Accounts From Incomplete Records PDF

CHAPTER 9 CHAPTER 9 ACCOUNTS FROM INCOMPLETE RECORDS LEARNING OUTCOMES After studying this Chapter, you would be able to: ♦ Learn how to derive capitals at two different points of time through...

CHAPTER 9 CHAPTER 9 ACCOUNTS FROM INCOMPLETE RECORDS LEARNING OUTCOMES After studying this Chapter, you would be able to: ♦ Learn how to derive capitals at two different points of time through statement of affairs. ♦ Learn the technique of determining profit by comparing capital at two different points of time. ♦ Prepare Trading and Profit and Loss Account and Balance Sheet from incomplete records. © The Institute of Chartered Accountants of India  1.2 9.2 ACCOUNTING CHAPTER OVERVIEW Definition of Single Entry System and its features Types of Single entry system Determination of profit by comparing capitals at different points of time Statement of Affairs and its comparison with Balance sheet Technique of obtaining complete information for preparation of financial statements Completion of Incomplete Preparation of double entry Accounting Preparation of books of Financial in all process Trial Balance accounts statements transactions General Techniques Fresh Derivation of Investment by Information proprietors/ Techniques from Cash partners of obtaining Book complete accounting information Distinction Analysis of between Sales Ledger Business and Purchase Expenses and Ledger Drawings © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.3 Sources Collection of necessary information utilized by about assets and liabilities Accountant Derivation of opening and Statement of Affairs at different points of closing time capitals 1. INTRODUCTION Very often small sole proprietorship and partnership businesses do not maintain double entry book keeping. There might be reasons like lack of knowledge of accounting, or the business is small and they do not wish to spend time or effort in maintaining the accounting records. As such, they might keep a record of the cash transactions and credit transactions only. But at the end of the accounting period, they will want to know the performance and financial position of their businesses. Think of a grocery-vendor who sells vegetables on a street or runs a small shop. Is he expected to learn accounting formally? No, he is only looking at keeping a record of a few items including: - What amount is he supposed to pay for items purchased on credit from his supplier? - What cash has he collected by selling those vegetables? - In case he runs a shop, how much amount has he paid for rent or electricity expenses? - In case he sells some items on credit, how much is he supposed to receive from that customer? There might be other reasons for incomplete records such as: - Accounting records are destroyed by accident, such as fire; - Some essential figure is unknown and must be calculated as a balancing figure (for example, due to inventory being damaged or destroyed). Every person would like to know the profit generated by the business. What we expect to learn is how to use those records to arrive at the profit or loss earned by the business or understand the financial position of that business. This chapter discusses how to complete the accounts from available incomplete records and addresses the problems faced in a single-entry system. © The Institute of Chartered Accountants of India  1.4 9.4 ACCOUNTING There is no such formal system as Single-Entry System as the accounts can only be prepared using Double Entry System. It might be appropriate to mention that a single-entry system is truly a system of incomplete or improper records. The way “Single Entry System” operates is that for some transactions the book-keepers complete entries and for some others they complete just one aspect of the transaction. In fact, for some other transactions, they even do not pass any entry. The task of the accountant is to establish link among the available information and to finalize these accounts. Normally, the businessmen keep a record of cash receipts and cash payments and personal accounts (receivables, payables, capital etc.) Also, information from bank statement (withdrawals, deposits) is easily available as well. Features of Single Entry System It is an inaccurate, unscientific and unsystematic method of recording business transactions. There is generally no record of real and nominal accounts and, in most of the cases; a record is kept for cash transactions and personal accounts. Cash book mixes up business and personal transactions of the owners. There is no uniformity in maintaining the records and the system may differ from firm to firm depending on the requirements and convenience of each firm. Profit under this system is only an estimate based on available information and therefore true and correct profits cannot be determined. The same is the case with the financial position in the absence of a proper balance sheet. 2. TYPES OF SINGLE ENTRY SYSTEM A scrutiny of many procedures adopted in maintaining records under single entry system brings forth the existence of following three types: (i) Pure single entry: In this, only personal accounts are maintained with the result that no information is available in respect of cash and bank balances, sales and purchases, etc. In view of its failure to provide even the basic information regarding cash etc., this method exists only on paper and has no practical application. (ii) Simple single entry: In this, only: (a) personal accounts, and (b) cash book are maintained. Although these accounts are kept on the basis of double entry system, postings from cash book are made only to personal accounts with no other account to be found in the ledger. Cash received from debtors or cash paid to creditors is simply noted on the bills issued or received as the case may be. © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.5 For example, M/s Small shop runs a retail shop. It keeps a register of amount receivable from people for items sold (bread, butter, milk etc). as under: Mr. A – ` 300 Mr. B – ` 450 Mr. C – ` 260. The business does not maintain a record of what item has been sold. It is only concerned about the amount receivable (personal account balance) from its customers. (iii) Quasi single entry: In this: (a) personal accounts, (b) cash book, and (c) some subsidiary books are maintained. The main subsidiary books kept under this system are Sales book, Purchases book and Bills book. No separate record is maintained for discounts, which are entered into the personal accounts. In addition, some scattered information is