CIMA - C2 Fundamentals of Financial Accounting
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290 19: Incomplete records ⏐ Part C Final accounts and audit
Calculate the I/S figure for telephone expense.
Solution
The telephone expense to be shown in the I/S account for the year to 30 June 20X7 is the balancing figure in the
following T account. (Remember that an accrual is a current liability, and so is a credit balance b/f.)
TELEPHONE EXPENSES
$
$
Cash
6,720
Balance b/f (accrual)
850
Balance c/f (accrual)
1,140
I/S (balancing figure)
7,010
7,860
7,860
Balance b/f
1,140
10 Drawings
Drawings are cash withdrawals made by the proprietor for his personal use. He may also pay personal funds into the
business bank account.
Drawings would normally represent no particular problem at all in preparing a set of final accounts from incomplete
records, but it is not unusual for questions to introduce a situation in which:
(a) the business owner pays income into his bank account which has nothing whatever to do with the business operations.
For example, the owner might pay dividend income, or other income from personal investments into the bank.
(b) the business owner pays money out of the business bank account for items which are not business expenses, eg
life insurance premiums or holidays.
10.1 Accounting for drawings
Where such personal items of receipts or payments are made.
(a) Receipts should be set off against drawings. For example, if a business owner receives $600 in personal
dividend income and pays it into his business bank account then the accounting entry is
DEBIT Cash
CREDIT Drawings
(b) Payments should be charged to drawings.
DEBIT Drawings
CREDIT Cash
10.2 Drawings: beware of the wording in a question
You should note the following.
(a) If a question states that a proprietor
'
s drawings during the year are
'
approximately $40 per week
',
you
should assume that drawings for the year are $40 × 52 weeks = $2,080.
(b) If a question states that drawings in the year are
'
between $35 and $45 per week
'
, do
not
assume that the
drawings average $40 per week and so amount to $2,080 for the year. You could not be certain that the
actual drawings did average $40, and so you should treat the drawings figure as a missing item that needs
to be calculated.
Assessment
focus point
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Part C Final accounts and audit ⏐ 19: Incomplete records 291
11 The business equation
The business equation is:
Profit(loss) = movement in net assets – capital introduced + drawings
11.1 Computing net profit
The most obvious incomplete records situation is that of a sole trader who has kept no trading records. It may not be
possible to reconstruct his whole income statement, but it will be possible to compute his profit for the year using the
business equation
.
Here is the basic statement of financial position format:
Assets
XX
Capital
X
Liabilities
X
XX
This can be rearranged as:
Assets
XX
Liabilities
(X
)
X
Capital X
So this gives us a figure for capital – assets less liabilities, or
net assets
.
What will increase or decrease capital?
Capital is changed by:
(a) Money paid in by the trader
(b) Drawings by the trader
(c) Profits or losses
So, if we are able to establish the traders net assets at the beginnings and end of the period, we can compute profits as
follows:
Profit (loss) = movement in net assets – capital introduced + drawings
We want to eliminate any movement caused by money paid in or taken out for personal use by the trader. So we take out
capital introduced and add back in drawings.
The formula can be written as P = I + D – Ci, where I is increase in net assets.
11.2 Example: business equation
Joe starts up his camera shop on 1 January 20X1, from rented premises, with $5,000 inventory and $3,000 in the bank.
All of his sales are for cash. He keeps no record of his takings.
At the end of the year he has stock worth $6,600 and $15,000 in the bank. He owes $3,000 to suppliers. He had paid in
$5,000 he won on the lottery and drawn out $2,000 to buy himself a motorbike. The motorbike is not used in the
business. He has been taking drawings of $100 per week. What is his profit at 31 December 20X1?
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292 19: Incomplete records ⏐ Part C Final accounts and audit
Solution
Opening net assets
Inventory
5,000
Cash
3,000
8,000
Closing net assets
Inventory
6,600
Cash
15,000
Payables
(3,000
)
18,600
Movement in capital
10,600
Less capital paid in
(5,000)
Plus drawings ((100 × 52) + 2000)
7,200
Profit
12,800
12 Dealing with incomplete records problems
12.1 Suggested approach
A suggested approach to dealing with incomplete records problems brings together the various points described so far
in this chapter. The nature of the
'
incompleteness
'
in the records will vary from problem to problem, but the approach
should be successful in arriving at the final accounts whatever the particular characteristics of the problem.
