Accounting for Incomplete Accounting Records

8/11/2019 Accounting for Incomplete Accounting Records

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Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110 092 India

UNIT

CLAS

X SE

ccounts from

incomplete Records

Accounts from

incomplete RecordsStudents Material


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Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110 092 India

CBSE-i

Accounts formincomplete RecordsStudents Material

UNIT-9

CLASS

XI


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The CBSE-International is grateful for permission to reproduce

and/or translate copyright material used in this publication. The

acknowledgements have been included wherever appropriate and

sources from where the material may be taken are duly mentioned. In

case any thing has been missed out, the Board will be pleased to rectify

the error at the earliest possible opportunity.

All Rights of these documents are reserved. No part of this publication

may be reproduced, printed or transmitted in any form without the

prior permission of the CBSE-i. This material is meant for the use of

schools who are a part of the CBSE-International only.


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Education plays the most important role in acquiring professional and social skills and a positive attitude to face

the challenges of life. Curriculum is a comprehensive plan of any educational programme. It is also one of themeans of bringing about qualitative improvement in an educational system. The Curriculum initiated by Central

Board of Secondary Education -International (CBSE-i) is a progressive step in making the educational content

responsive to global needs. It signifies the emergence of a fresh thought process in imparting a curriculum which

would restore the independence of the learner to pursue the learning process in harmony with the existing

personal, social and cultural ethos.

The CBSE introduced the CBSE-icurriculum as a pilot project in few schools situated outside India in 2010 in

classes I and IX and extended the programme to classes II, VI and X in the session 2011-12. It is going to be

introduced in classes III, VII and for Senior Secondary classes with class XI in the session 2012-13.

The Senior Secondary stage of education decides the course of life of any student. At this stage it becomes

extremely important for students to develop the right attitude, a willingness to learn and an understanding of the

world around them to be able to take right decisions for their future. The senior secondary curriculum is expectedto provide necessary base for the growth of knowledge and skills and thereby enhance a student's potential to face

the challenges of global competitiveness. The CBSE-iSenior Secondary Curriculum aims at developing desired

professional, managerial and communication skills as per the requirement of the world of work. CBSE-iis for the

current session offering curriculum in ten subjects i.e. Physics Chemistry, Biology, Accountancy, Business-

Studies, Economics, Geography, ICT, English, Mathematics I and Mathematics II. Mathematics at two levels

caters to the differing needs of students of pure sciences or commerce.

The Curriculum has been designed to nurture multiple intelligences like linguistic or verbal intelligence, logical-

mathematical intelligence, spatial intelligence, sports intelligence, musical intelligence, inter-personal

intelligence and intra-personal intelligence.

The Core skills are the most significant aspects of a learner's holistic growth and learning curve. The objective of

this part of the core of curriculum is to scaffold the learning experiences and to relate tacit knowledge with formalknowledge. This involves trans-disciplinary linkages that would form the core of the learning process.

Perspectives, SEWA (Social Empowerment through Work and Action), Life Skills and Research would be the

constituents of this 'Core'.

The CBSE-iCurriculum evolves by building on learning experiences inside the classroom over a period of time.

The Board while addressing the issues of empowerment with the help of the schools' administering this system

strongly recommends that practicing teachers become skilful and lifelong learners and also transfer their learning

experiences to their peers through the interactive platforms provided by the Board.

The success of this curriculum depends upon its effective implementation and it is expected that the teachers will

make efforts to create better facilities, develop linkages with the world of work and foster conducive environment

as per recommendations made in the curriculum document.

I appreciate the effort of Dr.Sadhana Parashar, Director (Training), CBSE, Dr. Srijata Das, Education Officer, CBSEand Ms. Anjali Chhabra, Assistant Education Officer, CBSE and their teams involved in the development of this

document.

The CBSE-iwebsite enables all stakeholders to participate in this initiative through the discussion forums. Any

further suggestions on improving the portal are always welcome.