also available in respect of few important items of expenses like wages, rent, rates, etc. In fact, this is the method which is generally adopted as a substitute for double entry system. Some businesses may also maintain additional records like Bills book or Sales book. This might be required for tax or other purposes. For example, a shop selling t-shirts may want to issue a bill to each customer for the sales made to them. This will help them validate any returns of goods within reasonable time. In addition, they may keep a purchase book to record all purchases. Also, organisations employing workers keep records of cash wages paid and take acceptance from the workers for the amount paid to them. Types of single entry system Pure single entry Simple single entry Quasi single entry Personal accounts, Personal accounts and Only personal accounts cash book and cash book are are maintained subsidiary books are maintained maintained © The Institute of Chartered Accountants of India  1.6 9.6 ACCOUNTING 3. ASCERTAINMENT OF PROFIT BY CAPITAL COMPARISON This method is also known as Net Worth method or Statement of Affairs Method. Net Worth method or Statement of Affairs Method. Profit/ Closing Opening (Loss) Capital Capital If detailed information regarding revenue and expenses is not known, it becomes difficult to prepare profit and loss account. Instead by collecting information about assets and liabilities, it is easier to prepare balance sheet at two different points of time. So, while preparing accounts from incomplete records, if sufficient information is not available, it is better to follow the method of capital comparison to arrive at the profit/loss for the current year. 3.1 Methods of Capital Comparison Closing capital increases if there is profit, while it reduces if there is loss incurred during the year. However, if the proprietor/partners make fresh investments in the business, capital increases; and any withdrawal made by them, decreases the capital. The following points shall be considered while computing the profit/loss under capital comparison method- Particulars ` Capital at the end (a) XX Add: Drawings XX Less: Fresh capital introduced XX Capital at the beginning (b) XX Profit (a-b) XX ILLUSTRATION 1 Raju does not maintain proper records of his business. However, he provides the following information: ` Opening capital 10,000 Closing capital 12,500 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.7 Drawings during the year 3,000 Capital added during the year 3,750 You are required to calculate the profit or loss for the year. SOLUTION Computation of Profit or Loss during the year ` Closing Capital 12,500 Add: Drawings during the year 3,000 15,500 Less: Additional capital during the year (3,750) Less: opening capital (10,000) Net Profit for the year 1,750 ALTERNATIVELY Profit/Loss can also be ascertained as balancing figure by preparing capital account as follows: Particulars ` Particulars ` To drawings 3,000 By Balance b/d 10,000 To Balance c/d 12,500 By additional capital 3,750 By Net Profit (Bal Fig) 1,750 15,500 15,500 It is clear from the above discussion that to follow the capital comparison method, one should know the opening capital and closing capital. This should be determined by preparing statement of affairs at the two respective points of time. Capital = Assets (-) liabilities. Thus, the preparation of statement of affairs will require listing of assets and liabilities and their amount. The accountant utilizes the following sources for the purpose of finding out the assets and liabilities of a business enterprise: (i) Cash book for cash balance (ii) Bank pass book for bank balance (iii) Personal ledger for debtors and creditors (iv) Inventory by actual counting and valuation. © The Institute of Chartered Accountants of India  1.8 9.8 ACCOUNTING (v) As regards fixed assets, he prepares a list of them. The proprietor would help him by disclosing the original cost and date of purchase. After deducting reasonable amount of depreciation, the written down value would be included in the Statement of Affairs. After obtaining all necessary information about assets and liabilities, the next task of the accountant is to prepare statement of affairs at two different points in time. The design of the statement of affairs is just like balance sheet as given below: Statement of affairs as on........... Liabilities ` Assets ` Capital (Bal. Fig.) xx Building xx Loans, Bank overdraft xx Machinery xx Sundry creditors xx Furniture xx Bills payable xx Inventory xx Outstanding expenses Sundry debtors xx Bills receivable xx Loans and advances xx Cash and bank xx Prepaid expenses xx xx xx Now from the statement of affairs prepared at two different dates, the opening and closing capital balances can be obtained. ILLUSTRATION 2 Rakesh started his business on 1st of April 2021. He invested a capital of Rs 1,00,000. On 31st March 2022, he has the following information available as per the Single-entry system maintained by him. ` Cash balance (counted) 3,200 Inventory (physically verified) 34,800 Receivable from Ajay against credit sales 31,000 Machine 85,000 Payable to Vinod towards credit purchase 12,000 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.9 Loan taken from Bank 10,000 Drawings made during the year 24,000 You are required to calculate the profit or loss earned by Rakesh for the year ended 31st March 2022. SOLUTION Statement of Affairs as on 31st March, 2022 Liabilities Amount Assets Amount Sundry Creditors 12,000 Cash balance 3,200 Loan from bank 10,000 Inventory 34,800 Capital (Bal fig) 1,32,000 Sundry Debtors 31,000 Machine 85,000 1,54,000 1,54,000 Statement of profit or loss for the year ended 31st March, 2022 Capital as at 31st March 2022 1,32,000 Add: Drawings made during the year 24,000 Total 1,56,000 Less: Opening Capital as at 1st April 2021 (1,00,000) Profit for the year ended 31st March 2022 56,000 3.2 Difference between Statement of Affairs and Balance Sheet Basis Statement of affairs Balance sheet Source It is prepared on the basis of It is based on transactions recorded strictly transactions partly recorded on the basis of double entry book keeping; under the double entry book each item in the balance sheet can be keeping and partly under the verified from the relevant subsidiary books, single entry. Most of the ledger and documentary evidences. assets are recorded based on the estimates, assumptions, information gathered from memory rather from the records. Capital In this statement, capital is Capital is derived from the capital account merely a balancing figure in the