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3. L2- Incomplete records new.docx - LESSON TWO OTHER...

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LESSON TWOOTHER ASPECTS OF FINAL ACCOUNTS(a)INCOMPLETE RECORDSAn incomplete record situation is whereby, the accounting system falls short ofthe double entry.This may be due to:Lack of records at all; orInsufficient records that will facilitate the preparation of final accounts.Reasons for incomplete records:a)Managers or owners may not have theskillsor expertise in preparingand maintaining an accounting system (records and procedures).b)It may not beeconomicalfor the business to maintain accountingrecords due to the volume or/and nature of transactions (small scalebusinesses)c)Records aredestroyed(e.g. through fire),stolen or misplaced.d)Maintaining incomplete records consumes less time.e)It is moreconvenient to maintain records as per the single entry system.Limitations of Incomplete RecordsThough maintaining Incomplete Records is easier but it is not a systematicmethod of maintaining accounts. Its limitations are as follows:1.We cannot prepareaTrial Balanceto ensure the accuracy of the accountsin the absence of the double entry system.2.It fails to ascertain theaccurate financialresults of theorganization.3.Investigation and examination of the profitability, solvency, and liquidityare difficult. Hence, the outsiders and banks may not lend money for theexpansion of thebusiness.4.In case of loss by fire or theftclaiming the insurance amount causes greatdifficulty due to incomplete records and missing information.5.Also, convincing the incometaxauthorities about the computed income isdifficult in the absence of proper accounting.There are 4 main approaches in preparing final accounts where there areinsufficient records.a) Estimating income from the net assets/determining opening capital fromaccounting equation.b) Estimating income from the use of ratios.c)Use of a simple cashbook and bank statement.d) Use of control accounts.N/B:approach number c and d are normally used together.(a)Estimating Income from the Net AssetsWhere the available records are so deficient (i.e. it is impossible to compile areasonable complete cash summary, the only method of estimating the profits orloss for the period, is to prepare statement of affairsshowing the net worth ofthe business at the beginning and at the end of the period.The profit/loss is estimated by use of the following formulas:Profit or loss =ClosingOpening+DrawingsAdditional
CapitalCapitalCapitalOr where there are no non current liabilities then this optional formula can beusedProfit or loss =Closing-Opening+Drawings-AdditionalNet AssetNet AssetCapitalACCOUNTING EQUATION;ASSETS=CAPITAL/EQUITY+LIABILITIESORASSETS-LIAILITIES =CAPITAL/EQUITYIN FINANCED BY SECTIONOPENING CAPITALXXXLESS: DRAWINGS(XXX)ADD: NET PROFITXXXCLOSING CAPITALXXX

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Term
Winter
Professor
N/A
Tags
Balance Sheet, Generally Accepted Accounting Principles

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