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Financial Accounting

Introduction

This topic is about how to prepare trading, profit and loss account under an incomplete record or single-entry accounting system.

Meaning

This is system of accounting of financial transactions that are recorded without conformity with the rule of double entry’.

The records so prepared based on a single entry or one-leg entry by any bookkeeper or record keeper is hence incomplete or inadequate for proper accounting system. In order to prepare a normal accounting report, an accountant has to use one of his or her mental experience and ingenuity to prepare the accounts or financial reports from the incomplete records.

Features of Single Entry/Incomplete Records

  • Final accounts are prepared by comparing financial data of two or more years.
  • Accounting information is grossly inadequate.
  • Accounting records or books are not in existence or not well organized.
  • Mostly, records are kept on loose sheet or only cash book is kept.
  • There is no any accounting system in such an organization.
  • Record keeping is flexible.

Areas Where Single-Entry Accounting Systems Are Used

Areas where single accounting systems are used are as follows:

  • Schools
  • Government parastatals and agencies
  • Club association, unions (not-for-profit organization) and so on.
  • Sole traders, or small-scale business
  • Organizations that have no finance or accounting unit
  • Business or companies that are victims of artificial or natural disasters.
  • Business where records are kept on loose sheets.

Preparation of Statement of Affairs

A statement of affairs is the summary of a firms’ or a business’ assets, liabilities and owners stake at any given time.

It could be drawn at the beginning or at the end of every accounting year or period. The statement is drawn to ascertain any growth or increases in the components of the statements at any point in time. The information required to prepare this statement are: all fixed assets, total of debtors and creditors, owing and prepaid expenses, cash in hand and at bank and so on.

When two statements of affairs for different periods are compared, it will help to ascertain the followings:

The format for the statement of affairs is given in the following:

(a)        Opening Statement of Affairs

N
Fixed assets

Current assets

 

Less: Liabilities

Opening Capital

XXX

XXX

XXX

(XXX)

XXX

Opening capital = Total assets – Liabilities

(b)       Closing Statement of Affairs

N
Fixed assets

Current assets

 

Less: Liabilities

Closing Capital

XXX

XXX

XXX

XXX

XXX

Computation of profit Between the Two Profits

  N N
Closing capital   XXX
ADD: Drawings   XX
Less: Opening Capital XX
Additional Capital XX (XX)
Net Profit XX/(XX)

 Profit or loss can as well be computed as follows:

(a)        Opening capital + Profit – Drawings + Additional capital = New or closing capital

(b)       Profit = New capital + Drawing – Opening Capital – Additional Capital

Illustration 1

Abraka Ventures statements of affairs components as at 1 January, 2016 are given below.

N
Creditors

Bills payable

Plants and equipment

Stock

Debtors

Bills receivable

Cash

40,000

12,000

60,000

20,000

10,000

20,000

2,000

On 31 December, 2010, the following information was extracted from the business. Creditors N30,000, bill payables N16,000 equipments N50,000, stock N10,000 Debtors N20,000, Bills receivable N14,000, Cash N200 and drawings for the period were N16,000.

You are required to:

  • Calculate the opening capital
  • Show the closing capital and net profit

Illustration 2

Olaore Supermarket records all its financial transaction in a notebook. The following are extracts from the notebooks:

 

 

 

 

Stock

Creditors

Debtors

Cash in hands

Bank overdraft

Fixtures and fittings

Motor van

Notebooks
31 December, 2008 31 December 2009
N

33,000

30,000

40,000

500

50,000

15,000

20,000

N

46,000

28,800

35,000

4,000

38,000

15,000

20,000

 

The drawings during the year amounted to N5,000. Depreciation on furniture and fittings to be 10%, while N2,000 to be written off motor van. N1,000 of the debtors are irrecoverable and a general provision of 5% should be made on the debtors balance.

You are required to:

  • Ascertain the profit and loss for the year ended 31 December 2009.
  • Prepare a statement of affairs as at that date.

 

PREPARATION OF FINAL ACCOUNTS FROM INCOMPLETE RECORDS:

Conversion of Single Entry to Double Entry

An organization that keeps single entry or incomplete records of accounting may decide to prepare its annual final accounts from the inadequate information. It is possible under this incomplete records situation to prepare such final accounts by merely converting the single entry records to double entry records given the available information.     The following are the necessary books that need to be opened for such conversion:

  • Cash book
  • Sales ledger
  • Purchases ledger
  • Assets and liabilities account
  • Nominal accounts

If such conversion is done properly, a trial balance could be drawn to test the arithmetical accuracy of the records. For the purpose of the conversion and the preparation of final accounts from this situation, the following procedure should be adopted.

Step 1:            Prepare the opening statement of affairs purposely to ascertain opening capital.

Step 2:            Prepare the cash book with the details. This must include both the cash and bank accounts as the case may be either separately or in a cash book.

Step 3:            Prepare both debtors and creditors ledger control accounts to ascertain the total credit sales and total credit purchases.

