Accounts from Incomplete Records
Learning Outcomes
- Learn how to derive capitals at two different points of time through statement of affairs.
- Learn the technique of determining profit by comparing capital at two different points of time.
- Prepare Trading and Profit and Loss Account and Balance Sheet from incomplete records.
1. Introduction
- Very often small sole proprietorship and partnership businesses do not maintain double entry book keeping.
- They might keep a record of the cash transactions and credit transactions only.
- At the end of the accounting period, they will want to know the performance and financial position of their businesses.
KNOWLEDGE NUGGET
- Single Entry System: Incomplete or improper records
- Common in: Small sole proprietorship and partnership businesses
- Reasons: Lack of accounting knowledge, small business size
- Goal: Determine profit/loss and financial position
- There is no such formal system as Single-Entry System as the accounts can only be prepared using Double Entry System.
- Normally, the businessmen keep a record of cash receipts and cash payments and personal accounts (receivables, payables, capital etc.).
Features of Single Entry System
- It is an inaccurate, unscientific and unsystematic method of recording business transactions.
- There is generally no record of real and nominal accounts.
- Cash book mixes up business and personal transactions of the owners.
- There is no uniformity in maintaining the records.
- Profit under this system is only an estimate based on available information.
2. Types of Single Entry System
- (i) Pure single entry: Only personal accounts are maintained. No information available in respect of cash and bank balances, sales and purchases.
- (ii) Simple single entry: Personal accounts and cash book are maintained. Postings from cash book are made only to personal accounts.
- (iii) Quasi single entry: Personal accounts, cash book, and some subsidiary books (Sales book, Purchases book, Bills book) are maintained.
QUASI SINGLE ENTRY — FEATURES
- Personal accounts, cash book, and subsidiary books are maintained
- Main subsidiary books: Sales book, Purchases book, Bills book
- No separate record for discounts (entered into personal accounts)
- Scattered information available for important expenses (wages, rent, rates)
- This is the method generally adopted as a substitute for double entry system
3. Ascertainment of Profit by Capital Comparison
- This method is also known as Net Worth method or Statement of Affairs Method.
- By collecting information about assets and liabilities, it is easier to prepare balance sheet at two different points of time.
METHODS OF CAPITAL COMPARISON
- Closing capital increases if there is profit
- Closing capital decreases if there is loss
- Fresh investments → increase capital
- Withdrawals (drawings) → decrease capital
FORMULA — PROFIT/LOSS BY CAPITAL COMPARISON
| Capital at the end (a) | XX |
| Add: Drawings | XX |
| Less: Fresh capital introduced | (XX) |
| Capital at the beginning (b) | (XX) |
| Profit (a — b) | XX |
ILLUSTRATION 1
Raju does not maintain proper records of his business. Opening capital ₹10,000, Closing capital ₹12,500, Drawings ₹3,000, Capital added ₹3,750. Calculate profit or loss.
Solution:
- Closing capital: ₹12,500
- Add: Drawings: ₹3,000 → ₹15,500
- Less: Additional capital: (₹3,750)
- Less: Opening capital: (₹10,000)
- Net Profit: ₹1,750
3.1 Statement of Affairs
- Capital = Assets — Liabilities
- Sources for finding out assets and liabilities:
- Cash book for cash balance
- Bank pass book for bank balance
- Personal ledger for debtors and creditors
- Inventory by actual counting and valuation
- Fixed assets — original cost and date of purchase
STATEMENT OF AFFAIRS — FORMAT
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital (Balancing Figure) | XX | Building | XX |
| Loans, Bank overdraft | XX | Machinery | XX |
| Sundry creditors | XX | Furniture | XX |
| Bills payable | XX | Inventory | XX |
| Outstanding expenses | XX | Sundry debtors | XX |
| Bills receivable | XX | ||
| Cash and bank | XX | ||
| Prepaid expenses | XX | ||
| Total | XX | Total | XX |
3.2 Difference between Statement of Affairs and Balance Sheet
| Basis | Statement of Affairs | Balance Sheet |
|---|---|---|
| Source | Prepared on basis of transactions partly recorded under double entry and partly under single entry | Based on transactions recorded strictly on double entry bookkeeping |
| Capital | Capital is merely a balancing figure | Capital is derived from capital account in the ledger |
| Omission | Difficult to identify omitted assets and liabilities | No possibility of omission — balance sheet will not agree if items are missing |
| Valuation | Assets valued arbitrarily | Assets valued on scientific basis |
| Objective | To identify capital figures at beginning and end | To ascertain financial position on a particular date |
4. Techniques of Obtaining Complete Accounting Information
4.1 General Techniques
- Convert incomplete records first to double entry system and then draw up the Profit and Loss Account and Balance Sheet.