Vineet Joshi

Chairman, CBSE

Preface


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Advisory Conceptual Framework

Ideators Classes XI and XII

Shri Vineet Joshi, Chairman, CBSE Shri G. Balasubramanian, Former Director (Acad), CBSE

Dr. Sadhana Parashar, Director (Training), CBSE Ms. Abha Adams, Consultant, Step-by-Step School, NoidaDr. Sadhana Parashar, Director (Training), CBSE

Prof. A K Bakshi Ms. P Rajeshwari Dr. Niti Nandini Chatnani Ms. Neeta Rastogi

Dr. N K Sehgal Ms. Gyatri Khanna Dr. Anil K Bali Dr. Anshu

Prof. Kapil Kapor Mrs. Anita Makkar Dr. Preeti Tewai Dr. Rajesh Hassija

Ms. Renu Anand Prof. Biswajit Nag Dr. Deeksha Bajpai Ms. Mukesh Kumar

Dr. Barkatullah Khan Dr. Jacqueline Symss Mr. S K Agarwala Dr. Om Vikas

Ms. Avnita Bir Ms. Usha Sharma

English :

Chemistry :

Ms. Gayatri Khanna

Ms. Renu Anand

Ms. P Rajeshwary

Ms. Sandhya Awasthi

Ms. Manna Barua

Ms. Veena Bhasin

Ms. Urmil Guliani

Ms. Sudha Ravi

Mr. Anil Kumar

Ms. Vijaylaxmi Raman

Ms. Neerada Suresh

Ms. Himaal Handoo

Dr. G S Sodhi

Dr. Vimal Rarh

Dr. Shalini Baxi

Dr. Vinita Arora

Dr. Vandana Soni

Ms. Charu Maini

Ms. Rashmi Sharma

Ms. Kavita Kapoor

Biology :

Physics :

Mathematics :

Dr. Ranjana Saxena

Dr. Neeraja Sood

Dr. P Chitralekha

Ms. Mridula Arora

Ms. Lucy Jad

Ms. Priyanka Choudhury

Ms. Prerna Gosain

Ms. Malini Sridhar

Dr. B. Biswal

Ms. Namarata AlwadhiMr. Dhirender Sharma

Ms. Vandana Banga

Mr. Vivek

Dr. Sushil Kumar

Mrs. Monica Talwar

Mrs. Charu Dureja

Mrs. Seema Juneja

Dr. H K Bhatia

Dr. Sushma Bansal

Geography:

Economics:

Ms. K Jaya

Dr. Preeti Tewari

Ms. Rupa Das

Ms. S Fazal Daoud Firdausi

Ms. Neena Phogat

Ms. Sujata Sharma

Ms. Deepa Kapoor

Ms. Bharti Malhotra

Ms. Isha Kaushik

Mr. Riyaz Khan

Mr. S K Agarwala

Ms. Ambika Gulati

Ms. Nidhi Singh

Ms. Malti Modi

Ms. Sapna Das

Ms. Ingur Agarwal

Ms. Shankar Kulkarni

Accountancy :

Business Studies :

ICT :

Mr. S S Sehrawat

Dr. K Mohna

Dr. Balbir Singh

Ms. Bhupendra Kriplani

Ms. Shipra Vaidya

Mr. Sandeep Sethi

Dr. S K Bhatia

Ms. Meenu Ranjan Arora

Mrs. Shegorika

Mr. Sandeep SethiMs. Usha Sharma

Ms. Komal Bhatia

Ms. Ravisha Aggarwal

Mr. Mukesh Kumar

Ms. Nancy Sehgal

Ms. Purvi Srivastava

Ms. Gurpreet Kaur

Material Production Groups: Classes XI-XII

Cheif - Coordinators: Dr. Srijata Das, E.O

Acknowledgements

Coordinators:

Ms. Sugandh Sharma, EO

Ms. Madhu Chanda, RO (Inn)

Shri R. P. Sharma,Consultant (Science)

Dr Rashmi Sethi, EO

Shri Al Hilal Ahmed, AEO

Ms. Neelima Sharma,Consultant (English)

Ms. S. Radha Mahalakshmi, EO

Ms. Anjali Chhabra, AEO

Ms. Reema AroraConsultant (Chemistry)

Mr. Navin Maini, RO (Tech)

Shr. R. P. Singh, AEO

Mr. Sanjay Sachdeva, S O


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Preface

Acknowledgment

1. Introduction 1

2. Uses of Incomplete Records 8

3. Limitations of Incomplete Records 9

4. Worksheet - 1 11

5. Statement of Affairs Method or Net Worth Method 14

6. Comparison between Double Entry System and Incomplete 14

System of Recording.