Step 4:            Prepare a schedule or summary for total sales and purchases by adding the total credit sales and purchases with the cash sales and cash purchases.

Step 5:            Prepare control accounts for the nominal items that have outstanding or prepaids either at the beginning or at the end of the period in question.

Step 6:            Prepare any other required working schedules.

Step 7:            Prepare trading, profit and loss accounts from steps 1 – 6 above.

Step 8:            Prepare the balance sheet.

Illustration 3

Arsenal ventures had the assets and liabilities as at 1 January 2008.

N
Delivery van 120,000
Machine 180,000
Debtors 70,000
Bank 100,000
Stocks 25,000
Creditors for expenses 10,000

They do not keep proper records for their business transactions but the following were extracted from sketch books.

N
Opening cash balance 100,000
Receipts from debtors 85,000
Payments
Materials 52,000
Repairs of van 20,000
Telephones 2,500
Creditors for expenses 10,000

On 31, December 2008, debtors were owning N150,000 and closing stock was valued at N10,000

The following additional information was available:

N
Provision for depreciation

Delivery van

Machine

Accrued telephone expenses

Provision for doubtful debts

 

10,000

20,000

4,000

3,000

 

You are required to prepare:

  • Statement of affairs as at January 2008.
  • Trading, profit and loss account for the year ended 31 December 2008 and the balance sheet as at that date.

Solution

Opening Statement of Affairs as at 1 January 2008.

N
 

Delivery van

Machine

Debtors

Stocks

Bank

 

Less: Liabilities

Creditors for expenses

Opening capital

 

120,000

180,000

70,000

25,000

100,000

495,000

 

(10,000)

485,000

 

Bank Account

Receipts N N
Opening cash balance

Receipts from debtors

 

Less: Payments

Materials

Repairs of van

Telephone

Creditors for expenses

 

Closing cash balance

 

 

 

 

52,000

20,000

2,500

10,000

100,000

85,000

185,000

 

 

 

 

 

84,500

100,500

Debtors Ledger Control Account

N   N
Balance b/f

Credit sales a/c

 

Balance b/f

70,000

165,000

  235,000

150,000

Bank a/c

Balance c/f

85,000

150,000

235,000

 

Accrued Expenses Account

N   N
Balance a/c

Balance c/f

10,000

    4,000

    14,000

 

Balance b/f

P & L

 

Balance b/f

10,000

4,000

14,000

4,000

 

Arsenal Ventures

Trading Profits and Loss Account for the Period Ended 31 December 2008

N N
Sales

Less: Cost of sales

Opening stock

Purchases

 

Closing stock

 

Gross Profit

Less: Expenses

Repairs of van

Telephone (2,500 + 4,000)

Provision for doubtful dents

Depreciation:

Delivery van

Machines

 

Net profit

 

 

25,000

52,000

77,000

(10,000)

 

 

 

20,000

6,500

3,000

 

 

10,000

20,000

165,000

 

 

 

 

 

(67,000)

98,000

 

 

 

 

 

 

 

 

(59,500)

38,500

 Arsenal Ventures

Balance Sheet as at 31 December 2008

  Cost Depreciation Net NET Book Value
N N N
Delivery van

Machine

 

Current assest

Stock

Debtors (150,000 – 3,000)

Bank

 

120,000

180,000

300,000

(10,000)

(20,000)

(30,000)

 

10,000

147,000

100,500

257,500

110,000

160,000

270,000

 

 

 

Less: Accrued expenses

 

 

Financed by

Capital

Profits

(4,000) 253,500

523,500

N

485,000

38,500

523,500

Illustration 4

Wayne Salako Enterprises could not keep proper book for their business transactions during the year 2004. The following were extracted from the books.

N
Purchases:

Cash

Credit

Cash received from debtors

Purchases of furniture

Cash Sales

Expenses Paid:

Salaries

Electricity

Rent

Insurance

Rate

Advertisement

 

300,000

500,000

1,300,000

48,000

500,000

 

144,000

24,000

48,000

80,000

12,000

24,000

The following additional information was available:

(a)

01/01/2009

N

31/12/2009

N

Stock

Outstanding electricity

Rent owing

Insurance Prepaid

Debtors

Creditors

Rates In advance

100,000

1,600

4,000

3,600

50,000

30,000

3,000

140,000

2,400

3,600

4,000

64,000

44,000

2,400

(b)       Fixed assets on 1 January 2009 are as follows:

N
Furniture

Motor vehicle

Building

Cash at bank on 1 January 2009

72,000

500,000

700,000

200,000

 

(c)        Fixed asset should be depreciated as follows:

Furniture and building                   5%

Motor vehicle                                   20%

You are required to prepare trading, profit and loss accounts for the year ended 31 December 2009.

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See also

ACCOUNTING RATIOS AND INCOMPLETE RECORDS

ADMISSION OF NEW PARTNER AND RETIREMENT OF AN EXISTING PARTNER IN CONTINUING BUSINESS

GOODWILL

ISSUE OF SHARES

THE FINAL ACCOUNTS OF LIMITED LIABILITY COMPANIES

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