- Start the ledger accounts with the opening balances of assets, liabilities and capital.
- Post all entries which have not been posted from the Cash Book and other subsidiary books.
KEY POINTS FOR CONVERSION
- Personal receipts/payments of proprietor → credited/debited to Capital Account
- Business expenses paid from private resources → appropriate expense account debited
- Cash shortage due to proprietor's withdrawals → Capital Account debited
- Unidentified amounts → debit/credit to Capital Account
- Common expenses (e.g., rent) → allocate between business and proprietor
4.2 Derivation of Information from Cash Book
- Analysis of cash and bank receipts and payments should be extensive under significant heads.
- Prepare Cash and Bank Summary with both sides tallied.
CASH AND BANK SUMMARY — FORMAT
| Dr. | Cr. | ||
|---|---|---|---|
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Balance in hand (opening) | XX | By Expenses | XX |
| To Sales (Cash) | XX | By Purchases | XX |
| To Collection from Debtors | XX | By Sundry creditors | XX |
| To Fresh Capital | XX | By Drawings | XX |
| To Balance c/d (closing) | XX | By Balance c/d | XX |
| Total | XX | Total | XX |
4.3 Analysis of Sales Ledger and Purchase Ledger
TOTAL DEBTORS ACCOUNT — PROFORMA
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Opening balance | 5,000 | By Cash/Bank | 10,000 |
| To Sales | 38,000 | By Discount | 500 |
| To Bills dishonoured | 280 | By Bills receivable | 20,000 |
| To Interest | 100 | By Bad debts | 280 |
| By Closing balance | 12,600 | ||
| Total | 43,380 | Total | 43,380 |
TOTAL CREDITORS ACCOUNT — PROFORMA
| Particulars | Amount (₹) | Particulars | 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 | ||
| Total | 40,850 | Total | 40,850 |
4.4 Distinction between Business Expenses and Drawings
- Main items of drawings:
- Rent of premises used for residential and business purposes
- Common electricity and telephone bills
- Life insurance premiums paid from business cash
- Household expenses met from business cash
- Private loan payments out of business cash
- Personal gifts from business cash
- Goods or services taken for personal consumption
- Cash withdrawals to meet family expenses
- Amount collected from debtors used for personal expenses
4.5 Fresh Investment by Proprietors/Partners
- Fresh investments may take the following shape:
- Money from maturity of Life Insurance Policy
- Interest and dividend of personal investments
- Income from non-business property
- Payments made to creditors out of personal cash
Illustration 8
A. Adamjee keeps his books on single entry basis. Prepare final accounts for the year ending 31st March, 2022.
SOLUTION
A. Adamjee — Trading Account for the year ended 31st March, 2022
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Opening Inventory | 3,900 | By Sales | 62,100 |
| To Purchases | 49,100 | By Closing Inventory | 5,700 |
| To Gross profit c/d | 14,800 | ||
| Total | 67,800 | Total | 67,800 |
Profit & Loss Account for the year ended 31st March, 2022
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Salaries | 6,500 | By Gross Profit b/d | 14,800 |
| To Rent and Taxes | 1,500 | By Interest on investment | 200 |
| To General expenses | 2,500 | ||
| To Depreciation | 870 | ||
| To Provision for doubtful debts | 800 | ||
| To Net profit | 2,830 | ||
| Total | 15,000 | Total | 15,000 |
Summary
- Single entry system is generally found in sole trading concerns or even in partnership firms to some extent but never in case of limited liability companies on account of legal requirements.