7. Statement of Profit or Loss for the Year Ended.. 21

ont nt


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1

STUDENTS MANUAL

UUNIT 9 ACCOUNTS FROM INCOMPLETE RECORDS

So far you have studied that how a business unit ascertains profit/loss of the

business by following the process of Double Entry Book-Keeping.

But it is not necessary to strictly maintain Double Entry System to know the

profit/loss and financial position of a concern.

Many small scale enterprises do not maintain the complete records of their

transactions but they also have to ascertain the profit/loss of their business and

its financial position. So to ascertain the profit/loss and know about the financial

position of the business without keeping the records according to Double Entry


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Book-keeping is termed as Accounts from Incomplete Records.

So, Incomplete Records is a system in which some transactions are recorded with

all their proper debits and credits whereas in some other cases, no entry or only

one side of a transaction is recorded. Generally records of cash and personal

accounts of debits and creditors are properly maintained whereas records related

to assets and liabilities, expenses and revenues are not recorded completely but

are recorded partially. This is the reason why this system is called a system of

Incomplete Records OR Accounts from incomplete records. It may be defined as

follows :


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According to Kohler

"A system of book-keeping in which as a rule only records of cash and of

personal accounts are maintained, it is always incomplete double entry varying

with the circumstances".

It is important to note here that in this system some times we follow the double

entry system by keeping records of both debits and credits and some times we

do not follow this. So this incomplete system of recording cannot be called a

Single Entry System, because in this incomplete system of recording we mix the

approach of the Double Entry and Single Entry.

So this system of incomplete records is a system where :

(1) Both the aspects of some of the transactions are kept.

(2) Only one aspect of some of the transactions is kept.

(3) No aspect of some of the transactions is kept.

Therefore it is a system of Incomplete Records.

It would be extremely helpful for you to make a list of 5 very small

businesses around your locality or on the way to school.

Typical examples of small businesses would be of

The tea shop,

Dhobi,


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Pan and cigarette shop,

Flower stall,

A small snack shop or a canteen.

A cobbler,

A small tailor shop

Identify how they maintain records of:

Cash sales,

Credit sales

Cash purchases

Credit purchases

and Stock.


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Fill the following for home work. It can even be an imagination

Name of the shop.

____________________________________________________________

Name of the owner.

____________________________________________________________

Nature of business.

_______________________________________ service, trading or else

Number of employees.

____________________________________________________________

Which books of accounts does he maintain?

[Journal, Cash book, Purchase book, Sales book, Trading Account, P and

L Account, Balance Sheet]

Does he know anything about depreciation, stock registers?

Does he have a bank account?

Now evaluate why these businesses do not want to complete their

Accounts?

What sort of problems do you see them facing in the future?

Are the Accounts systematic?

Does he know his Assets and liabilities?


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How does he calculate Profit and Losses?.

What are the advantages and disadvantages of maintaining Accounts in

such a manner?

SUGGESTED ANSWERS

ADVANTAGES

Simple to follow.

Suitable for small concerns.

Flexible.

Inexpensive method.

DISADVANTAGES

No accuracy of profits.

No comparison.

Future plans cannot be based as no statements.

No accuracy.

True value of assets cannot be judged.

No internal check.


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Features / Characteristics of Incomplete Records.

The main features of Incomplete Records are as follows :

(1)

It is an unsystematicmethod of recording transactions.

(2) Only records of cash transactions and records of personal accounts are

maintained properly.

(3) There is no information related to revenue/gains and expense / losses,

assets and liabilities in these records.

(4) Sometimes owner's personal transactions are also recorded in the Cash

Book.

(5) Accounts of different organisations are not comparable due to no

uniformity in maintaining records.

(6) Due to lack of complete information the business unit has to depend on

original vouchers to collect necessary information. For example to collect

information related to total sales business will have to depend on the

Original Vouchers of Credit Sale. In the same way Credit Purchase will be

known by Purchase Vouchers.


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(7) Profit/Loss cannot be calculated accurately. Only an estimated profit/loss

can be known. Similarly Balance Sheet may not reflect the complete and

true position of assets and liabilities.

1.

