Transcript Transition to Management

BACCT1201 • Financial Accounting
LECTURE 1
Accounting For Single Entry and
Incomplete Records
Issah Hamdu
Faculty of Business Management and Globalization
Tel : 603 8317 8833 (Ext 8403)
Email: [email protected]
Objectives
In this chapter, you will learn about the explanations and
Illustrations of:
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the principles underlying the Cash Basis versus Accrual
Basis of Accounting.
How profit can be ascertained from incomplete financial
records
Draw up the income statement and balance sheet from
records not kept on a double entry system
Deduce the figures for cash and purchase from incomplete
records
Deduce cash drawings when all other cash receipts and cash
payments are known
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Cash Basis vs. Accrual Basis:
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The Cash Basis accounting is used when revenue is
recognized based on cash actual received. Under this
method, an expenses is recognized only when payment is
made. This method is commonly used by small and petty
traders who are unable to advance credit for goods sold.
•
Accrual basis accounting on the other hand is a method of
accounting whereby revenue is recognized (earned) once
goods are delivered or services rendered to a customer.
Expenses are incurred once benefits is derived or services
provided by another party. This method is widely used by
most businesses and all corporations.
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Examining Accounts & Accounting
Systems : Single Entry vs. Double Entry..
Any set of accounts needs to be prepared on double-entry lines.
However, in the majority of cases (especially so with small
traders) this does not mean that the records will have been kept
on a double-entry basis. Where records are incomplete the
accounts may only balance because of the introduction of
estimates and balancing figures.
However, if a more comprehensive accounting system is
Maintained But falls short of double entry the accountant may
'complete' the double entry after the end of the year, either in the
client's own nominal ledger or in his or her own papers. There may
be a full set of sales and purchases ledgers in such a system, but
the lack of a nominal ledger means it is single-entry.
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Examining Accounts & Accounting
Systems : Single Entry vs. Double Entry..
• The fact that an accounting system is double-entry and every
transaction is recorded twice as a debit and a credit in the
records does not necessarily guarantee its accuracy. There will
be more books to maintain than in a simple single-entry cash
book system and it may therefore require more ingenuity to
circumvent. However, the vital factor is the integrity of the
figures recorded, no matter how allegedly comprehensive the
accounting system. This is true of a computerized accounting
system too.
• The lack of complete financial records based on double entry
principles is mainly faced by small business majority of who
cannot afford to invest enough resources to take care of their
accounting needs.
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Why Double Entry is Not Used
•
Generally, for small business such as ‘pasar malam traders’,
small shop keeper or internet cafe owner, using a complete
double entry system is just unthinkable. Operators of such
businesses may either not have accounting knowledge at that
level or simply because they can have all the information they
need about their business without the need to maintain double
entry principles.
•
In some cases records of small business operations might have
been lost either through fire or theft.
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Small businesses will generally record one entry for almost all
transactions, usually in the form of a cash journal. This will
include all information on cash and sales.
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Preparation of Financial Statements
from Incomplete Records
•
Financial statements of small businesses have to be
prepared at least once in a while at least to compute their
profit, sales or purchases. This is usually necessary for tax
computational purposes.
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To find out the trading results from an incomplete record, it
is necessary to compare the trader’s capital at the start of
the trading period with the capital at the end of the trading
period.
•
This analysis can be derived from your knowledge of the
accounting from studied in Business Accounting
(BACCT1101).
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Preparation of Financial Statements from
Incomplete Records
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The Effect of Profit on Capital: Where there is no injection of
additional cash or resources into a business by the owner(s),
any increase in capital (from the opening balance) is the result
of a ‘profit’ made by the business.
•
Example: - 1.1.08
Open balance of capital 50,000.00
• 31.12.0 Closing balance of capital 120,000.00
Profit for 2008
70,000.00
The above computed is directly derived from the accounting
equation
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Preparation of Financial
Statements from Incomplete
Records
Identifying profit from a list of opening and closing balances of
Assets and liabilities:
Statement of affairs: This is prepared using the opening
balances of assets and liabilities to determine the opening
balance of capital. The opening capital is then used (in the
statement of affairs prepared at the end of the financial year) to
help compute the profit at the end of the period.
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Preparation of Financial
Statements from Incomplete
Records
Where cash drawings is provided, that will be used along side
The opening capital computed to derive the profit for the
period. The next slide demonstrate this concept with an
illustration
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Preparation of Financial Statements
from Incomplete Records
Below are the opening and closing balances of SUKA HATI
Enterprise, a trade at a night market in Gombak for 2006 and
2007:
As at 31.12.2006
As at 31.12.2007
Van RM18,000
Furniture RM5,400
Debtors RM12,300
Stock RM9,000
Cash & Bank RM15,000
Creditors RM3600
Loan from Orang Kaya RM10,500
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Van (net of depreciation) RM15,000
Furniture (net of deprec.) RM4,800
Debtors RM18,600
Stock RM11,400
Cash & Bank RM23,400
Creditors RM5400
Loan from Orang Kaya RM6,000
Drawings RM15,600
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Preparation of Financial Statements
from Incomplete Records
•
Prepare a statement of affairs for 2006 and
compute profit for 2007
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See Excel File for proposed solution
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Preparation of Financial Statements from
Incomplete Records
Small businesses usually keep records of their cash transactions. This
makes the preparation of the financial possible. The following steps can
be used as a guide in the preparation of financial statements from
incomplete records:
1. Compute the opening capital (using the statement of affairs template)
2. Ascertain credit sales (using debtors control account)
3. Ascertain credit purchase (using creditors control account)
4. Ascertain the expenses chargeable to the profit and loss account
5. Prepare trading, profit and loss account
6. Computing unknown figure such as Sales, Cost of sales or Gross profit
using the following formulas:
Gross profit margin
Mark-up
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= Gross profit/Sales
= Gross profit/Cost of sales
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Preparation of Financial Statements from
Incomplete Records – an example
As a professional accountant, you have been hired by Mr. Bright,
owner of Zombi Enterprise, a sole proprietorship selling toiletries in
Zango to help prepare his business’s final account for the year ending
31.12.2007. After a thorough check on his books you have obtain the
following information about his business:
a. No record of sales has been kept (most of which is usually on
credit). A payment of RM61,500 (RM48,000 by cheque) has been
received from a customer for credit sale earlier.
b. A total of RM31,600 was paid to suppliers during the period by
cheque.
c. Expenses paid during the period (by cheque): rent RM3,800;
general expenses RM310; rent (by cash) RM400
d. Mr. bright took RM250 on a weekly basis as drawings.
e. Additional information on Zombi enterprise are as follows:
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Preparation of Financial Statements from
Incomplete Records – an example
Debtors
Creditors
Rent owing
Bank
Cash
Stock
31.12.2006
RM
5,500
1,600
5,650
320
6,360
31.12.2007
RM
6,600
2,600
350
17,940
420
6,800
F. Zombi enterprise only fixed asset was some fixtures valued at
31.12.2006 at RM3,300. This assets is depreciated annually at 10%.
See the step-by-step preparation of the income statement of Zombi
enterprise in excel sheet.
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Preparation of Financial Statements from
Incomplete Records: Statement of affairs
Zombi Enterprise
Statement of Affairs as at 31.12.2006
Fixed Assets
Fixture
Current Assets
Stock
Debtors
Cash
Bank
Current liability
Creditors
RM
6360.00
5,500.00
320.00
5650.00
17,830.00
1,600.00
16,230.00
19,530.00
________
19,530.00
Financed by:
Capital
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RM
3,300.00
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Preparation of Financial Statements from
Incomplete Records: Cash Book
Cash Book as at 31.12.2007
Cash
Bank
Cash
Bal. b/d
320
5650
Creditors
Debtor
13500
48000
Rent
31600
400
General exp.
Balance b/d
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13820
53650
420
17940
Bank
3800
310
Drawings
13000
Balance c/d
420
17940
13820
53650
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Preparation of Financial Statements from
Incomplete Records – Computing credit
purchase
Creditors Control Account
RM
RM
Cash
31600
Balance b/d
1600
Balance c/d
2600
Purchases*
32600
34200
34200
* Missing figure
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Preparation of Financial Statements from
Incomplete Records – Computing credit
purchase
Debtors Control Account
RM
Balance b/d
5500
Sales*
62600
RM
Cash Received:
Cash
13500
Bank
48000
Balance c/d
6600
68100
68100
* Missing figure
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Preparation of Financial Statements from
Incomplete Records – Computing credit
purchase
Rent Account
RM
Cash
400
Bank
3800
Balance c/d
350
RM
P&L*
4550
4550
4550
* Missing figure
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Preparation of Financial Statements from
Incomplete Records
Zombi
Trading Account for the Year Ending 31.12.2007
RM
Sales
RM
62600
Less: Cost of sales
Opening stock
6360
Purchases
32600
Closing stock
(6800)
Cost of sales
32160
Gross profit c/d
30440
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Preparation of Financial Statements from
Incomplete Records
Zombi
Profit & Loss Accounts for the Year Ending 31.12.2007
RM
Gross profit b/d
RM
30440
Less: expenses
Rent
4550
General expenses
310
Depreciation
330
5190
Net profit
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25250
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Preparation of Financial Statements from
Incomplete Records
Zombi Balance Sheet as at 31.12.2007
Fixed Assets
Fixtures (net)
Depreciation
RM
Current Assets
Stock
Debtors
Cash
Bank
Current liability
Creditors
Rent accrued
RM
6800
6600
420
17940
31760
(2600)
(350)
(2950)
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RM
3300
(330)
2970
Financial Accounting
(28810)
31780
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Preparation of Financial Statements
from Incomplete Records
Financed By:
RM
19530
25250
44780
Capital
Net profit
Drawings
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(13000)
31780
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Preparation of Financial Statements
from Incomplete Records
Incomplete Records and Missing Figures:
1. Drawings/Cash Received/Cash Paid: Sometimes one of
these may be missing from the cash receipts and payments.
Where the missing amount is in respect of payments, then
its normal to assume that the missing figure is the amount
required to make both totals agree in the cash column of
the cash book (note that for bank related transactions a
copy of all transactions can always be obtained from the
bank).
2. Where payments are less than receipts, it is likely that the
missing figure is cash receipts from customers
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Preparation of Financial
Statements from Incomplete
Records
1. Note that in using the ‘balancing figure’ to identify the
missing figures one must ensure that all the other variables
have been verified.
1. Cash sales and credit sales (cash purchase and credit
purchase): Where there is cash purchase or cash sales,
upon computing credit sales or credit purchase the two
should be added as the TOTAL is the correct figure to use.
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The End
End of Lecture 1
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