ledger and therefore the total of © The Institute of Chartered Accountants of India  1.10 9.10 ACCOUNTING being excess of assets over assets side will always be equal to the total liabilities. Hence assets need of liabilities side. not be equal to liabilities. Omission Since this statement is There is no possibility of omission of any prepared from incomplete item of asset and liability since all items are records, it is very difficult, to properly recorded. Moreover, it is easy to identify and record those locate the missing items since the balance assets and liabilities, if sheet will not agree. omitted from the books. Basis of The valuation of assets is The valuation of assets is done on scientific Valuation generally done in an arbitrary basis, fixed assets are shown at the original manner; therefore, no method costs less depreciation till date. Any of valuation is disclosed. change in the method of valuation is properly disclosed. Objective The objective of preparing this The objective of preparing the balance statement is to identify the sheet is to ascertain the financial position capital figures in the on a particular date. beginning and at the end of the accounting period respectively. 3.3 Preparation of Statement of Affairs and Determination of Profit It has been discussed in Para 3.1 that figures of assets and liabilities should be collected for preparation of statement of affairs. Given below an example: ILLUSTRATION 3 Assets and Liabilities of Mr. X as on 31-03-2021 and 31-03-2022 are as follows: 31-03-2021 31-03-2022 ` ` Assets Building 1,00,000 ? Furniture 50,000 ? Inventory 1,20,000 2,70,000 Sundry debtors 40,000 90,000 Cash at bank 70,000 85,000 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.11 Cash in hand 1,200 3,200 Liabilities Loans 1,00,000 80,000 Sundry creditors 40,000 70,000 Decided to depreciate building by 2.5%p.a. and furniture by 10% p.a. One Life Insurance Policy of the Proprietor was matured during the period and the amount ` 40,000 is retained in the business. Proprietor took @ ` 2,000 p.m. for meeting family expenses. Prepare Statement of Affairs as on 31-03-2021 and 31-03-2022. SOLUTION Mr. X Statement of Affairs as on 31-03-2021 & 31-03-2022 Liabilities 31-03-2021 31-03-2022 Assets 31-03-2021 31-03-2022 ` ` ` ` Capital 2,41,200 4,40,700 Building 1,00,000 97,500 Loans 1,00,000 80,000 Furniture 50,000 45,000 Sundry creditors 40,000 70,000 Inventory 1,20,000 2,70,000 Sundry debtors 40,000 90,000 Cash at bank 70,000 85,000 Cash in hand 1,200 3,200 3,81,200 5,90,700 3,81,200 5,90,700 ILLUSTRATION 4 Take figures given in Illustration 4. Find out profit of Mr. X for the year ended 31-03-2022. SOLUTION Determination of Profit by applying the method of the capital comparison ` Capital Balance as on 31-03-2022 4,40,700 Less: Fresh capital introduced (40,000) 4,00,700 © The Institute of Chartered Accountants of India  1.12 9.12 ACCOUNTING Add: Drawings (` 2000 × 12) 24,000 4,24,700 Less: Capital Balance as on 31-03-2021 (2,41,200) Profit 1,83,500 Note: Closing capital is increased due to fresh capital introduction, so it is deducted. Closing capital was reduced due to withdrawal by proprietor; so it is added back. ALTERNATIVELY Capital account can be prepared as follows: Particulars ` Particulars ` To drawings 24,000 By Balance b/d 2,41,200 To Balance c/d 4,40,700 By additional capital 40,000 By Net Profit (Bal Fig) 1,83,500 4,64,700 4,64,700 ILLUSTRATION 5 The Income Tax Officer, on assessing the income of Shri Moti for the financial years 2020-2021 and 2021-2022 feels that Shri Moti has not disclosed the full income. He gives you the following particulars of assets and liabilities of Shri Moti as on 1st April, 2020 and 1st April, 2022. ` 1-4-2020 Assets : Cash in hand 25,500 Inventory 56,000 Sundry debtors 41,500 Land and Building 1,90,000 Wife’s Jewellery 75,000 Liabilities : Owing to Moti’s Brother 40,000 Sundry creditors 35,000 1-4-2022 Assets : Cash in hand 16,000 Inventory 91,500 Sundry debtors 52,500 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.13 Land and Building 1,90,000 Motor Car 1,25,000 Wife’s Jewellery 1,25,000 Loan to Moti’s Brother 20,000 Liabilities : Sundry creditors 55,000 During the two years the domestic expenditure was ` 4,000 p.m. The declared incomes of the financial years were ` 1,05,000 for 2020-2021 and ` 1,23,000 for 2021-2022 respectively. State whether the Income-tax Officer’s contention is correct. Explain by giving your workings. SOLUTION Calculation of Capital of Shri Moti ₹ 1-4-2020₹ ₹ 1-4-2022₹ Assets Cash in hand 25,500 16,000 Inventory 56,000 91,500 Sundry debtors 41,500 52,500 Land & Building 1,90,000 1,90,000 Wife’s Jewellery 75,000 1,25,000 Motor Car — 1,25,000 Loan to Moti’s Brother — 20,000 3,88,000 6,20,000 Liabilities: Owing to Moti’s Brother 40,000 — Sundry creditors 35,000 75,000 55,000 55,000 Capital 3,13,000 5,65,000 Income during the two years: Capital as on 1-4-2022 5,65,000 Add: Drawings – Domestic Expenses for the two years (₹ 4,000 × 24 months) 96,000 6,61,000 © The Institute of Chartered Accountants of India  1.14 9.14 ACCOUNTING Less: Capital as on 1-4-2020 (3,13,000) Income earned in 2020-2021 and 2021-2022 3,48,000 Income declared (₹ 1,05,000 + ₹ 1,23,000) 2,28,000 Suppressed Income 1,20,000 The Income-tax officer’s contention that Shri Moti has not declared his true income is correct. Shri Moti’s true income is in excess of the disclosed income by ₹ 1,20,000 based on the information available 4. TECHNIQUES OF OBTAINING COMPLETE ACCOUNTING INFORMATION When books of accounts are incomplete, it is essential to complete double entry in respect of all transactions. The whole accounting process should be carefully followed and Trial Balance should be drawn up. 4.1 General Techniques Where the accounts of a business are incomplete, it is advisable to convert them first to the double entry system and then to draw up the Profit and Loss Account and the Balance Sheet, instead of determining the amount of profit/loss by preparing the statement of affairs. As books of accounts of different firms being incomplete in varying degrees, it is not possible to suggest a formula which could uniformly be applied for preparing final accounts therefrom. As a general rule, it is essential to first start the ledger accounts with the opening balances of assets, liabilities and the capital. Afterwards, each book of original entry should be separately dealt with, so as to complete the double entry by posting into the ledger all entries which have not been posted. For example, If only personal accounts have been posted from the Cash