USES OF INCOMPLETE RECORDS

(1) Simple Method. No special knowledge is required to maintain records

so is a simple method.

(2) Suitable for Small concerns. This method is suitable where business is

of small scale and number of transactions are not much. Similarly they

maintain very few fixed assets.

(3) Flexible Method. As this method does not follow the strict rules of

double entry system so the method can change accordingly to the

requirements.


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(4) Profits can be Estimated Easily. As there are less number of

transactions, profits / losses can be estimated easily. Moreover by

comparing financial position of the business at the close of the

accounting period with the financial position of business in thebeginning of the accounting period profits / losses can be estimated

easily.

(5) Less Expensive. Number of accounts maintained in this system are

less as compared to Double Entry System. So this system is not

expensive.

2.

LIMITATIONS OF INCOMPLETE RECORDS.

The mechanism of maintaining incomplete Record has some limitations due

to insufficient information. These are as follows :

(1) Only Estimated Profit / Loss is Known. Trading and profit and loss

account cannot be prepared so it is difficult to know the accurate profit

and loss so profit / losses can only be estimated.

(2) Comparative Study is Difficult. Comparison with other concern is not

possible if they are following Double Entry System or even comparison

within the concern is not correct due to incomplete information of

transactions of business.


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(3) Not Suitable for Planning and Control. For proper planning a

business needs complete information about the accounts. But due to

incomplete system of information planning cannot be done properly

and as we know controlling depends on planning so in the absence ofproper planning controlling will also be not effective.

(4) Difficulty in knowing the Arithmetical Accuracy. In case of Double

Entry Book-keeping every transaction is debited as well as credited

with the same amount so we can easily check the arithmetical accuracy

but that can't done in this system, because preparation of Trial-Balance

is not possible in this system.

(5) Inaccuracy in Financial Position of a Business. Due to inaccurate

profit/loss and lack of information about the assets and liabilities,

financial position of a business cannot be known accurately.

(6) Difficulty in knowing the True value of Business . Due to improper

recording of assets and liabilities it is difficult to find out the true value

of the business.


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(7) Internal Check is not Possible. Due to lack of complete information

there is always a possibility of errors and frauds. Moreover detection

and their rectification is very difficult.

Not Acceptable. To calculate income tax, the income tax authorities convert thissystem into Double Entry System to calculate income tax accurately so we cansay this system is not accepted by the income tax authorities.

WORK SHEET No. 1

1. List two advantages of Single entry system

_____________________________________________________________________

_____________________________________________________________________

[simplicity, cost effective, specialised knowledge not required, saves time,easy ascertainment of profit and loss.]

2. List two disadvantages of Single entry.

_____________________________________________________________________

_____________________________________________________________________

[lack of arithmetical accuracy, no control over assets, no internal check,comparison with previous year not possible, incomplete and unscientific]

3. Difference between Single entry and Double entry

_____________________________________________________________________

_____________________________________________________________________


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[single not scientific, trial balance not prepared, not authentic.

Double records both aspects, scientific, trial balance can be prepared, isscientific, accepted by law]

4. Difference between Balance Sheet and Statement of affairs

_____________________________________________________________________

_____________________________________________________________________

[Balance Sheet - Capital Account is prepared separately, aim is to ascertainfinancial position of the enterprise, both sides of the Balance Sheetsagree automatically if no omission, capital is the balancing figure.It isprepared to ascertain capital, if both sides do not agree it is difficult to dentifyomissions. Such a statement of assets and liabilities is known as

(1)

Statement of Affairs

Comparison between Double Entry System and Incomplete System of

Recording.

After analysing both the system we may observe the following differences :

(1) Double Entry follows the recording of both aspects of a transactions.

But in this system both aspects for some transactions, one aspect or no

aspect for other transactions are followed.

(2) All three accounts i.e. Personal, Real and Nominal are maintained in

Double Entry System. Only Personal Account and Cash Book is

maintained in this system.

(3) Trial-balance can be prepared in Double Entry System so arithmetical

accuracy can be checked.

But in this system no arithmetical accuracy can be checked but not

possible to prepare trial-balance.

(4) In Double Entry correct profit / loss can be calculated.

But in this system profit / loss can only be estimated.


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(5) Double Entry system is used by almost all the business.

