Week 10 - Accounting for partnerships and Incomplete records Pt2

Question 1

What are incomplete records in accounting?

Answer 1

Incomplete records refer to situations where a business does not maintain full double-entry accounting records, often only keeping partial or basic financial information.

Question 2

Why might a small business keep incomplete records?

Answer 2

Lack of accounting knowledge

Time constraints

Cost of hiring an accountant or using software

Belief that detailed records aren’t useful

• Common among sole traders or very small partnerships

Question 3

What challenges do incomplete records create for accountants?

Answer 3

– Accountants must reconstruct accounts using whatever information is available (e.g. bank statements, invoices, receipts)
– May require estimates or assumptions
– Increases the risk of errors or missing transactions
– Makes it harder to detect fraud or theft

Question 4

What types of information might still be available in incomplete records?

Answer 4

– Bank statements
– Sales invoices or summaries
– Purchase receipts
– Cheque book stubs
– Personal notes of takings and expenses

Question 5

What types of documents might incomplete records consist of?

Answer 5

Incomplete records may include:

Cash book / petty cash book

Cash receipts (record of incoming cash)

Bills and invoices (paid and unpaid)

Bank statements

Last year’s statement of financial position (or previous financial statements)

Question 6

Why might a business have incomplete records?

Answer 6

The business is using a single-entry system instead of full double-entry.

The records are not properly maintained or organised.

A disaster (e.g. fire, flood, or theft) has damaged or destroyed records.

The owner has limited accounting knowledge, especially common in small businesses.

Question 7

What is a single-entry system?

Answer 7

A single-entry system records only one side of each transaction, typically just cash flow. It does not track assets, liabilities, and capital in full detail. It lacks the checks and balances of double-entry accounting.

Question 8

What are the limitations of incomplete records?

Answer 8

Difficult to prepare accurate financial statements

Harder to detect errors and fraud

Challenging to track profitability and financial health

Limited use for decision-making and external reporting

Question 9

Example where revenue and expenses are incomplete
Joe doesn’t keep proper accounting records. His accountant produced a balance sheet for him at 31.12.17 showing the
following:
* Assets = £10,000; Liabilities = £3,500
* During the year, Joe has introduced new capital of £11,000 into the business and has withdrawn £4,000 in drawings for his living expenses.
* The accountant has calculated the following figures for 31.12.18:
* Assets = £12,500; Liabilities = £4,000.
* Calculate the profit for the year.

Answer 9

OB Assets – OB Liabilities = OB Equity
10,000 - 3500 = 6500
CB Assets – CB Liabilities = CB Equity
12,500 - 4000 = 8500

CB Equity = OB Equity + Profit + Capital Introduced – Drawings

Profit = CB Equity – OB Equity – Capital Introduced + Drawings

Profit = 8,500 - 6,500 - 11,000 + 4,000
Profit = -5,000

Joe made a loss of £5,000 during the year.

Question 10

What is a single-entry system in accounting?

Answer 10

A single-entry system records transactions only in books of prime entry, such as the cash book, but not in ledgers.

There may still be information available on:

Receivables (debtors)
Inventories (stock)
Non-current assets (e.g. equipment, vehicles)

This allows for the preparation of an Income Statement (I/S) and Statement of Financial Position (B/S), even without full ledgers.

Question 11

What is meant by “books of prime entry”?

Answer 11

Books of prime entry are the first place transactions are recorded. Examples include:

Cash book

Sales and purchases journals
Petty cash book
These are not part of the double-entry system on their own.

Question 12

What is an “incomplete single entry” system?

Answer 12

This refers to situations where no formal accounting records exist, but other documents are available, such as:

Bank statements

Cheque book stubs

Invoices (sales and purchases)
From these, accountants reconstruct a cash book and use it to create an Income Statement and Balance Sheet

Question 13

What is the first step when completing accounts from incomplete records?

Answer 13

Prepare opening accounts, especially to determine opening capital, using the previous year’s statement of financial position or available data.

Question 14

What must be done if no cash book exists?

Answer 14

Reconstruct the cash book using:

Bank statements

Receipts

Cheque stubs

Invoices
This will help track cash inflows and outflows.

Question 15

How are purchases calculated with incomplete records?

Answer 15

Add up cash purchases and credit purchases

Use invoices and supplier statements

Adjust for opening and closing payables to get total purchases for the period

Question 16

How can sales be estimated if records are incomplete?

Answer 16

Use cash sales and credit sales info

Analyse bank receipts, till receipts, and customer accounts

If very limited data:

Use gross profit margin or mark-up ratio

Estimate sales based on cost of goods sold

Question 17

How are accruals and prepayments accounted for in incomplete records?