The approach is as follows.
Step 1
If it is not already known, establish the opening statement of financial position and the proprietor's
interest.
Step 2
Open up four accounts.
(i) Trading account (if you wish, leave space underneath for entering the rest of the income statement
later)
(ii) A cash book, with two columns if cash sales are significant and there are payments in cash out of
the till
(iii) A receivables account
(iv) A payables account
Step 3
Enter the opening balances in these accounts.
Step 4
Work through the information you are given line by line. Each item should be entered into the relevant
account, as appropriate.
You should also try to recognise each item as a 'I/S income or expense item' or a 'closing statement of
financial position item'.
It may be necessary to calculate an amount for drawings and an amount for non-current asset
depreciation.
Step 5
Look for the balancing figures in your accounts. In particular you might be looking for a value for credit
sales, cash sales, purchases, the cost of goods sold, the cost of goods stolen or destroyed, or the closing
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Part C Final accounts and audit ⏐ 19: Incomplete records 293
bank balance. Calculate these missing figures, and make any necessary double entry (eg to the trading
account from the payables account for purchases).
Step 6
Now complete the income statement and statement of financial position. Working T accounts might be
needed where there are accruals or prepayments.
13 Using a receivables account to calculate both cash sales
and credit sales
A final point which needs to be considered is how a missing value can be found for cash sales and credit sales, when a
business has both, but takings banked by the business are not divided between takings from cash sales and takings from
credit sales.
13.1 Example: using a receivables account to find total sales
A business had, on 1 January 20X8, trade receivables of $2,000, cash in the bank of $3,000, and cash in hand of $300.
During the year to 31 December 20X8 the business banked $95,000 in takings.
It also paid out the following expenses in cash from the till.
Drawings $1,200
Sundry expenses $800
On 29 August 20X8 a thief broke into the shop and stole $400 from the till.
At 31 December 20X8 trade receivables amounted to $3,500, cash in the bank $2,500 and cash in the till $150.
What was the value of sales during the year?
Solution
If we tried to prepare a receivables account and a two column cash book, we would have insufficient information, in
particular about whether the takings which were banked related to cash sales or credit sales. All we do know is that the
combined sums from receivables and cash takings banked is $95,000.
The value of sales can be found instead by using the receivables account, which should be used to record cash takings
banked as well as payments by receivables. The balancing figure in the receivables account will then be a combination of
credit sales and some cash sales. The cash book only needs to be a single column.
RECEIVABLES
$
$
Balance b/f
2,000
Cash banked
95,000
Sales – to trading account
96,500
Balance c/f
3,500
98,500
98,500
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294 19: Incomplete records ⏐ Part C Final accounts and audit
CASH (EXTRACT)
$ $
Balance in hand b/f 300 Payments in cash:
Balance in bank b/f 3,000 Drawings 1,200
Receivables a/c 95,000 Expenses 800
Other payments ?
Cash stolen 400
Balance in hand c/f 150
Balance in bank c/f 2,500
The remaining
'
undiscovered
'
amount of cash sales is now found as follows.
$
$
Payments in cash out of the till
Drawings
1,200
Expenses
800
2,000
Cash stolen
400
Closing balance of cash in hand
150
2,550
Less opening balance of cash in hand
(300
)
Further cash sales
2,250
(This calculation is similar to the one described above for calculating cash sales.)
Total sales for the year are
$
From receivables account
96,500
From cash book
2,250
Total sales
98,750
A similar technique can be used to find cash and credit purchases using a payables account.
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Part C Final accounts and audit ⏐ 19: Incomplete records 295
Chapter roundup
•
Incomplete records occur when a business does not have a full set of accounting records because:
– The proprietor of the business does not keep a full set of accounts.
– Some of the business accounts are accidentally lost or destroyed.
•
Where accounts for the previous period are not available, the accountant will have to reconstruct an opening statement
of financial position.
•
If a business does not keep a record of its sales on credit, the value of these sales can be derived from the opening
balance of trade receivables, the closing balance of trade receivables, and the payments received from trade receivables
during the period.
•
A similar relationship exists between purchases of inventory during a period, the opening and closing balances for trade
payables, and amounts paid to trade payables during the period.
