can be easily ascertained.

Purchases Ledger: Generally speaking, a Purchases Ledger is not as commonly maintained as the Debtors Ledger for it being 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 accepted, 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 by debiting or crediting the respective impersonal accounts. Contra credit or debit being given to total creditor’s account.

From the available information total creditors account 

Particulars	Dr. Amount	Particulars	Cr. Amount
To Cash/bank	25,000	By Opening Balance	10,000
To Purchase Returns	400	By Purchases	30,400
To Bills payable	8,700	By Bill payable dishonoured	450
To discount received	100
To Closing Balance	6,650
	40,850		40,850

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

Cash paid to Creditors including on account of bills payable during the period ...............

Closing balance of Creditors and Bills Payable ...................

Total ___  _ ___

 

Less: Opening balance of Creditors and Bills Payable ...................

Net credit purchase during the period ...................

Cash paid to creditors during the period ...................

Add: Bills Payable issued to them ...................

Total ___  _ __

Closing balance of Creditors

Less: Opening balance of creditors ...................

Credit Purchases during the period ...................

Nominal Accounts: It is quite likely that the total expenditure shown by 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 (1+2+3)	5	6 (4-5)
Rent & Rates	2,200	300	100	2,600	150	2,450
Salaries	4,500	500	1,000	6,000	250	5,750

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 para 4.2. Given some other information, how to compute credit purchase and credit sale is discussed below:

Opening balance (1-4-20X1)
Inventory	20,000
Sundry Creditors	12,300
Sundry Debtors	15,000
Closing Balance (31-03-20X2)
Inventory	15,000
Sundry Creditors	13,800
Sundry Debtors	25,600
CAsh paid to creditors	26,370
Cash received from debtors	45,600
Cash sales	8,340
Cash purchases	3,000
Discouunt received during the year	1,130
Discount allowed	1,870

Particulars	Dr. Amount	Particulars	Cr. Amount
To Cash	26,370	By Balance b/d (opening)	12,300
To Discount (received)	1,130	By Purchases (balancing figure)	29,000
To Balance c/d (closing)	13,800
	41,300		41,300

Particulars	Dr. Amount	Particulars	Cr. Amount
To Balance b/d	15,000	By Cash	45,600
To Credit sales (balancing figure)	58,070	By Discount (allowed)	1,870
		By Balance c/d	25,600
	73,070		73,070

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.

• 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.
• Amount collected from debtors directly used for meeting personal expenses.

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

Like drawings, often fresh investments made by 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.
• Payments made to creditors out of personal cash.

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

 

In the examination we would be given:

1. Opening and closing assets and liabilities
2. Cash transactions
3. Other information

1. Trading Account
2. Profit and loss account
3. Balance Sheet

How to proceed

STEP I: Prepare format of

1. Trading Account for the year
2. Profit and loss account for the year
3. Balance Sheet at the end of the year

And various other accounts as working notes as follows

1. Opening Balance Sheet
2. Cash Book (with two separated Cash and Bank column if possible)
3. Total Debtors Account
4. Bills Receivable Account (if required)
5. Total creditors Account
6. Bills payable Account (if required)
7. Any particular fixed asset (if required)
8. Any other account as required

STEP II

1. Do the posting of opening balances in the opening balance sheet and as opening balance in concerned account
2. Do the posting of all the transactions on the basis of double entry.
3. Take in to account all the information given
4. Close all the accounts one by one logically, finding out missing figures and posting them to second account concerned. e.g. you can find cash collected from debtors from cash account , then post it to debtors account and find closing debtors etc.
5. Complete the trading account, profit and Loss account and then balance sheet.

Single entry problem is just like su do ku, one must be able to find out missing figures logically and sequentially