Where as this system is only followed by small scale business and

institutions.

(6) Double Entry system is considered as an authentic system by the court,

moreover it is accepted by income tax authorities also.

Whereas court does not consider this system as an authentic system

and income tax authorities also do not accept this system for income-

tax purpose.

5.

ASCERTAINMENT OF PROFIT / LOSS BY PREPARING STATEMENT

OF AFFAIRS METHOD OR NET WORTH METHOD.

Whether business is keeping incomplete records for their business or

maintaining complete records according to Double Entry Book-keeping, in both

the cases the business wants to know the resulot of its operations in the form of

profit/loss of the business.

Now if the business is maintaining accounts according to the incomplete system,

then how will the result of the business be ascertained or how will theprofit/losses be known to assess the efficiency and success/failures of business.

Therefore, to know the results of business there is a need for preparing the

financial statements to disclose :


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(1) The profits earned or losses incurred during a given period of time and

(2) The amount of assets and liabilities at the closing date of an accounting

period.

To know all this, one has to use the available information in the incomplete

records to find out the profit/loss and financial position of an enterprise at the

end of the year. There are two ways to find out the results of the business :

(1) Preparing statement of affairs or net worth method.

(2) Preparing Trading and Profit and Loss Account and the Balance Sheet by

completing the records called Conversion Method.

Note :

As per our syllabus, according to CBSE curriculum for Class XI only Statement of

Affairs or Net Worth method is discussed here.

I.Statement of Affairs Method

Or

Net Worth Method

According to this method, two statements of affairs i.e. statement of assets and

liabilities as at the beginning and at the end of the relevant accounting period are

prepared to calculate the amount of change in capital during the period.


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In order to do that he has to understand the profits of the previous years.

FUN ACTIVITY HELP THE TEACHER TO MAKE A SCRIPT OF THE

FOLLOWING.

A small activity with the following script can be enacted.

Required

A board, a chalk, three volunteers from the class.

One --- Owner of a shop --Mr A .

Two --- Buyer Mr. B.

Three -- Student to write on the board.

Mr B wants to buy the business of Mr A.

Mr A has been running his business for the past 10 years, he wants to sell it as hewants to go back to his village.

Mr A has never maintained any accounts, hence he is not able to justify theprofits of the past 10 yrs.

The student hears their conversation and offers to help.


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Student to Mr A -----Can you tell me the status of your business today.

He draws a Balance Sheet on the board and notes what Mr A has to say.

[he is actually drawing the Balance Sheet as on that day ]

The missing figure of that shall be the Capital.

The statement he collects can be like

Bank balance,

Cash in hand,

Furniture,

Stock,

Debtors

and other assets.

On the Liability side he should have

Creditors,

Outstanding expenses

The difference becomes the Capital.[CLOSING]

-----------------BALANCE SHEET [CLOSING]------------------------------------------------| BANK 15,000

CREDITORS 5,000 | CASH 5,000

OUTSTANDING 3,000 | DEBTORS 15,000

EXPENSES | FIXED ASSETS 50,000

CAPITAL [ 77,000] | --------------------------

bal fig ---------- 85,000

85,000 ------------------------

Then he asks Mr A

What was his status when he started the business

Mr A ------ Well I had brought 10,000 from home and I had purchased


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furniture of around 2000 and started this business with

cash 8000 [the capital amount remains at 10,000]Accordingly

Opening Capital +Profit = Closing Capital

10,000 +profit =77,000

therefore Profit is 67,000

Mr A [seems confused] Is that all I have earned in the past ten years?

Then he remembers that he was withdrawing Rs 3,000 every month for his

personal and house hold expenses.

The student then derives another formula on the board

Opening Capital + Profit -Drawings =Closing Capital

10,000+profit-[3000x120 months]=77,000

10,000+Profits-3,60,000 = 77000

Profit =3,60,000+77,000-10,000=4,23,000

Mr A aah, that is the profit I have made in the past ten years

Hence now Mr B can think of how much to offer him

It is a nice link to introduce the concept of goodwill later for class 12

The script can go on.

Statement of Affairs.

It should be noted that this Statement of Affairs is similar to Balance Sheet

because the statement also shows liabilities on the left side and assets on the right

hand side.