Book, debits and credits pertaining to nominal accounts and real accounts that are not posted, should be posted into the ledger. If there are Discount Columns in the Cash Book, the totals of discounts paid and received should be posted to Discounts Allowed and Discounts Received Accounts respectively, for completing the double entry. Afterwards, the other subsidiary books, i.e., Purchases Day Book, Sales Day Book, Purchase Return Book, Sales Return Book, Bills Receivable and Bills Payable, etc. should be totaled up and their totals posted into the ledger to the debit or credit of the appropriate nominal or real accounts, as the personal aspect of the transactions have been posted already. © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.15 When an Accountant is engaged in posting the unposted items from the Cash Book and other subsidiary books, he may be confronted with a number of problems. The manner in which some of them may be dealt with is described below: (1) In the Cash Book, there can be several receipt entries which have no connection with the business but which belong to the proprietor, e.g., interest collected on his private investment, legacies received by him, amount contributed by the proprietor from his private resources, etc. All those amounts should be credited to his capital account. Also the Cash Book may contain entries in respect of payments for proprietor’s purchases and his personal expenses. All such items should be taken to his capital account on the debit side as drawings. (2) Amounts belonging to the business after collection may have been directly utilised for acquiring business assets or for meeting certain expenses instead of being recorded in the Cash Book. On the other hand, the proprietor may have met some of the business expenses from his private resources. In that case, the appropriate asset or expense account should be debited and the source of obtaining funds to be credited. (3) If cash is short, because the proprietor had withdrawn amount without any entry having been made in the cash book the proprietor’s capital account should be debited. In fact, it will be necessary to debit or credit the proprietor’s capital account in respect of all unidentified amounts which cannot be adjusted anywhere else. (4) Where the benefit of an item of an expense is received both by the proprietor and business, then it should be allocated between the two on some equitable basis e.g. rent of premises when the proprietor lives in the same premises, should be allocated on the basis of the area occupied by him for residence. In the end, it will be possible to draw a Trial Balance. Students are advised to prepare a Trial balance as it will bring out any mistakes committed while making the above adjustments. 4.2 Derivation of Information from Cash Book The analysis of cash as well as bank receipts and payments, should be extensive but under significant heads, so that various items of income and expenditure can be posted therefrom into the ledger. However before posting the information into the ledger the same should be collected in the form of an account, the specimen whereof is shown below: Cash and Bank Summary Account for the year ended (assumed figures) Cash Bank Cash Bank ` ` ` ` To Balance in hand 590 7,400 By Expenses 3,000 - © The Institute of Chartered Accountants of India  1.16 9.16 ACCOUNTING (opening) (Sundry payments) To Sales 6,500 - By Purchases 100 6,000 To Collection from By Sundry creditors - 5,000 Debtors - 10,000 By Drawings 1,500 - By Petty expenses 800 - By Rent - 1,000 By Electricity and water 350 - By Repairs 350 - By Wages - 1,000 By Balance in Hand 990 4,400 7,090 17,400 7,090 17,400 The important point about incomplete records is that much of the information may not be readily available and that the relevant information has to be ascertained. A good point is to prepare Cash and Bank Summary (if not available in proper form with both sides tallied). The cash and bank balance at the end should be reconciled with the cash and bank books. Having done so, the various items detailed on the Summary Statements, should be posted into the ledger. It is quite likely that some of the missing information will then be available. Consider the following about a firm relating to 31st March 2022. ` Cash Balance on 1st April, 2021 250 Bank overdraft on 1st April, 2021 5,400 Cash purchases 3,000 Collection from Sundry debtors 45,600 Sale of old furniture 750 Purchase of Machinery 12,000 Payment of Sundry creditors 26,370 Expenses 8,450 Fresh Capital brought in 5,000 Drawings 3,230 Cash Balance on 31st March, 2022 310 Bank balance on 31st March, 2022 1,180 Now prepare the cash and Bank Summary. © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.17 Cash and Bank Summary Dr. ` ` Cr. Cash Balance on 1-4-2021 250 Bank overdraft on 1-4-2021 5,400 Collection from Sundry debtors 45,600 Cash purchases 3,000 Sale of old furniture 750 Purchase of Machinery 12,000 Fresh Capital brought in 5,000 Payment to Sundry creditors 26,370 Balancing figure- (Cash sales) 8,340 Expenses 8,450 Drawings 3,230 Cash balance on 31-03-2022 310 Bank balance on 31-03-2022 1,180 59,940 59,940 See that debit side is short by ` 8,340. What may be the possible source of cash inflow? It can be cash sales. 4.3 Analysis of Sales Ledger and Purchase Ledger Sales Ledger: It would disclose information pertaining to the opening balances of debtors, transactions made with them during the year such as goods sold to them on credit, bills receivable drawn on them, bills dishonored, if any; cash received from them, sales returns, discount, rebate or any other concession allowed to them, receipts of bills receivable, bad debts written off and transfers. Journal entries must be made by debiting or crediting the impersonal accounts concerned with contra credit or debit given to total debtors account. Analysis of Sales Ledger of the year Op. Sales Bills Total Cash Dis- Bills Sales Bad Total Balance Customer Disho- Debits counts Recd. Debts Credit (cl.) Recd. Returns Balance nored Allw. From the aforementioned, it will be possible to build up information about sales and other accounts which can then be posted in totals, if so desired. It would also be possible to prepare Total Debtors © The Institute of Chartered Accountants of India  1.18 9.18 ACCOUNTING Account in the following form: Proforma of Total Debtors Account (assumed figures) ` ` To Opening balance 5,000 By Cash/Bank 10,000 To Sales 38,000 By Discount 500 To Bills dishonoured 280 By Bills receivable 20,000 To Interest 100 By Bad debts 280 By Closing balance 12,600 