Answer 17

Review bills paid:

In advance (prepayments)

Outstanding at year-end (accruals)
Adjust the expenses in the Income Statement accordingly.

Question 18

How are assets treated in incomplete records?

Answer 18

Use asset values to calculate depreciation

If an asset is sold:

Calculate profit or loss on disposal

Adjust non-current assets accordingly

Question 19

What do we check for receivables in incomplete records?

Answer 19

Estimate closing trade receivables

Check for bad debts or doubtful debts

Adjust in the Income Statement as an expense

Question 20

What adjustments should be made for drawings, dividends, or new capital?

Answer 20

Identify owner’s drawings (cash or goods taken out)

Note any dividends (for companies)

Record any new capital or loans introduced during the year

Question 21

What is the final step after reconstructing records?

Answer 21

Prepare financial statements:

Income Statement (profit/loss for the period)

Statement of Financial Position (assets, liabilities, and capital)

Question 22

Steps for completing incomplete records (Overall)

Answer 22

Prepare opening accounts to work out e.g. opening capital (if not already prepared)
* Prepare a cash book/account (if there isn’t one)
* Calculate purchases looking at cash and credit payments
* Calculate sales by looking at cash and credit receipts
– You may need to use ratios etc to calculate percentage profit where information is very incomplete.
* Look at bills which have been paid in advance or not paid at year end for accruals and prepayments
* Use asset values to calculate depreciation, profit on sale etc
* Look at receivables to calculate bad debts etc
* Check if any drawings/dividends have been paid and any more
capital/loans introduced
* Prepare financial statements

Question 23

Look at veterinary products example

Question 24

What is the formula to calculate credit sales from cash receipts?

Answer 24

Credit sales = CB trade receivables – OB trade receivables + Cash received
from trade receivables

Question 25

How do you calculate credit sales using the process of deduction?

Answer 25

Use the Receivables (Debtors) Account: Credit Sales = Closing Receivables – Opening Receivables + Cash Received from Customers Or, rearranged from T-account: Credit Sales = Cash Received + Closing Receivables – Opening Receivables

Question 26

What items are needed to calculate credit sales from incomplete records?

Answer 26

Opening receivables (from last year’s balance sheet) Cash received from receivables (from the cash book or bank statement) Closing receivables (usually given or estimated)

Question 27

Why are cash sales ignored when calculating credit sales this way?

Answer 27

Because the Receivables Account only tracks credit transactions—cash sales are received immediately and do not affect receivables.

Question 28

Example: Use the following to calculate credit sales OB receivables: £1,000 Cash received: £2,500 CB receivables: £700

Answer 28

Using the formula: Credit Sales = 2,500 (cash received) + 700 (closing balance) – 1,000 (opening balance) Credit Sales = £2,200 Trade Receivables Account look like for the above example: Dr (Receivables a/c) Opening Balance: £1,000 Credit Sales: £2,200 Total: £3,200 Cr Cash received: £2,500 Closing Balance: £700 Total: £3,200

Question 29

What are the two main steps to calculate Cost of Goods Sold (COGS)?

Answer 29

Calculate purchases using the Trade Payables (Creditors) Account Calculate COGS using the Inventory (Stock) Account

Question 30

How do you calculate purchases on credit using trade payables?

Answer 30

Use the formula: CB trade payables = OB trade payables + Purchases on credit – cash paid on credit purchases Rearrange: Purchases on Credit = Cash Paid on Credit Purchases + Closing Balance of Payables – Opening Balance of Payables

Question 31

How does the Trade Payables T account look when calculating purchases on credit?

Answer 31

Dr (Trade Payables) Cash Paid (from cash book) Balance b/d (Closing Balance) Cr (Trade Payables) Opening Balance (OB) Purchases on Credit (???) Balance c/f (Closing Balance)

Question 32

What is the basic formula for Cost of Goods Sold (COGS)?

Answer 32

COGS = Opening Inventory + Purchases – Closing Inventory

Question 33

How do you calculate COGS from purchases?

Answer 33

COGS can be calculated using the Inventory Account: COGS = Opening Inventory + Purchases (from creditors) – Closing Inventory Note: Purchases come from your trade creditors, which have already been calculated.

Question 34

How does the Inventory T-account look when calculating COGS?

Answer 34

Dr (Inventory) Opening Balance (OB) Cost of Purchases (from creditors) Balance C/F (Closing Balance) Cr (Inventory) Cost of Goods Sold (COGS) Closing Balance (CB) .