•
In some questions you must use the information in the trading account rather than the trade payables account to find the
cost of purchases. This information could also be used to find inventories or cost of sales.
•
Where inventory, sales or purchases is the unknown figure, it will be necessary to use information on gross profit
percentages in order to construct a trading account in which the unknown figure can be inserted as a balance.
•
A similar type of calculation can derive the value of goods stolen or destroyed.
•
If no cash book has been kept it may need to be written up from available information. This is sometimes done as a two-
column bank/cash book.
•
Where there is an accrued expense or a prepayment, the charge to be made in the I/S account for the item concerned
should be found from the opening balance b/f, the closing balance c/f, and cash payments for the item during the period.
•
Drawings are cash withdrawals made by the proprietor for his personal use. He may also pay personal funds into the
business bank account.
•
The business equation is:
Profit(loss) = movement in net assets – capital introduced + drawings
•
A final point which needs to be considered is how a missing value can be found for cash sales and credit sales, when a
business has both, but takings banked by the business are not divided between takings from cash sales and takings from
credit sales.
Quick quiz
1 Given cash sales $15,000, receipts from credit customers $23,000, opening receivables (at 1.1.X1) $7,500 and closing
receivables (at 31.12.X1) $9,500, calculate the total sales for a business, which does not keep full records, for 20X1.
A $36,000
B $38,000
C $40,000
D $25,000
2 A business has opening payables (1.7.20X1) $5,000, closing payables (30.6.20X2) $7,000, cash purchases $1,500, cash
payments to credit suppliers $28,000. Calculate the total purchases figure for inclusion in the trading account.
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296 19: Incomplete records ⏐ Part C Final accounts and audit
A $27,500 C $31,500
B $29,500 D $30,000
3 The term 'incomplete records' means that?
A The business has not kept a full set of accounting records
B The records have been lost
C Small limited liability companies are not under an obligation to keep full accounts
D The business is unable to complete its financial statements
4 A business has the following assets and liabilities at 1.1.X1, calculate the owners capital at 1.1.X1. Premises $15,000,
van $5,000, inventory $2,000, payables $8,000, receivables $6,000, accruals $1,000, bank loan $10,000, bank overdraft
$1,200.
A $10,200 C $7,800
B $9,800 D $23,800
Answers to quick quiz
1 C Correct: $23,000 + $9,500 – $7,500 + $15,000.
A Incorrect, you have reversed opening and closing receivables balances.
B Incorrect, this is cash sales plus receipts from receivables which must be adjusted for opening and closing
receivables.
D Incorrect, this is credit sales, you were asked for total sales.
2 C Correct, 28,000 + 7,000 – 5,000 = $30,000 credit purchases + $1,500 cash purchases.
A Incorrect, you have transposed opening and closing payables.
B Incorrect, payments to credit suppliers must be adjusted for payables changes.
D This is the credit, not total, purchases figure.
3 A Correct.
B If records have been lost, it will be necessary to create financial statements from the data which remains.
C Small limited liability companies must keep 'proper accounting records'.
D This is a consequence of not keeping proper records, the business accountant will work from incomplete data
which will make the task more difficult and expensive.
4 C Correct: 15,000 + 5,000 + 2,000 – 8,000 + 6,000 – 1,000 – 10,000 – 1,200 = 7,800 = net assets = capital.
A Incorrect, you have treated the bank overdraft as an asset.
B Incorrect, you have treated both receivables and payables incorrectly.
D Incorrect, you have included payables as an asset – be careful how you extract data from lists of items given in
questions.
Now try the questions below from the Question Bank
Question numbers Page
81–91 407
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297
Topic list Syllabus references
1 The receipts and payments account D (8)
2 Income and expenditure account D (8)
3 Preparing income and expenditure accounts D (8)
The accounts of
unincorporated
organisations
(income and expenditure accounts)
Introduction
So far you have dealt with the accounts of businesses. This chapter considers non-trading
organisations, that is organisations which are not incorporated under the Companies Act and
whose objectives are to provide services to their members or the pursuit of one or a number
of activities rather than the earning of profit.
If subscriptions are charged, there will be a need for some financial records, the minimum
possible being a cash book and petty cash book. Clubs, which rely on this minimum
package, often confine their annual accounts to a receipts and payments account. This is
simply a summary of cash received and paid for a period, and is discussed in Section 1 of
this chapter.