43,380 43,380 In can be seen from the above format that, if any one figure is not given it can be found out easily as the balancing figure. It can be opening balance, credit sales, cash collected or closing balance etc. For instance, if the information about sales is not available it could be ascertained as the balancing figure, i.e., in the total Debtors Account given above, if all other figures are given, amount of sales on credit basis can be easily ascertained. ILLUSTRATION 6 Calculate the bad debts from the below information: Opening balance of Debtors ` 5,00,000 Closing balance of Debtors ` 7,00,000 Amount received in Cash ` 6,00,000 Discount allowed ` 10,000 Credit Sales ` 11,40,000 Bills Receivable ` 3,00,000 Bad Debts ??? SOLUTION Debtors Account Particulars Amount Particulars Amount Balance b/f 5,00,000 Cash A/c 6,00,000 Credit Sales 11,40,000 Discount allowed 10,000 Bills Receivable 3,00,000 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.19 Bad Debts 30,000 (Bal fig) Balance c/f 7,00,000 16,40,000 16,40,000 Purchases Ledger: Generally speaking, a Purchases Ledger is not as commonly maintained as the Debtors Ledger for it being convenient to make entries in respect of outstanding liabilities at the time they are paid rather than when they are incurred. The information is available in respect of opening balance of the creditors, goods purchased on credit, bills payable accepted, bills payable dishonored; cash paid to the creditors during the year, discount and other concessions obtained, returns outwards and transfers. Here also, journal entries must be made by debiting or crediting the respective impersonal accounts. Contra credit or debit being given to total creditor’s account. From the available information total creditors account can be prepared as follows Proforma of Total Creditors Account (assumed figures) ` ` To Cash/bank 25,000 By Opening Balance 10,000 To Purchase Returns 400 By Purchases 30,400 To Bills Payable 8,700 By Bill payable dishonoured 450 To discount received 100 To Closing Balance 6,650 40,850 40,850 If a proper record of return to creditors, discount allowed by them etc., has not been kept, it may not be possible to write up the Total Creditors A/c. In such a case, net credit purchase can be ascertained as follows: Cash paid to Creditors including on account of bills XXX payable during the period Closing balance of Creditors and Bills Payable XXX Total XXX Less: Opening balance of Creditors and Bills Payable XXX Net credit purchase during the period XXX Alternatively Cash paid to creditors during the period XXX © The Institute of Chartered Accountants of India  1.20 9.20 ACCOUNTING Add: Bills Payable issued to them XXX Closing balance of Creditors XXX Less: Opening balance of creditors XXX Credit Purchases during the period XXX ILLUSTRATION 7 Calculate the credit purchases from the below information: Opening balance of creditors ` 4,00,000 Closing balance of creditors ` 5,00,000 Payments made in Cash ` 8,50,000 Discount received ` 20,000 SOLUTION Total Creditors Account Particulars Amount Particulars Amount Cash paid 8,50,000 Balance b/d 4,00,000 Discount received 20,000 Credit Purchases (Bal. fig) Balance c/d 5,00,000 9,70,000 13,70,000 13,70,000 Nominal Accounts: It is quite likely that the total expenditure shown by balance of nominal account may contain items of expenditure which do not relate to the year for which accounts are being prepared and, also, there may exist certain items of expenditure incurred but not paid, which have not been included therein. On that account, each and every account should be adjusted in the manner shown below (figures assumed): Cash and Amount Paid out Total Pre Expenses Particulars Bank of Private Payment for the Payment Accrued Fund period 1 2 3 4 5 (2+3+4) 6 7 (5-6) ` ` ` ` ` ` Rent & Rates 2,200 300 100 2,600 150 2,450 Salaries 4,500 500 1,000 6,000 250 5,750 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.21 Only the amount entered as “expenses for the period” should be posted to the respective nominal accounts. A similar adjustment of nominal accounts in respect of revenue receipt should be made. Let us continue with the example given in para 4.2. Given some other information, how to compute credit purchase and credit sale is discussed below: Opening balance (1-4-2021) ` Inventory 20,000 Sundry creditors 12,300 Sundry debtors 15,000 Closing Balance (31-03-2022) Inventory 15,000 Sundry creditors 13,800 Sundry debtors 25,600 Cash paid to creditors 26,370 Cash received from debtors 45,600 Cash sales 8,340 Cash purchases 3,000 Discount received during the year 1,130 Discount allowed 1,870 What are the purchases for 2021-2022? Let us prepare the Sundry Creditors Account. Sundry Creditors Account ` ` To Cash 26,370 By Balance b/d 12,300 To Discount (received) 1,130 (opening) To Balance c/d (closing) 13,800 By Purchases (balancing figure) 29,000 41,300 41,300 The credit purchases are ` 29,000; cash purchases are ` 3,000: hence total purchases are ` 32,000. © The Institute of Chartered Accountants of India  1.22 9.22 ACCOUNTING Likewise prepare the Sundry Debtors Account: Sundry Debtors Account ` ` To Balance b/d 15,000 By Cash 45,600 To Credit sales (balancing figure) 58,070 By Discount (allowed) 1,870 By Balance c/d 25,600 73,070 73,070 So total sales = credit sales + cash sales = ` 58,070 + ` 8,340 = ` 66,410 4.4 Distinction between Business Expenses and Drawings It has been already stated that often the distinction is not made between business expenses and drawings. While completing accounts from incomplete records, it is necessary to scan the business transactions carefully to identify the existence of drawings. The main items of drawings are (illustrative): Rent of premises commonly used for residential as well as business purposes. Common electricity and telephone bills. Life insurance premiums of proprietor/partners paid from business cash. Household expenses met from business cash. Private loan paid to friends and relatives out of business cash. Personal gifts made to any friends and relatives out of business cash. Goods or services taken from the business for personal consumption. Cash withdrawals to meet family expenses. Amount collected from debtors directly used for meeting personal expenses. So it is necessary to scan the summary of cash transactions, business resources and their utilization to assess the nature of drawings and its amount. 