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