But even then it cannot be termed as Balance Sheet because date contained in

this statement of affairs are based on the relevant document and physical count

whereas in Balance Sheet the date is totally based on Ledger Balance.


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Format of Statement of Affairs

Statement of Affairs as at

Liabilities Amount

(Rs.)

Assets Amount

(Rs.)

Bills Payable XXX Land and

Building

XXX

Creditors XXX Machinery XXX

Outstanding

Expenses

XXX Furniture XXX

Capital *(Balancing Figure) XXX

Stock XXX

Debtors XXX

Cash and Bank XXX

Prepaid Expenses

Capital *

XXX

(Balancing

Figure)

XXX

XXX XXX

Note :

* Capital may be either in the liabilities side or the assets side depending on the

total of both sides. If total of assets side is more, then capital will be in the

liabilities side or vice-versa.

Calculation of Profit/Loss under Statement of Affairs Methods is as follows:


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To calculate profit/loss, we compare opening capital (which will be calculated by

preparing opening statement of affairs) with closing capital (which will be

calculated by preparing closing statement of affairs). If closing capital is more

than the opening capital then the balancing figure will be profit or vice-versa.

This profit or loss is to be adjusted with the withdrawals made by the owner or

any fresh capital introduced by him during the accounting period for the

purpose of finding out the net profit earned or net loss incurred during the year.

So profit / loss during the year may be calculated by the following equation:

Profit or Loss = Capital at the end Capital at the beginning + Drawings made

during the year - Capital introduced (additional capital) during the year

Statement of Profit or Loss for the given period may be shown as follows :


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STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED .....

Particulars Amount

(Rs.)

Capital as at the end of year (calculated from statement of

affairs as at the end of year)xxx

Add: Drawings during the year. xxx

Less: Additional capital introduced during the year xxx

Adjusted capital at the end of year xxx

Less: Capital as at the beginning of year

(calculated from statement of affairs as at the beginning of

year)

xxx

Profit or loss made during the year xxx

Now this calculation of Profit / Loss under this incomplete system of recording

may be better understood with the help of the following illustrations.


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For a healthy start,

TICK THE RIGHT ONE.

1.

Generally, incomplete records are maintained by a:

(a)trader (b) Society (c) Company (d) Government

2. When closing capital is greater than opening capital, it denotes:

(a)Profit

(b)Loss

(c) Profit if there is no introduction of fresh capital

(d) No profit no loss

3. When closing capital is less than opening capital, it denotes:

(a)Profit (b) Loss (c) Loss if there is no drawing (d) None .


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Illustration 1 Calculation of Profit without adjustments

Mr. John started a business of a small printing press on April 1, 2007 with a

capital of Rs. 75,000. John did not maintain his Books of Accounts on the basis of

Double Entry During the year he introduced additional capital of Rs. 22,500. He

has also withdrawn Rs. 15,000 for his personal use.

On March 31, 2008, his assets and liabilities were as follows :

Sundry Creditors Rs. 1,35,000, Sundry Debtors Rs. 1,88,400, Stock Rs. 37,125,

Cash in hand Rs. 37,470. Calculate profit or loss made by Mr. Arvind during the

year by using Statement of Affairs Method.

Solution:

Books of Mr. John

Statement of Affairs as on March 31, 2008

Liabilities Amount

(Rs.)

Assets Amount

(Rs.)

Sundry Creditors 1,35,000 Cash-in-hand 37,470

Capital (Balancing Figure) 1,27,995 Debtors 1,88,400

Stock 37,125

2,62,995 2,62,995


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Statement of Profit or Loss for the year ended March 31, 2008

Particulars Amount(Rs.)

Capital as on March 31, 2008 (as calculated by preparing

statement of affairs at the end) 1,27,995

Add: Drawings during the year. 15,000

1,42,995

Less: Additional capital introduced during the year (22,500)

Adjusted capital at the end of year (i.e. on March 31, 2008) 1,20,495

Less: Capital in the beginning of the year i.e. April 1, 2007 75,000

Profit made during the year 45,495

Illustration 2

Mr. Ronald run a small scale business of ready made Garments. He was

maintaining only some records just to know the estimate of profit or loss from

the business. On April 1, 2005, he had the following assets and liabilities :


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Furniture and Fittings = Rs. 2,20,000

Building = Rs. 6,00,000

Stock = Rs. 70,000

Cash at Bank = Rs. 80,000Cash in Hand = Rs. 12,716

Dues from Customers (Debtors) = Rs. 30,000

Dues of Creditors = Rs. 80,000

Outstanding Wages = Rs. 16,408

He also paid Rs. 9,600 p.m. school fee of his children from the business. He had

also introduced Rs. 18,000 during the year as additional capital.

