by Philip Dunn

CAT syllabus for Maintaining Financial Records and Accounts includes, in the content analysis of objectives, the following statement – “methods of restructuring accounts from incomplete records”. The purpose of this paper is to cover these concepts in a way which will enable students to develop competence in this important examinable area.

Many small businesses do not keep complete double entry records. For them, a simple cash book to record receipts and payments may be enough. A system complete with day books and ledgers would provide better information and be less susceptible to undetected error; but there is no law which says books must be double entry. Even the tax authorities expect many businesses to run happily with less.

The trouble with incomplete records, when it comes to preparing period end financial statements, is that they do not tell the whole story. There is no record of outstanding debtors or creditors, nor of stock, nor, without analysis, of for what receipts and payments have been received and paid, or, in some cases, of the split between revenue and capital items.

In a double entry system these would all be represented by ledger balances. In an incomplete system the figures must be calculated, extrapolated, or extracted – in the case of creditors and debtors by making ‘accruals’ and ‘pre-payment’ calculations.

Arriving at the year-end profit and loss account and balance sheet will rely heavily on application of the concept of the ‘accounting equation’. This is defined as: assets equal proprietors’ capital plus liabilities. Thus the value of capital can be determined at any point in time.

Examination questions on incomplete records – a frequent feature of the CAT, B1 level, tend to focus on either sole trader or partnership accounts. In such instances any change in capital structure will be influenced by any one or a combination of the following transactions, events or results:

• introduction of capital;
• drawings; and/or
• trading profits or losses.

Using the accounting equation, and given the values of opening and closing capital together with drawings and the amounts of any capital introductions, the value of profit or loss can be determined – as is illustrated below.

Example 1
Tony Cook is a self employed plumber. His financial details for the years ended 1999 and 2000 showed:

Tony’s drawings for the year were £10,650. He had sold some shares for £1,050, the proceeds of which he had paid into his business bank account.

Thus, profit for the year can be calculated as:

The balance sheet figures should be supported by reconciled bank statements, unpaid sales invoices totalling the sum included as debtors, unpaid purchase invoices totalling creditors, and receipts for payments for fixed assets along with depreciation calculations.

Example 2
A similar approach can be used to determine sales and purchases totals, when given a cash book showing receipts and payments, together with opening and closing debtors and creditors. The following illustrates the use of such techniques.

John Risdon is a self employed motor engineer. He maintains a cash book to record his business receipts and payments. The following is a summary of the cash book for year ended 31 December 2000:

Assets and liabilities at 31 December 1999 and 2000 were:

The motor vehicle had been purchased second hand on 1 January 1999 for £10,000 and is subject to depreciation at 25% per annum, straight line, (that is, it is being written off over four years, its expected useful economic life).

This information can be used to produce statements for the year ended 31 December 2000.
Opening capital can be arrived at by using the “accounting equation”.

This can also be shown in the form of a control account:

Likewise the purchases and motor van running costs (where, because opening and closing creditors and debtors, the insurance pre-payment; and the actual amounts paid are all known, the charge for the year can be calculated).

Notes for Preparation of the Final Accounts
NB: The difference between the opening and closing motor van valuation (£7,500 – £5,000 = £2,500, is the depreciation charge for the year, ie: (£10,000 x 25% per annum).

The proceeds from the sale of the personal motor vehicle, which were paid into the business bank account, represent capital introduced. Other costs are shown in the summary cash book extract.

We can now draft the final accounts for the year ended 31 December 2000.

Trading and Profit and Loss Account of J Risdon for Year Ended 31 December 2000

Balance Sheet as at 31 December 2000

I hope that this overview helps you to develop further your competence in this important topic area.

Dr Philip E Dunn, Esk Valley Business School