4.5 Fresh Investment by proprietors / partners Like drawings, often fresh investments made by proprietors’ /partners are not readily identifiable. It becomes necessary to scan the business transactions carefully. Apart from direct cash investment, fresh investments may take the following shape: © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.23 Money collected and put in the business on maturity of Life Insurance Policy of the proprietors. Interest and dividend of personal investment of the proprietors collected and put in the business. Income from non-business property collected and put in the business. Payments made to creditors out of personal cash. Unless these items are properly identified and segregated, business income will be affected and proper statement of affairs cannot be prepared. ILLUSTRATION 8 A. Adamjee keeps his books on single entry basis. The analysis of the cash book for the year ended on 31st March, 2022 is given below: Receipts ` Payments ` Bank Balance as on 1st April, 2021 2,800 Payments to Sundry creditors 35,000 Received from Sundry Debtors 48,000 Salaries 6,500 Cash Sales 11,000 General expenses 2,500 Capital brought during the year 6,000 Rent and Taxes 1,500 Interest on Investments 200 Drawings 3,600 Cash purchases 12,000 Balance at Bank on 31st March, 2022 6,400 Cash in hand on 31st March, 2022 500 68,000 68,000 Particulars of other assets and liabilities are as follows: 1st April, 2021 31st March, 2022 Sundry debtors 14,500 17,600 Sundry creditors 5,800 7,900 Machinery 7,500 7,500 Furniture 1,200 1,200 Inventory 3,900 5,700 Investments 5,000 5,000 © The Institute of Chartered Accountants of India  1.24 9.24 ACCOUNTING Prepare final accounts for the year ending 31st March, 2022 after providing depreciation at 10 per cent on machinery and furniture and ` 800 against doubtful debts. SOLUTION A. Adamjee Trading Account for the year ended 31st March 2022 ` ` ` To Opening Inventory 3,900 By Sales 62,100 To Purchases 49,100 By Closing Inventory 5,700 To Gross profit c/d (b.f.) 14,800 67,800 67,800 Profit & Loss Account for the year ended 31st March 2022 ` ` ` To Salaries 6,500 By Gross Profit b/d 14,800 To Rent and Taxes 1,500 By Interest on investment 200 To General expenses 2,500 To Dep: Machinery@ 10% 750 Furniture @ 10% 120 870 To Provision for doubtful debts 800 To Net profit carried to Capital A/c (b.f.) 2,830 15,000 15,000 Balance Sheet as on 31st March 2022 Liabilities ` ` Assets ` ` A. Adamjee’s Capital Machinery 7,500 on 1st April, 2021 29,100 Less : Depreciation (750) 6,750 Add: Fresh Capital 6,000 Furniture 1,200 Add: Profit for the year 2,830 Less : Depreciation (120) 1,080 37,930 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.25 Less: Drawings (3,600) 34,330 Inventory-in-trade 5,700 Sundry debtors 17,600 Sundry creditors 7,900 Less : Provision for Doubtful debts (800) 16,800 Investment 5,000 Cash at bank 6,400 Cash in hand 500 42,230 42,230 Working Notes: 1. Balance sheet of A. Adamjee as on 1st April 2021 Liabilities ` Assets ` Sundry creditors 5,800 Machinery 7,500 A. Adamjee’s capital 29,100 Furniture 1,200 (balancing figure) Inventory 3,900 Sundry debtors 14,500 Investments 5,000 Bank balance (from Cash statement) 2,800 34,900 34,900 2. Ledger Accounts A. Adamjee’s Capital Account ` ` 31.03.22 To Drawings 3,600 01.04. 21 By Balance b/d 29,100 31.03.22 By Net Profit 2,830 31.03.22 To Balance c/d (b.f.) 34,330 31.03.22 By Cash 6,000 37,930 37,930 © The Institute of Chartered Accountants of India  1.26 9.26 ACCOUNTING Sales Account ` ` 31.03.22 To Trading A/c 62,100 31.03.22 By Cash 11,000 (b.f.) 31.03.22 By Total Debtors Account (Credit Sales) 51,100 62,100 62,100 Total Debtors Account ` ` 01.04.21 To Balance b/d 14,500 31.03.22 By Cash 48,000 31.03.22 To Credit sales 51,100 31.03.22 By Balance c/d 17,600 (Balancing figure) 65,600 65,600 Purchases Account ` ` 31.03.22 To Cash A/c 12,000 31.03.22 By Trading To total Creditors A/c 37,100 Account (b.f.) 49,100 (credit Purchases) 49,100 49,100 Total Creditors Account ` ` 31.03.22 To Cash 35,000 01.04.21 By Balance b/d 5,800 31.03.22 To Balance b/d 7,900 31.03.22 By Credit Purchases 37,100 (Balancing figure) 42,900 42,900 ILLUSTRATION 9 From the following data furnished by Mr. Manoj, you are required to prepare a Trading and Profit and Loss Account for the year ended 31st March, 2022 and Balance Sheet as at that date. All workings should form part of your answer. © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.27 Assets and Liabilities As on 1st As on 31st April 2021 March 2022 ` ` Creditors 15,770 12,400 Sundry expenses outstanding 600 330 Sundry Assets 11,610 12,040 Inventory in trade 8,040 11,120 Cash in hand and at bank 6,960 8,080 Trade debtors ? 17,870 Details relating to transactions in the year: Cash and discount credited to debtors 64,000 Sales return 1,450 Bad debts 420 Sales (cash and credit) 71,810 Discount allowed by trade creditors 700 Purchase returns 400 Additional capital-paid into Bank 8,500 Realisations from debtors-paid into Bank 62,500 Cash purchases 1,030 Cash expenses 9,570 Paid by cheque for machinery purchased 430 Household expenses drawn from Bank 3,180 Cash paid into Bank 5,000 Cash drawn from Bank 9,240 Cash in hand on 31-3-2022 1,200 Cheques issued to trade creditors 60,270 © The Institute of Chartered Accountants of India  1.28 9.28 ACCOUNTING SOLUTION In the books of Mr. Manoj Trading Account for the year ending 31st March, 2022 ` ` ` ` To Opening Inventory 8,040 By Sales To Purchases 59,030 Cash 4,600 (58,000 + 1,030) Credit 67,210 Less: Returns (400) 58,630 71,810 To Gross profit c/d 14,810 Less: Returns (1,450) 70,360 By Closing inventory 11,120 81,480 81,480 Profit & Loss Account for the year ending 31st March, 2022 ` ` To Sundry expenses (W.N.(v)) 9,300 By Gross profit b/d 14,810 To Discount 1,500 By Discount 700 To Bad Debts 420 To Net Profit transfer to Capital 4,290 15,510 15,510 Balance Sheet of Mr. Manoj as on 31st March, 2022 Liabilities ` ` Assets ` Capital Sundry assets 12,040 Opening balance 26,770 Inventory in trade 11,120 Add: Addition 8,500 Sundry debtors 17,870 Net Profit 4,290 Cash in hand & at bank 8,080 39,560 Less: Drawings (3,180) 36,380 Sundry creditors 12,400 Outstanding expenses 330 49,110 49,110 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.29 Working Notes: (i) Cash sales Combined Cash & Bank Account ` ` To Balance b/d 6,960 By Sundry creditors 60,270 To Sundries (Contra) 5,000 By Sundries (Contra) 5,000 To Sundries (Contra) 9,240 By Sundries (Contra) 9,240 To Sundry debtors 62,500 By Drawings 3,180 To Capital A/c 8,500 By Machinery 430 To Sales (Cash Sales-Balancing 4,600 By Sundry expenses 9,570 Figure) By Purchases 1,030 By Balance c/d 8,080 96,800 96,800 (ii) Total Debtors Account ` ` To Balance