On March 31, 2006 his position was as follows :

Furniture and Fittings Rs. 2,50,000

Buildings Rs. 6,00,000

Stock Rs. 60,000

Cash at Bank Rs. 65,000

Cash in Hand Rs. 23,816

Dues from Customers (Debtors) Rs. 24,700

Dues to Creditors Rs. 78,816

Calculate the profit made by Mr. Ronald during the year by Statement of Affairs

Method.


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Solution:

Profit made during the year 1,25,592

Illustration 3

Suzanne started a business with Rs. 3,12,000 on January 1, 2007. He borrowed Rs.

2,34,000 from the bank at 12% p.a. interest. Additional amount introduced during

the year in the business was Rs.4,68,000. At the end of the year his position was

as follows :

Rs.

(1) Cash in hand 23,400

(2)

Cash at Bank 10,14,000(3) Car 2,00,000

(4) Debtors 1,12,000

(5) Creditors 1,40,400

(6) Amount Withdrawn from the Business for Personal use 14,040

p.m.

(7) Loan from Bank at 12% p.a. 2,34,000

(8)

Accrued Interest on Loan @ 12% p.a. for one year.

Find out his profit from the business for the year ended December 31, 2007.

Solution :


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First Step. In this case first of all we will calculate profit/loss of the business

during the year as we have calculated earlier.

Second Step. Now this calculated profit/loss will be adjusted according to given

adjustments in the following ways :

Deduct all those items which result in increase in expenses like depreciation,

outstanding expenses, interest on capital, interest on loans, provisions for

doubtful debts, bad debts etc.

Similarly Add all those items which result in the increase in incomes like prepaid

expenses, interest on investments.

After deducting and adding the items ion the calculated profit/loss we will be

Net Profit/Loss.

Third Step. Now closing statement of affairs is prepared again but now it will be

prepared after taking all the adjustments into consideration. This repeated

statement of affairs may also be called a Balance-Sheet because it is prepared

after all the adjustments have been taken into consideration.

Important Note.


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Rent is outstanding for Rs. 4,824

Solution :

Statement of affairs as on December 31, 2007

Liabilities Amount

(Rs.)

Assets Amount

(Rs.)

Creditors 6,700 Cash-in-Hand 6,000

Bills Payable 2,680 Cash-at-Bank 67,700

Capital (Balancing Figure) 1,50,080 Inventory 26,800

Debtors 20,000

Bills Receivable 6,800

Furniture 5,360

Machinery 26,800

1,59,460 1,59,460


Liabilities Amount

(Rs.)

Assets Amount

(Rs.)



Capital (Balancing Figure) 3,75,200 Inventory 46,900

Debtors 53,600


Furniture 32,160

Machinery 46,900

Motor Van 80,400

3,93,960 3,93,960


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Particulars Amount

(Rs.)

Capital as on December 31, 2008 3,75,200

Add : Drawings made during the year 80,400

4,55,600

Less : Additional capital introduced during the year 26,800

Adjusted Capital as on December 31, 2008 4,28,800

Less : Opening Capital (Capital as on December 31, 2007 1,50,080

Profit before Adjustment

Adjustment

2,78,720

Less: Depreciation

16,616

2,62,104

Less: Rent Outstanding 4,828

Net Profit after Adjustments 2,57,280


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Balance Sheet as on December 31, 2008

(Statement of Affairs as on December 31, 2008 after adjustment)

Liabilities Amount

(Rs.)

Assets Amount

(Rs.)



Outstanding Rent 4,824 Inventory 46,900

Capital (31.12.2007) Debtors 53,600

Rs. Bills Receivable 16,080

1,50,080 Rs.

Add : Additional

Capital 26,800

Furniture 32,160

- Depreciation 3,216 28,944

1,76,880 Machinery Rs.