A receipts and payments account may be adequate for some clubs but has important
deficiencies when used by clubs which have substantial assets (in addition to cash) and
liabilities. The arguments in favour of accruals-based accounting apply to clubs as well as
profit-making entities. Most large clubs do produce financial statements based on accruals
accounting. In particular many clubs produce what is basically an income statement but they
call it an income and expenditure account. This is the subject of Section 2 and 3 of this
chapter.
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298 20: The accounts of unincorporated organisations (income and expenditure accounts)⏐ Part C Final accounts and audit
1 The receipts and payments account
The receipts and payments account is effectively a summary of an organisation's cash book. For small clubs with a few
straightforward transactions, this statement may be sufficient. For larger concerns it will be used to prepare an income
and expenditure account and statement of financial position.
This chapter deals with the financial statements for non-profit making organisations.
1.1 Use of the receipts and payments account
Many charities and clubs keep records only of cash paid and received. To facilitate production of the financial statement,
an analysed cash book may be used. No statement of financial position is produced with a receipts and payments
account.
1.2 Example: receipts and payments account
HIGH LEE STRONG TENNIS CLUB
RECEIPTS AND PAYMENTS ACCOUNT
FOR THE YEAR ENDED 30 APRIL 20X0
Receipts
$
Payments
$
Balance b/f
16
Bar expenses
106
Bar takings
160
Rent
50
Subscriptions
328
Wages
140
Postage
10
Printing
12
Affiliation fees to LTS
18
Lawn mower*
50
Heat and light
60
___
Balance c/f
58
504
504
*Item of capital expenditure
The table lists advantages and disadvantages of this type of financial statement.
Advantages Disadvantages
(a) Very easy to produce and understand. (a) Takes no account of any amounts owing or prepaid.
(b) Serves as a basis for the preparation of the income
and expenditure account and statement of
financial position.
(b) Includes items of capital expenditure and makes no
distinction between capital and revenue items.
(c) Takes no account of depreciation of non-current
assets.
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Part C Final accounts and audit ⏐ 20: The accounts of unincorporated organisations (income and expenditure accounts) 299
2 Income and expenditure account
An income and expenditure account is the name given to what is effectively the income statement of a non-trading
organisation, eg sports clubs, social clubs, societies, charities and so on. The principles of 'accruals' accounting (the
matching concept) are applied to income and expenditure accounts in the same way as for income statements.
2.1 Non-trading entities
In a non-trading organisation the result for the year is described as a surplus or deficit, not a profit or loss, and the
capital of the organisation is known as the accumulated fund.
There are a few differences between the final accounts of a non-trading organisation and those of a business.
(a) Since non-trading organisations do not exist to make profits, the difference between income and matching
expenditure in the income and expenditure account is referred to as a surplus or a deficit rather than a
profit or loss.
(b) The capital or proprietorship of the organisation is referred to as the accumulated fund, rather than the
capital account. In addition, other separate funds might be kept by the organisation.
(c) There is usually no separate trading account. Instead, it is usual to net off expenditure against income for
like items.
2.2 Sources of income for non-trading organisations
Non-trading organisations differ in purpose and character, but we shall concentrate here on sports clubs, social clubs or
societies. These will obtain their income from various sources which include the following.
• Membership subscriptions
• Payments for life membership
•
'Profits' from bar sales
•
'Profits' from the sale of food in the club restaurant or cafeteria
•
'Profits' from social events, such as dinner-dances
• Interest received on investments
Netting off expenditure against income for like items means that where some sources of income have associated
costs, the net surplus or deficit should be shown in the income and expenditure account.
For example:
(a) If a club holds an annual dinner-dance the income and expenditure account will net off the costs of the
event against the revenue to show the surplus or deficit.
(b) If a club has a bar, the income and expenditure account will show the surplus or deficit on its trading.
Although the organisation itself does not trade, the bar does and so it is correct to refer to
'profits' from
the bar.
Where there is trading activity within a non-trading organisation (eg bar sales, cafeteria sales etc) so that the
organisation must hold inventories of drink or food etc it is usual to prepare a trading account for that particular activity,
and then to record the surplus or deficit from trading in the income and expenditure account. An example is shown
below.
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