b/d (bal. fig.) 16,530 By Bank 62,500 To Sales (71,810–4,600 1) 67,210 By Discount(64,000 – 62,500) 1,500 By Return Inward 1,450 By Bad Debts 420 By Balance c/d 17,870 83,740 83,740 (iii) Total Creditors Account ` ` To Bank 60,270 By Balance b/d (bal. fig.) 15,770 To Discount 700 By Purchases 58,000 To Return Outward 400 To Balance c/d 12,400 73,770 73,770 1 From combined cash and bank account © The Institute of Chartered Accountants of India  1.30 9.30 ACCOUNTING (iv) Balance Sheet as on 1st April, 2021 Liabilities ` Assets ` Capital (bal. fig.) 26,770 Sundry Assets 11,610 Sundry Creditors 15,770 Inventory in Trade 8,040 Outstanding Expenses 600 Sundry Debtors (from total 16,530 debtors A/c) Cash in hand & at bank 6,960 43,140 43,140 (v) Expenses paid in Cash 9,570 Add: Outstanding on 31-3-2022 330 9,900 Less: Outstanding on 1-4-2021 (600) 9,300 (vi) Due to lack of information, depreciation has not been provided on fixed assets. ILLUSTRATION 10 Mr. Anup runs a wholesale business where in all purchases and sales are made on credit. He furnishes the following closing balances: 31st March 2021 31st March 2022 Sundry debtors 70,000 92,000 Bills receivable 15,000 6,000 Bills payable 12,000 14,000 Sundry creditors 40,000 56,000 Inventory 1,10,000 1,90,000 Bank 90,000 87,000 Cash 5,200 5,300 Summary of cash transactions during the year 2021- 2022: (i) Deposited to bank after payment of shop expenses @ ` 600 p.m., salary @ ` 9,200 p.m. and personal expenses @ ` 1,400 p.m. ` 7,62,750. © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.31 (ii) Cash Withdrawn from bank ` 1,21,000. (iii) Cash payment to suppliers ` 77,200 for supplies and ` 25,000 for furniture. (iv) Cheques collected from customers but dishonoured ` 5,700. (v) Bills accepted by customers ` 40,000. (vi) Bills endorsed ` 10,000. (vii) Bills discounted ` 20,000, discount ` 750. (viii) Bills matured and duly collected ` 16,000. (ix) Bills accepted ` 24,000. (x) Paid suppliers by cheque ` 3,20,000. (xi) Received ` 20,000 on maturity of one LIC policy of the proprietor by cheque. (xii) Rent received ` 14,000 by cheque for the premises owned by proprietor. (xiii) A building was purchased on 30-11-2021 for opening a branch for ` 3,50,000 and some expenses were incurred on this building, details of which are not maintained. (xiv) Electricity and telephone bills paid by cash ` 18,700, due ` 2,200. Other transactions: (i) Claim against the firm for damage ` 1,55,000 is under legal dispute. Legal expenses ` 17,000. The firm anticipates defeat in the suit. (ii) Goods returned to suppliers ` 4,200. (iii) Goods returned by customers ` 1,200. (iv) Discount offered by suppliers ` 2,700. (v) Discount offered to the customers ` 2,400. (vi) The business is carried on at the rented premises for an annual rent of ` 20,000 which is outstanding at the year end. Prepare Trading and Profit & Loss Account of Mr. Anup for the year ended 31st March 2022 and Balance Sheet as on that date. © The Institute of Chartered Accountants of India  1.32 9.32 ACCOUNTING SOLUTION Trading Account of Mr. Anup for the year ended 31st March 2022 ` ` ` ` To Opening Inventory 1,10,000 By Sales 9,59,750 To Purchases 4,54,100 Less: Sales Return (1,200) 9,58,550 Less: Purchases Return By Closing Inventory 1,90,000 (4,200) 4,49,900 To Gross Profit (b.f.) 5,88,650 11,48,550 11,48,550 Profit & Loss Account of Mr. Anup for the year ended 31st March 2022 ` ` To salary (9,200 x 12) 1,10,400 By Gross Profit 5,88,650 To Electricity & Tel. Charges (18,700 + 2,200) 20,900 By Discount 2,700 To Legal expenses 17,000 To Discount (2,400 + 750) 3,150 To Shop exp. (600 x 12) 7,200 To Provision for claims for damages 1,55,000 To Shop Rent 20,000 To Net Profit (b.f.) 2,57,700 5,91,350 5,91,350 Balance Sheet as on 31st March 2022 Liabilities ` Assets ` Capital A/c (W.N.vi) 2,38,200 Building (from summary 3,72,000 Add : Fresh capital introduced cash and bank A/c) Maturity value from LIC 20,000 Furniture 25,000 Rent 14,000 Inventory 1,90,000 Add : Net Profit 2,57,700 Sundry debtors 92,000 5,29,900 Bills receivable 6,000 Less : Drawing(14,00 x12) (16,800) 5,13,100 Cash at Bank 87,000 Rent outstanding 20,000 Cash in Hand 5,300 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.33 Sundry creditors 56,000 Bills Payable 14,000 Outstanding expenses Legal Exp. 17,000 Electricity & Telephone charges 2,200 19,200 Provision for claims for damages 1,55,000 7,77,300 7,77,300 Working Notes : (i) Sundry Debtors Account ` ` To Balance b/d 70,000 By Bill Receivable A/c To Bill receivable A/c-Bills 3,000 Bills accepted by customers 40,000 dishonoured To Bank A/c-Cheque 5,700 By Bank A/c - Cheque 5,700 dishonoured received To Credit sales (Balancing 9,59,750 By Cash (from summary 8,97,150 Figure) cash and bank account) By Return inward A/c 1,200 By Discount A/c 2,400 By Balance c/d 92,000 10,38,450 10,38,450 (ii) Bills Receivable Account ` ` To Balance b/d 15,000 By Sundry creditors A/c To Sundry Debtors A/c 40,000 (Bills endorsed) 10,000 (Bills accepted) By Bank A/c (20,000 – 750) 19,250 By Discount A/c 750 (Bills discounted) © The Institute of Chartered Accountants of India  1.34 9.34 ACCOUNTING By Bank Bills collected on maturity 16,000 By Sundry debtors Bills dishonoured (Bal. Fig) 3,000 By Balance c/d 6,000 55,000 55,000 (iii) Sundry Creditors Account ` ` To Bank 3,20,000 By Balance c/d 40,000 To Cash 77,200 By Credit purchase To Bill Payable A/c 24,000 (Balancing figure) 4,54,100 To Bill Receivable A/c 10,000 To Return Outward A/c 4,200 To Discount Received A/c 2,700 To Balance b/d 56,000 4,94,100 4,94,100 (iv) Bills Payable A/c ` ` To Bank A/c (Balance figure) 22,000 By Balance b/d 12,000 To Balance c/d 14,000 By Sundry creditors A/c Bills accepted 24,000 36,000 36,000 (v) Summary Cash and Bank A/c Cash Bank Cash Bank ` ` ` ` To Balance b/d 5,200 90,000 By Bank 7,62,750 To Sundry debtors (Bal. Fig) 8,97,150 By Cash 1,21,000 To Cash 7,62,750 By Shop exp. (600 x 12) 7,200 To Bank 1,21,000 By Salary (9,200 x 12) 1,10,400 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.35 To Sundry Debtors 5,700 By Drawing A/c 16,800 To Bills receivable 19,250 (1,400 x 12) To Bills receivable 16,000 By Bills Payable 22,000 To Capital (maturity value of 20,000 By Sundry creditors 77,200 3,20,000 LIC policy) By Furniture 25,000 To Capital (Rent received) 14,000 By Sundry Debtors 5,700 By Electricity & Tel. 18,700 Charges By Building (Bal. fig) 3,72,000 By Balance c/d 5,300 87,000 10,23,350 9,27,700 10,23,350 9,27,700 (vi) Statement of Affairs as on 31st March 2021 Liabilities ` Assets ` Sundry Creditors 40,000 Inventory 1,10,000 Bills Payable 12,000 Debtors 70,000 Capital (Balancing figure) 2,38,200 Bills receivable 15,000 Cash at Bank 90,000 Cash in Hand 5,200 2,90,200 2,90,200 SUMMARY Single entry system is generally found in sole trading concerns or even in partnership firms to some extent but never in case of limited liability companies on account of legal requirements. There are basically 3 types of single entry systems: (i) Pure Single Entry (ii) Simple Single Entry (iii) Quasi Single Entry Single entry system ignores the concept of duality and therefore, transactions are not recorded in their two-fold aspects. © The Institute of Chartered Accountants of India  1.36 9.36 ACCOUNTING TEST YOUR KNOWLEDGE True and false 1. A Trial Balance cannot be drawn up from books kept under Single Entry. 