- There are basically 3 types of single entry systems:
- (i) Pure Single Entry
- (ii) Simple Single Entry
- (iii) Quasi Single Entry
- Single entry system ignores the concept of duality and therefore, transactions are not recorded in their two-fold aspects.
Test Your Knowledge
True and False
- 1. A Trial Balance cannot be drawn up from books kept under Single Entry. True
- 2. Nominal Accounts are kept under Single Entry System. False
- 3. Single Entry System can be adopted by small firms. True
- 4. Profit under single entry system is always correct and accurate. False
- 5. Profits computed under single entry system by different business entities are not comparable. True
Multiple Choice Questions
| 1. In case of net worth method, profit is determined by | (a) Preparing a trading and profit and loss account. (b) Comparing the capital in the beginning with the capital at the end of the accounting period. (c) Comparing the net assets in the beginning with the net assets at the end. |
| 2. Single entry system can be followed by | (a) Small firms. (b) Joint stock companies. (c) Co-operative societies. |
| 3. Closing capital is calculated as | (a) Opening capital + Additional capital — Drawings. (b) Opening capital + Additional capital — Drawings + Profit. (c) Opening capital + Additional capital + Drawings — Profit. |
| 4. Under single entry system, only personal accounts are kept and, in some cases, | (a) Cash book is maintained (b) Fixed assets' accounts are maintained (c) Liabilities' accounts are maintained |
| 5. The closing capital of Mr. B as on 31.3.2022 was ₹4,00,000. On 1.4.2021 his capital was ₹3,50,000. His net profit was ₹1,00,000. He introduced ₹30,000 as additional capital. Find out the amount drawn by Mr. B for domestic expenses. | (a) ₹1,00,000 (b) ₹80,000 (c) ₹1,20,000 |
| 6. Opening capital: ₹60,000; Drawings: ₹5,000; Capital introduced: ₹10,000; Closing capital: ₹90,000. Profit earned? | (a) ₹20,000 (b) ₹25,000 (c) ₹30,000 |
High-Yield Interactive Quiz — Accounts from Incomplete Records
Q1. In single entry system, which accounts are generally maintained?
Correct Answer: B. Under single entry system, generally cash book and personal accounts of creditors and debtors are maintained, and no other ledger is maintained.
Q2. Profit under single entry system is determined by:
Correct Answer: C. In single entry system, profit is determined by comparing capital at two different points of time (Net Worth method).
Q3. Statement of Affairs is prepared from:
Correct Answer: B. Statement of Affairs is prepared on the basis of transactions partly recorded under double entry and partly under single entry.
Q4. In Statement of Affairs, Capital is:
Correct Answer: A. In Statement of Affairs, capital is merely a balancing figure being excess of assets over liabilities.
Q5. Which of the following is NOT a type of single entry system?
Correct Answer: C. The three types of single entry systems are: Pure single entry, Simple single entry, and Quasi single entry.
Q6. If closing capital is ₹1,32,000, drawings are ₹24,000, and opening capital is ₹1,00,000, the profit is:
Correct Answer: C. Profit = Closing Capital + Drawings — Opening Capital = ₹1,32,000 + ₹24,000 — ₹1,00,000 = ₹56,000.
Q7. In quasi single entry, which subsidiary books are maintained?
Correct Answer: C. In quasi single entry, personal accounts, cash book, and some subsidiary books (Sales book, Purchases book, Bills book) are maintained.
Q8. Single entry system is generally found in:
Correct Answer: B. Single entry system is generally found in sole trading concerns or even in partnership firms to some extent but never in case of limited liability companies.
Q9. Total Debtors Account is used to find:
Correct Answer: B. Total Debtors Account is used to find credit sales (as the balancing figure) when other information is given.
Q10. Total Creditors Account is used to find:
Correct Answer: B. Total Creditors Account is used to find credit purchases (as the balancing figure) when other information is given.
Q11. Profit under single entry system is:
Correct Answer: B. Profit under single entry system is only an estimate based on available information and therefore true and correct profits cannot be determined.
Q12. Which of the following would be treated as drawings?
Correct Answer: C. Household expenses met from business cash are treated as drawings. Salary, purchases for resale, and business rent are business expenses.