by Incomplete Records refers to a system of accounting where all financial transactions of a business are not recorded in a complete and systematic manner. It is generally followed by small businesses and sole proprietors who maintain only limited records such as cash book, personal accounts of debtors and creditors, and some supporting documents. Under this system, the principles of Double Entry System are not fully followed. Due to incomplete records, it becomes difficult to determine accurate profit or loss and the true financial position of the business. Special methods like Statement of Affairs Method and Conversion Method are used to prepare final accounts from incomplete records.
Preparation of Final Accounts from Incomplete Records:
When complete books of accounts are not maintained, final accounts are prepared from the available incomplete records. The objective is to determine the profit or loss and financial position of the business. Under incomplete records, necessary information is collected from cash book, personal accounts, bills, and other available documents. Two main methods are used for preparing final accounts:
- Statement of Affairs Method
- Conversion Method
Steps for Preparation of Final Accounts
1. Preparation of Statement of Affairs
A Statement of Affairs is prepared to find opening and closing capital.
Formula:
Capital = Assets − Liabilities
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | xxx | Cash | xxx |
| Bills Payable | xxx | Debtors | xxx |
| Loans | xxx | Stock | xxx |
| Outstanding Expenses | xxx | Furniture | xxx |
| Capital (Balancing Figure) | xxx | Machinery | xxx |
2. Preparation of Total Debtors Account
It is prepared to calculate credit sales.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| Opening Debtors | xxx | Cash Received | xxx |
| Credit Sales | xxx | Returns | xxx |
| Bills Receivable | xxx | Bad Debts | xxx |
| Closing Debtors | xxx |
Credit Sales = Closing Debtors + Cash Received + Returns + Bad Debts + Bills Receivable − Opening Debtors
3. Preparation of Total Creditors Account
It is prepared to calculate credit purchases.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| Cash Paid | xxx | Opening Creditors | xxx |
| Returns Outward | xxx | Credit Purchases | xxx |
| Bills Payable | xxx | ||
| Closing Creditors | xxx |
Credit Purchases = Closing Creditors + Cash Paid + Returns + Bills Payable − Opening Creditors
4. Preparation of Trading Account
Trading Account is prepared to calculate gross profit or gross loss.
| Debit Side | Amount | Credit Side | Amount |
|---|---|---|---|
| Opening Stock | xxx | Sales | xxx |
| Purchases | xxx | Closing Stock | xxx |
| Direct Expenses | xxx | ||
| Gross Profit | xxx |
5. Preparation of Profit and Loss Account
It determines net profit or net loss.
| Debit Side | Amount | Credit Side | Amount |
|---|---|---|---|
| Indirect Expenses | xxx | Gross Profit | xxx |
| Depreciation | xxx | Other Income | xxx |
| Net Profit | xxx |
6. Preparation of Balance Sheet
Balance Sheet shows the financial position of the business.
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Creditors | xxx | Cash | xxx |
| Bills Payable | xxx | Debtors | xxx |
| Capital | xxx | Stock | xxx |
| Loans | xxx | Fixed Assets | xxx |
Important Adjustments
| Adjustment | Treatment |
|---|---|
| Closing Stock | Shown in Trading A/c and Balance Sheet |
| Outstanding Expenses | Added to Expense and shown as Liability |
| Prepaid Expenses | Deducted from Expense and shown as Asset |
| Depreciation | Charged in Profit and Loss A/c |
| Bad Debts | Deducted from Debtors |
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