CHAPTER-10 ACCOUNTS FROM INCOMPLETE RECORDS Learning Objectives After studying this lesson you will be able to : Define the concept of incomplete records. Distinguish between Double entry system and Accounts from Incomplete records. Ascertain the amount of profit or loss using Statement of Affairs method. Differentiate between Balance Sheet and Statement of Affairs. Prepare Statement of Affairs using given data. Suggested Methodology Illustration Method Discussion Method Some small size business entities do not follow the double entry system of maintaining the accounting records because : 1. It is very costly system 2. It is a time consuming method, and 3. It requires expert staff to adhere to principles and accounting standards of system. Due to the above mentioned reasons, some business entities maintains books of accounts under the system Accounting from Incomplete records. The system in which no set rules of double entry system are followed is called [XI Accountancy] 186
Accounts from Incomplete records. Under this system only the following accounts are maintained cash book, and The personal accounts Some Real Account according to need Note : Nominal accounts are not maintained under this system. Under this system of maintaining accounts : Both the aspects of only certain transactions are recorded e.g. cash received from debtors or cash paid to creditors. One aspect of some transactions are recorded e.g. cash paid for purchase of goods. Some financial events are not recorded at all e.g. depreciation charged on fixed assets. Points to Remember Accounting Principles and Accounting Standards are not followed properly under this system. Original vouchers provide base for preparing the accounts. This method is highly flexible because it can be adjusted according to the needs of the orgnanisation. Profit or less is ascertained by either Statement of Affairs method or Conversion into Double Entry System Method. Use of Incomplete Records Books according to this system can be maintained only by those small entities in the form of Sole Proprietorship or Partnership firms that are not bound to keep records of business transactions as per double entry system. Companies cannot maintain books under this system because of legal provisions. 187 [XI Accountancy]
Limitations of Incomplete Records 1. Incomplete method : This method is incomplete method of maintaining the accounting records as the aspects, debit and credit, of every transaction are not recorded. 2. Unscientific System : This system is an unscientific system as not set rules are followed for recording the business transactions. 3. Arithmetical Accuracy cannot be checked : Under this system no real and nominal accounts are maintained. As such a trial balance cannot be prepared to check the arithmetical accuracy of the books of accounts. 4. True Profit or Loss cannot be ascertained : In the absence of Trial balance, a trading and profit and loss account cannot be prepared and hence the profit or loss ascertained during a particular period is based on estimates, hence cannot be relied upon. 5. True financial position of the business cannot be Judged : Since real accounts are not maintained, it is not possible to prepare a balance sheet showing the true financial position of the business. A Statement of Affairs is prepared to show the financial position of the business which itself shows the estimated values of assets and liabilities. 6. Chances of Errors and Frauds : Under this system the principles of double entry system are not followed hence internal checking is not possible. It leads to chances of errors and frauds. Also, it becomes very difficult to detect them. Ascertainment of Profit or Loss The main objective of any business enterprise is to earn profits. Business persons are always interested to know the amount of profit earned or loss beared during an accounting period. In case of organizations maintaining accounts under incomplete records the amount of profit or loss can be ascertained by Statement of Affairs method or Net Worth method. Statement of Affairs Method Under this method, profits or losses of the business are ascertained by comparing the Capital at the end, Capital at the beginning of the accounting period. [XI Accountancy] 188
