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Advance Financial Accounting (FIN-611)
VU
LESSON # 1
ACCOUNTING FOR INCOMPLETE RECORDS
1.
Introduction
This topic is also known as Single Entry System of Accounting. In this chapter we will
learn how an accountant prepares financial statements of those organizations which
are not keeping up proper double entry book keeping system of accounting.
From accounting system stand point, business organizations can be classified into
three broad categories:
1.1
Small scale business entities
These consist of very small sized business entities like; barber shop, mutton
shop, washer man, general store, electrician etc. etc.
1.2
Medium scale business entities
These consist of medium sized business entities like; drycleaner, motor car
dealers, house building contractors, schools etc. etc.
1.3
Large scale business entities
These consist of large sized business entities like; importers/exporters, motor
car manufactures, transporters etc. etc.
Here it must be made clear that large scale business entities have these much resources
with them that these can easily afford a systematic accounts department where they
will be following the double entry book keeping system. Moreover, most of these
concerns are incorporated bodies and these have to maintain systematic accounting
records in order to fulfill requirements of the Companies Ordinance 1984 and
International Financial Reporting Standards (IFRS).
2.
Accounting for Small scale business entities
Small  scale  business  entities  are  often  single  owner  organizations  (Sole
proprietorship). These are very small in size and can not really run an accountants
department in their organizations. They have a very little setup in which a sole trader
is acting so many rolls; he/she is the sales manager, and also the purchase manager,
also responsible for marketing and accounts matters as well.
A sole proprietor is also concerned about financial performance (profitability) and
financial position of the organization, which can make him/her able to take certain
future decisions. Certain government agencies, like taxation department, also require
knowing profits of the organization.
But as the size of the organizations are very little and these can hardly afford an
accountant therefore a very simple accounting system is proposed for such
organizations.
2.1
Accounting Records
These organizations do not have to keep any complex accounting records, these are
directed by their accounts consultant (Qualified Accountants) to keep certain
information relating to cash receipts (introduction of fresh capital) and payments
(drawings) and also relating to the period end balances of assets and liabilities. As size
of the transactions are very little therefore one can remember very easily what are the
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Advance Financial Accounting (FIN-611)
VU
year end balances of loan taken or was there any addition or disposal of assets during
the year. Finally the consultants prepare a statement of profit or loss for the period and
also a balance sheet as on the closing date of such period.
2.2
Statement of Profit or Loss
As you have studied in your earlier courses that profit is an out come of the Income
Statement that is prepared in a systematic way with the help of a trial balance
extracted from the ledger. But over here in the absence of a trial balance we are not
able to prepare an Income Statement. Here we will see that where that profit goes
within the financial statements, we finally find that the profit is added up in the
Owner's Equity, which appears like this:
Rs.
Owner's Equity (opening balance)
***
Add
Fresh capital (introduced during the year)
***
Net profit (for the year)
***
Less
Drawings (during the year)
(**)
Owner's Equity (closing balance)
***
For small scale business entities, which are not preparing proper books of accounts
and cannot extract a trial balance, the technique to calculate Net Profit will be to come
other way round.
To calculate Net Profit figure from the above equation one must know the all other
information that has to be put into it. Now the above equation will be reversed and
Net Profit figure will be its out come and this equation is then named as the
"Statement of Profit or Loss".
Name of the Organization
Statement of Profit or Loss
For the year ended December 31, 20x7
Rs.
Owner's Equity (closing balance)
***
Add
Drawings (during the year)
***
Less
Owner's Equity (opening balance)
(**)
Fresh Capital (introduced during the year)
(**)
Net profit (for the year) [balancing figure]
***
2.3
Statement of Affairs
From examination stand point, Drawings and Fresh capital will be given in the
questions but often the students will be required to calculate the opening and closing
balances of Owner's Equity as these will not be given in the question as a single
amount.
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Advance Financial Accounting (FIN-611)
VU
If you have not yet forgotten the basic accounting equation then Statement of Affairs is
very simple to understand. What you learned in the basic accounting equation was
that:
ASSETS
=
OWNER'S EQUITY + LIABILITIES
So to calculate the balance of owner's equity the equation will be reversed like:
OWNER'S EQUITY  =  ASSETS
+ LIABILITIES
Name of the Organization
Statement of Affairs
As on Opening and Closing Date
Opening
Closing
Rs.
Rs.
ASSETS
Furniture and fixture (net of depreciations)
***
***
Stocks
***
***
Debtors (net of provisions)
***
***
Prepaid expenses
***
***
Bank
***
***
Cash
***
***
LIABILITIES
Loan
(**)
(**)
Creditors
(**)
(**)
Accrued expenses
(**)
(**)
OWNER'S EQUITY (Net Assets)
***
***
The balance of Owner's Equity can also be termed as Net Assets as it is the balance of
assets after subtracting all liabilities.
2.4
Difference between Balance Sheet and Statement of Affairs
The only difference is that in Balance Sheet we put RESOURCES (Assets) against the
SOURCES (Owner's equity and Liabilities) by doing this we come to know the
financial position of the organization, whereas in Statement of Affairs we simply
calculate the balance of owner's equity at opening/closing dates of the accounting
period by subtracting liabilities for the asset. Balance sheet equation provides help in
calculating the balance of owner's equity and that's all.
Practice Questions
1
From the following information prepare statement of profit or loss for the
year.
Rs.(000)
Opening balance of capital
100
Closing balance of capital
150
Drawings
40
Fresh capital introduced during the year
25
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Advance Financial Accounting (FIN-611)
VU
2
Bilal Anwar started in business on 1 January 2005 with Rs. 10,000 in a bank
account. Unfortunately he did not keep proper books of account. He is
forced to submit a calculation of profit for the year ended 31 December 2005
he had stock valued at cost Rs. 3,950, a van which had cost Rs. 2,800 during
the year and which had depreciated by Rs. 550, debtors of Rs. 4,970,
expenses prepaid of Rs. 170, bank balance Rs. 2,564, cash balance Rs. 55,
trade creditors Rs. 1,030, and expenses owing Rs. 470. His drawings were:
cash Rs. 100 per week for 50 weeks, Cheque payments Rs. 673. Draw up
statements to show the profit or loss for the year.
3
Jehan Zeb is a dealer who has not kept proper books of account. At 31
August 2006 his state of affairs was as follows:
Rs
Cash
115
Bank Balance
2,209
Fixtures
4,000
Stock
16,740
Debtors
11,890
Creditors
9,052
Van (at valuation)
3,000
During the year to 31 August 2007 his drawings amounted to Rs. 7,560.
Winnings from a football pool Rs. 2,800 were put into the business Extra
fixtures were bought for Rs. 2,.000. At 31 August 2007 his assets and
liabilities were: Cash Rs. 84; Bank overdraft Rs. 165; stock Rs. 21,491;
Creditors for goods Rs. 6,002; Creditors for expenses Rs. 236; Fixtures to be
depreciated Rs. 600; Van to valued at Rs. 2,500; Debtors Rs. 15,821; prepaid
expenses Rs. 72 Draw up a statement showing the profit and loss made by
Jehan Zeb for the year ended 31 August 2007.
4
Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet