Transcript 3 INCOMPLETE RECORDS LEARNING OUTCOME:
Chapter 3
INCOMPLETE RECORDS
LEARNING OUTCOME: TO PREPARE ACCOUNTING RECORDS AND REPORTS FROM INCOMPLETE OR SINGLE-ENTRY ACCOUNTING SYSTEMS AND CONVERT THEM TO DOUBLE-ENTRY SYSTEMS 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
1
KEY TERMS
analysis method comparison method double-entry incomplete records reconstruction single-entry statement to ascertain profit 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
2
REASONS FOR INADEQUATE BUSINESS RECORDS
Lack of accounting knowledge Main concentration on primary activity Lack of knowledge on legislative requirements for accounting record Hiding cash transactions for tax avoidance Confusing business and personal banking transactions Lost accounting records e.g. via theft or fire 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
3
SOURCES OF INFORMATION
Bank records Accounts receivable Accounts payable Business Activity Statements Instalment Activity Statements Insurance companies Finance or banking organisations The previous accountant 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
4
ADVANTAGES OF DOUBLE ENTRY ACCOUNTING
Balancing control (debits = credits) All transactions are recorded Easier to detect fraudulent practices and errors Records are kept of business assets Liabilities are known Profit and loss calculated on regular basis 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
5
ADVANTAGES OF DOUBLE ENTRY ACCOUNTING
Budget comparisons can be made Ratios, business trends, sales forecasts and management information easily determined Easy to comply with legislative requirements such as GST, income tax and company law 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
6
CALCULATING PROFIT AND LOSSES
THE COMPARISON METHOD Used when there is very little business information available Many assumptions need to be made Comparison is made between the closing Statements of Financial Position for two financial years to determine changes in the owner’s equity during that period The comparison is called ‘Statement to Ascertain Profit’ 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
7
STATEMENT TO ASCERTAIN PROFIT
Use information from two consecutive years to determine net assets for each year NET ASSETS = OWNER’S EQUITY Verify net profit using comparison method
Verification of net profit using comparisons of capital
Capital at end Less : Capital at beginning $555,000 $500,000 $55,000 Net change Add : Drawings Less : Additional capital
Net profit
$8,000 $20,000
$43,000
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
8
CALCULATING PROFIT AND LOSSES
THE ANALYSIS METHOD Revenue and expense accounting are reconstructed to obtain missing data Examples are: Accounts receivable account to ascertain credit sales Accounts payable account to ascertain credit purchases Depreciation and accumulated depreciation and disposal of assets Balance day adjustments (accruals and prepayments) 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
9
CALCULATION OF CREDIT SALES
Illustration 3F (page 63)
ACCOUNTS RECEIVABLE Date 1.7.08 30.6.09 Details Balance Interest revenue
Credit sales*
Debit ($) Date 14 000 50 30.6.09 Details Sales returns Bad debts
10 160
24 210
closing balance of accounts receivable is known
Discount allowed Cash Balance
*Credit sales are the difference between the two sides given that the
Credit ($) 250 400 60 7 500 16 000 24 210
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
10
CALCULATION OF CREDIT PURCHASES
Illustration 3G (page 64)
ACCOUNTS PAYABLE Date 30.6.09 Details Purchase returns Discount revenue Cash Balance Debit ($) Date 400 100 6200 6000 12700 30.6.09 Details Balance Interest charged Credit purchases* Credit ($)
*Credit purchases are the difference between the two sides given that the closing balance of accounts payable is known
7000 120 5580 12700
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
11
SUMMARY: Analysis method
Accounts receivable
Credit sales
Closing balance
Statement to ascertain profit
Accumulated depreciation
Depreciation
Closing balance
Net profit
Accounts payable
Credit purchases
Closing balance
Statement of Financial Position Opening general journal entry 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting
by David Willis, slides prepared by Kaye Watson
Inventories
Opening/closing balances
Closing balance 12