Add : Net Profit

(Adjusted) 2,57,280

46,900

- Depreciation 9,380 37,520

4,34,160 Motor Van Rs.

Drawings 80,400 8,400

- Depreciation 4,200

3,53,760 76,380

3,77,344 3,77,344

Note :

It may be noted that while preparing statement of affairs after adjustment

(Balance-Sheet) opening capital will be taken after adding additional capital anddeducting drawings and at last adjust Net Profit is added to this capital.


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He introduced a fresh capital of Rs. 1,04,000 during the year and withdraw Rs.

13,000 per month for personal use. There were bad-debts of Rs.2,600. Provision of

doubtful debts is made at 5% on debtors. Rent of Rs.3,120 was outstanding.

Insurance of Rs. 910 was prepaid. Depreciation on furniture and officeequipment was charged @ 10% p.a.

Solution :

Adjustment

Less : Depreciation

(i)

(ii)

20,800

Less : Bad-Debts 2,600

Provision for doubtful debts

13,390

Less: Outstanding Rent 3,120

Add: Prepaid Insurance 910

Net Profit after adjustments 3,77,000


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Balance Sheet as on December 31, 2006

Liabilities Amount

(Rs.)

Assets Amount

(Rs.)

Sundry Creditors 67,600 Cash-in-Hand 31,200

Rent Outstanding 3,120 Bank-Balance 8,000

Capital as on Dec. 31, 2005

Rs. 2,36,600

Rs.

Add: Addition

Capital 1,04,000

Sundry Debtors 2,18,400

Less : Bad-Debts 2,600

3,40,600 2,15,800

Less : Drawings 1,56,000 Less : Provision for

doubtful debts

10,790

2,05,010

Add: Net Profit

(Adjusted) 3,77,000

Rs.

Furniture = 78,000

Less : Depreciation

7,800

70,200

Office Equipments

Rs. 1,30,000

Less : Depreciation

13,000

1,17,000

5,61,600 Prepaid-Insurance 910

6,32,320 6,32,320


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Illustration 6

Rose a trader, does not keep proper books of account for his business. From the

following information ascertain his profit or loss for the year ended March 31,

2007 and also prepare his Statement of Affairs as on that date.

Particulars April 1, 2006

(Rs.)

March 31, 2007

(Rs.)

Stock-in-Trade 30,060 32,580

Sundry Creditors 29,000 34,560

Sundry-Debtors 20,160 19,080

Cash-in-Hand 450 2,520

Bank-Overdraft 33,280 Nil

Furniture 2,700 2,700

Scooter 3,420 Nil

Bank Balance Nil 5,220

Rose has withdrawn Rs. 360 p.m. from the business for his personal use. 10%

depreciation is to be charged on furniture.

Rs. 1,080 was considered as irrevocable amount from debtors and 5% provision

was created for doubtful debts. Rs. 360 provision is created for Bills Receivable.

Solution :


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Books of Rose

Statement of Affairs as on April 1, 2006

Liabilities Amount

(Rs.)

Assets Amount

(Rs.)

Sundry Creditors 29,000 Cash-in-Hand 450

Bank-Overdraft 33,280 Sundry Debtors 20,160

Capital (Balancing Figure) 23,310 Bills Receivable 28,800

Stock-in-Trade 30,060

Furniture 2,700

Scooter 3,42085,590 85,590

Statement of Affairs as at March 31, 2007

Liabilities Amount

(Rs.)

Assets Amount

(Rs.)


Capital (Balancing Figure) 36,540 Cash-in-Bank 5,220

Sundry Debtors 19,080



Furniture 2,700

71,100 7,100


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Statement of Affairs as at March 31, 2007 (After adjustments)

Liabilities Amount

(Rs.)

Assets Amount

(Rs.)


Capital as on April 1, 2006

= Rs. 23,310

Cash-in-Bank

Sundry Debtors

5,220

Less : Drawings 4,320 19,080

18,990 - B. Debts 1,080

Add: Net Profit

14,940

33,930 18,000

- Provision 900 17,100

Bills Receivable

Rs. 9,000

- Provision 360 8,640


Furniture 2,700

-Depreciation -

270

2,430

68,490 68,490


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Accounting for Incomplete Accounting Records

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