Question 35

Given the following, how do you calculate COGS: Opening inventory: £1,500 Purchases (from creditors): £20,300 Closing inventory: £1,800

Answer 35

Using the COGS formula: COGS = 1,500 + 20,300 – 1,800 COGS = £20,000

Question 36

How is the Inventory T-account structured when calculating COGS?

Answer 36

Dr (Inventory) Opening Balance (OB) Purchases (from creditors) Balance C/F (Closing Balance) Cr (Inventory) Costs of Goods Sold (COGS) Closing Balance (CB) .

Question 37

What is required for the Balance Sheet (B/S) for PPE?

Answer 37

The following values are required: Cost: The original value of the PPE, including purchases and any improvements Accumulated Depreciation: Total depreciation recorded up to the balance sheet date Net Book Value: The cost minus the accumulated depreciation Net Book Value = Cost – Accumulated Depreciation

Question 38

What is required for the Income Statement (I/S) for PPE?

Answer 38

For the Income Statement, you need: Depreciation expense for the year This is the total depreciation on the motor vehicles and equipment for the period. Depreciation Expense = Depreciation of Van + Depreciation of Equipment (if any)

Question 39

How is Rent Expense calculated for the Income Statement (I/S)?

Answer 39

CB prepayment = OB prepayment + cash paid - Rent expense Rearrange: Rent Expense = Opening Prepayment + Cash Paid – Closing Prepayment

Question 40

What information do you need to calculate Rent Expense?

Answer 40

Opening Prepayment: Rent that was paid in advance from last year. Cash Paid: The actual rent paid during the current year. Closing Prepayment: The amount of rent paid in advance at the end of the current year.

Question 41

Why is Rent Expense adjusted by prepayments for both I/S and B/S?

Answer 41

In the Income Statement: Rent Expense reflects the actual cost of rent for the period, adjusting for any prepaid amounts. In the Balance Sheet: The closing prepayment represents the amount of rent paid in advance, which is an asset.

Question 42

How is the Rental T-account structured when calculating Expense for I/S?

Answer 42

Dr (Rental) Opening Balance Cash paid in yr Cr (Rental) Expense for I/S (???) Closing Balance

Question 43

Calculating Veterinary Products expenses for I/S and prepayments for B/S: Prepayment: - Rent paid on 31 August 2018 covers period to 31 August 2019. The amount is in the cash book £3,200 - At 28/02/2019, 6 months of this rent has been “used” and 6 months relates to the next financial year - Prepayment is therefore 6/12 x £3,000 = - This is the amount shown in the B/S for 28/02/2019 (Closing balance) - Opening balance is from previous year’s B/S: 1,400

Answer 43

Rent expense = OB prepayment + cash paid – CB prepayment

Question 44

How is Electricity Expense calculated for the Income Statement (I/S)?

Answer 44

CB accrual = OB accrual + Electricity expense – cash paid Rearrange: Electricity Expense = Closing Accrual – Opening Accrual + Cash Paid

Question 45

What information is required to calculate Electricity Expense?

Answer 45

Opening Accrual: The amount of electricity expense accrued (owed) at the start of the year. Cash Paid: The amount of electricity paid for during the year. Closing Accrual: The amount of electricity expense accrued (owed) at the end of the year.

Question 46

Example: Calculate Electricity Expense Opening Accrual (OB): £2,000 Cash Paid: £10,000 Closing Accrual (CB): £1,500

Answer 46

Electricity Expense = 1,500 – 2,000 + 10,000 = £9,500 This would be recorded as the electricity expense in the Income Statement.

Question 47

How is the Electricity T-account structured when calculating Expense for I/S?

Answer 47

Dr (Electricity) Cash paid Closing Balance Cr (Electricity) Opening Balance Expense for I/S (???)

Question 48

What is the formula for calculating Total Sales?

Answer 48

Total Sales = Cash Sales + Credit Sales

Question 49

How do you calculate Current Assets for the Balance Sheet?

Answer 49

The Current Assets include: Inventory (Closing balance) Trade receivables (Closing balance) Prepayment (closing balance of rent, electricity, etc.)

Question 50

How do you calculate Current Liabilities for the Balance Sheet?

Answer 50

The Current Liabilities include: Trade payables (Closing balance) Accruals (Closing balance) Bank overdraft (if applicable)

Question 51

What is the formula to calculate Non-Current Liabilities?

Answer 51

Closing Bank Loan = Opening Bank Loan + New Bank Loans – Loan Repayments

Question 52

What is the formula for calculating Closing Equity Capital?

Answer 52

CB Equity Capital = OB Equity Capital + New Equity Introduced + Profit for the Year – Drawings