FINAL ACCOUNTS FROM INCOMPLETE RECORDS

1.0 INTRODUCTION

An incomplete record is a set of accounts in which no full accounting records are available for the extraction of trial balance, yet the determination of profit from such records is necessary to show the result of the business operations and its financial position. This Unit will enable you to learn the preparation of final accounts from incomplete records.

2.0 OBJECTIVES

At the end of this unit, you should be able to:
define incomplete records and appreciate their disadvantages understand the indication of incomplete records determine profit of a business from incomplete sets of records
prepare final accounts from sets of incomplete records.

3.0 MAIN CONTENT

3.1 Final Accounts from Incomplete Records

3.1.1 Meaning of Incomplete Records

An incomplete record is any system of records which are kept not in complete compliance with double entry principles. The level of incompleteness of the records varies from having double entry in respect of certain transactions to no entry in respect of certain transactions. The system, therefore, has the following disadvantages:

1. Difficulty in ascertaining the arithmetical accuracy of records; 
2. Difficulty in ascertaining the actual profit of a business; 
3. Difficulty in determining the exact financial position of a business; 
4. Difficulty in planning and decision making for the business’s future. 

3.2 Indication of Incomplete Records

The following are the indications of incomplete records:

1.  Availability of Personal Accounts: In most incomplete records, personal accounts are usually kept to enable the business know how much it owes or owed by its customers. The personal accounts are those of various debtors and creditors. 
2.  Reliance on Source Documents: In order to obtain adequate records of business transactions one has to rely on source documents such as invoices for purchases and sales, receipts, credit and debit note, etc. 
3. Availability of Cash Book: Cash book is usually maintained which takes into account both the personal and business transactions. 

SELF ASSESSMENT EXERCISE 2

1.  Discuss any two indications of incomplete records. 
2. Why is bank statement important in preparing final accounts for a business that keeps incomplete records? 

3.3 Determination of Profit and Other Items of Final Accounts

In determining the profit or loss of a business, one of the following approaches can be adopted:

1.  Net Worth Method: Under this method, the profit of the business is deemed to be the difference between the net worth at two different dates. The date at the beginning and the date at the end of the period. The net worth is often determined as the difference between assets and liabilities. Some adjustments might be required when using this method, as follows: Drawing: This is considered as part of the closing capital of a business that was withdrawn for private use. For the purpose of ensuring that a true profit figure is ascertained, drawing is added back to the closing capital in the profit statements. Further Capital: Where in the course of a period, the proprietor introduced additional capital, this will make the capital at end to be higher than expected which might imply that a profit has been realized but it does not reflect profit per se. Such capital is usually deducted from the closing capital in the profit statement. 
2. Conversion Method: This method is applied when single entry records are maintained for certain transactions. It enables detailed information of revenue and expenses of a business to be ascertained. 

In using this method, certain figures are implied as discussed below: Sales: This can be determined where the opening and closing debtors’ figures are provided as well as receipts from debtors. The balancing figures can be implied to be the sales value.

Purchases: This can be determined where the opening and closing figures for creditors are available and payments to suppliers are also given.

Cash and Bank Balances: These are determined by preparing a cash book. Total of receipts is compared with the total of payments and the difference is implied to be cash in hand or at bank.

Capital: This can be ascertained by comparing the opening assets and liabilities. The difference, that is the excess of assets over liabilities, represents capital.
Accounting Ratios: Sometimes one has to rely on past ratios in determining key financial information. Ratios that are to be used are mark-up, margin, stock turnover and net profit to sales. These ratios help in the determination of sales, purchases, stock and expenses.

4.0 CONCLUSION

This Unit has explained the alternative methods for profit determination where a business fails to maintain adequate accounting records under the double entry system of book keeping. However, it is desirable that adequate records are kept by business since regulatory authorities such as the Board of inland/ internal revenue may not rely on income statement prepared under this system.

5.0 SUMMARY

This Unit concludes our discussion on financial accounting aspect of the syllabus. It addresses issues relating to ascertainment of profit from an incomplete records, using either the net worth or conversion methods. It is clear that despite the difficulties in relying on and using the single entry and incomplete records, final accounts could still be determined to show the financial position and result of operations of the reporting entity.