Note : 1. When Capital at the end of an accounting is more than the capital in the beginning of the Accounting period Profits = Capital at the end Capital at the beginning 2. When Capital at the Capital at the Beginning is more than capital at the End of an Accounting Period. Losses = Capital at the Beginning Capital at the End For ascertainment of profit or loss, the following steps shall be taken : Step 1 : Calculate the amount of Opening capital (If not given in the Question) by preparing Statement of Affairs at the beginning of the accounting period. Step 2 : Calculate the amount of Closing Capital by preparing Statement of Affair at the end of the accounting period. Step 3 : Calculation of Profit or Loss by preparing Statement of Profit of Loss in the following manner : Statement of Profit or Loss for the year ended on.. Closing Capital (As ascertained by closing statement of affairs) Add - Drawings during the year Less - Additional capital introduced during the year Adjusted capital at the end Less - Opening Capital (As ascertained by Opening Statement of Affairs) Profit or loss for the year () () STATEMENT OF AFFAIRS A Statement of affairs is a statement showing the balances of assets (including cash and bank balance) on the right hand side and the balance of liabilities on the left hand side, on a particulars date. The difference in the total 189 [XI Accountancy]
of two sides is known as capital. Capital = Total Assets Total liabilities A statement of affairs is very similar to Balance Sheet as prepared for the business entities maintaining accounts under double entry system, though it should not be described as a Balance Sheet. A Statement of Affairs is prepared as follows : Statement of Affairs as on... Liabilities Assets Rs Bank Overdraft Cash in hand Sundry Creditors Cash at bank Bills Payable Bills Receivables Outstanding Expenses Sundry Debtors Income Received in Advance Stock Prepaid Expenses Capital Accrued Income (Balancing figure) Furniture Q. 1 Anil who keeps his books on single entry, tells you that his capital on 31-12-2013 was 18,700 and his capital on 1-1-2013 was 19,200. He further informs you that during the year he withdrew for his household purposes 8,420. He sold his investments of 2,000 at 2% premium and brought that money into the business. You are required to calculate Profit or Loss for the year 2013. Ans. Statement of Profit & Loss For the year ended on 31-12-2013 1. Statement of profit and loss 18,700 Add : Drawing during the years 8,420 27,120 Less : Capital introduced during the years 2,040 (2,000 102/100) [XI Accountancy] 190
25,080 Less : Capital in the beginning 19,200 Net profit for the year (B/F) 5,880 Q. 2 Ms. Anna started firm with a capital of 4,00,000 on 1st July 2013. She borrowed from her friends a sum of 1,00,000 @ 10% per annum (interest paid) for business and brought a further amount to capital 75,000. On Dec. 31, 2013, her position was : Cash 30,000 Stock 4,70,000 Debtors 3,50,000 Creditors 3,00,000 She withdrew 8,000 per month during the year. Calculate profit or loss for the year 2013 and show your workings clearly. Solution : Statement of Affairs as on 31st Dec. 2013 Assets Rs Creditors 3,00,000 Cash 30,000 Loan 1,00,000 Stock 4,70,000 Closing Capital (B/F) 4,50,000 Debtors 3,50,000 8,50,000 8,50,000 Statement of Profit & Loss For the year ended 31st Dec. 2013 Capital at the end 4,50,000 Add : Drawing during the years (8,000 6) 48,000 4,98,000 Less : Additional Capital introduced during the year 75,000 4,23,000 Less : Capital in the beginning 4,00,000 Net profit for the year (B/F) 23,000 191 [XI Accountancy]
Q. 3 Mr. Rajesh keeps his books by Single Entry Method. His position on 31st December, 2012 was as follows : Cash in hand 500, Cash at Bank 6,000, Stock 5,000, Debtors 3,300, Furniture 1,200, Creditors 4,000. During the year he introduced 4,000 as further capital in the Business, and withdrew 9,000 out of which he purchased a machine for 6,000 for the business. On 31 Dec., 2013 his position was as follows : Cash in hand 500, Cash at Bank 5,000, Stock 6,000, Debtors 4,600, Furniture 1,500 and Creditors 6,000. Prepare necessary statements showing the Profit or Loss earned by Mr. Rajesh during the year and a Balance Sheet as at 31st December, 2013 after making the following adjustments : Depreciate Furniture and Machine at 10% (on closing balance), write off bad debts 200 and provide 5% for doubtful debts. Solution : Statement of Affairs as on 31 Dec., 2012 Liabilities Assets Rs Creditors 4,000 Cash in Hand 500 Opening Capital 12,000 Cash at Bank 6,000 (B/F) Stock 5,000 Debtors 3,300 Furniture 1,200 16,000 16,000 Statement of Affairs as on 31st Dec. 2013 Liabilities Assets Rs Creditors 6,000 Cash in Hand 500 Machine 6,000 [XI Accountancy] 192
Less : Dep. 600 5,400 Opening Capital (B/F) 16,430 Cash at Bank 5,000 Stock 6,000 Debtors 4,600 Less : Bad Debts 200 4,400 Less : Provision 220 4,180 Furniture 1500 Less : Dep. 150 1,350 22,430 22,430 Statement of Profit & Loss For the year ended on 31st Dec., 2013 Capital at the end 16,430 Add : Drawing during the years (9,000 6,000) 3,000 19,430 Less : Capital introduced during the years 4,000 15,430 Less : Capital in the beginning 12,000 Net profit for the year (B/F) 3,430 193 [XI Accountancy]