2. Nominal Accounts are kept under Single Entry System. 3. Single Entry System can be adopted by small firms. 4. Profit under single entry system is always correct and accurate. 5. Profits computed under single entry system by different business entities are not comparable. Multiple Choice Questions 1. In case of net worth method, profit is determined by (a) Preparing a trading and profit and loss account. (b) Comparing the capital in the beginning with the capital at the end of the accounting period. (c) Comparing the net assets in the beginning with the net assets at the end of the accounting period. 2. Single entry system can be followed by (a) Small firms. (b) Joint stock companies. (c) Co-operative societies. 3. Closing capital is calculated as (a) Opening capital +Additional capital -Drawings. (b) Opening capital +Additional capital –Drawings + Profit. (c) Opening capital +Additional capital +Drawings - Profit. 4. Under single entry system, only personal accounts are kept and, in some cases, (a) Cash book is maintained (b) Fixed assets’ accounts are maintained (c) Liabilities’ accounts are maintained. © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.37 5. The closing capital of Mr. B as on 31.3.2022 was `4,00,000. On 1.4.2021 his capital was ` 3,50,000. His net profit for the year ended 31.3.2022 was ` 1,00,000. He introduced `30,000 as additional capital in February, 2022 Find out the amount drawn by Mr. B for his domestic expenses. (a) ` 1,00,000; (b) ` 80,000; (c) ` 1,20,000; 6. Given information: Opening capital: 60,000 Drawings: 5,000 Capital introduced during the period: 10,000 Closing capital: 90,000 Profit earned during the period ? (a) ` 20,000 (b) ` 25,000 (c) ` 30,000. Theoretical Questions 1. What is meant by Single entry System? What are the types of procedures adopted for this system? 2. Differentiate between Statement of Affairs and Balance Sheet. Practical Questions 1. A Firm sold 20% of the goods on cash basis and the balance on credit basis. Debtors are allowed 1½ month's credit and their balance as on 31.03.2021 is ` 1,25,000. Assume that the sale is uniform throughout the year. Calculate the credit sales and total sales of the company for the year ended 31.03.2022. 2. Mr. A runs a business of readymade garments. He closes the books of accounts on 31st March. The Balance Sheet as on 31st March, 2021 was as follows: Liabilities ` Assets ` A’s capital a/c 4,04,000 Furniture 40,000 Creditors 82,000 Stock 2,80,000 © The Institute of Chartered Accountants of India  1.38 9.38 ACCOUNTING Debtors 1,00,000 Cash in hand 28,000 Cash at bank 38,000 4,86,000 4,86,000 You are furnished with the following information: (1) His sales, for the year ended 31st March, 2022 were 20% higher than the sales of previous year, out of which 20% sales was cash sales. Total sales during the year 2020-21 were ` 5,00,000. (2) Payments for all the purchases were made by cheques only. (3) Goods were sold for cash and credit both. Credit customers pay be cheques only. (4) Deprecation on furniture is to be charged 10% p.a. (5) Mr. A sent to the bank the collection of the month at the last date of the each month after paying salary of ` 2,000 to the clerk, office expenses ` 1,200 and personal expenses ` 500. Analysis of bank pass book for the year ending 31st March 2022 disclosed the following: ` Payment to creditors 3,00,000 Payment of rent up to 31st March, 2022 16,000 Cash deposited into the bank during the year 80,000 The following are the balances on 31st March, 2022: ` Stock 1,60,000 Debtors 1,20,000 Creditors for goods 1,46,000 On the evening of 31st March 2022, the cashier absconded with the available cash in the cash book. You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 2022 and Balance Sheet as on that date. All the workings should form part of the answer. © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.39 3. Ram carried on business as retail merchant. He has not maintained regular account books. However, he always maintained ` 10,000 in cash and deposited the balance into the bank account. He informs you that he has sold goods at profit of 25% on sales. Following information is given to you: Assets and Liabilities As on 1.4.2021 As on 31.3.2022 Cash in Hand 10,000 10,000 Sundry Creditors 40,000 90,000 Cash at Bank 50,000 (Cr.) 80,000 (Dr.) Sundry Debtors 1,00,000 3,50,000 Stock in Trade 2,80,000 ? Ram’s capital 3,00,000 ? Analysis of his bank pass book reveals the following information: (a) Payment to creditors ` 7,00,000 (b) Payment for business expenses ` 1,20,000 (c) Receipts from debtors ` 7,50,000 (d) Loan ` 1,00,000 taken on 1.10.2021 at 10% per annum (e) Cash deposited in the bank ` 1,00,000 He informs you that he paid creditors for goods ` 20,000 in cash and salaries ` 40,000 in cash. He has drawn ` 80,000 in cash for personal expenses. During the year Ram had not introduced any additional capital. Surplus cash if any, to be taken as cash sales. All purchases are on credit basis. You are required to prepare Trading and Profit and Loss Account for the year ended 31.3.2022 and Balance Sheet as at 31st March, 2022. ANSWERS/ SOLUTIONS True and False 1. True: Since incomplete records are maintained, trial balance cannot be prepared 2. False: Under the single entry system of bookkeeping, generally cash book and personal accounts of creditors and debtors are maintained, and no other ledger is maintained. © The Institute of Chartered Accountants of India  1.40 9.40 ACCOUNTING 3. True: A single entry system is the one where financial transactions are recorded as a single entry in a log and is usually used by new small businesses. 4. False: Profit under single entry system is only an estimate based on available information and correct profits cannot be determined. 5. True: Since entry system has no fixed set of principles for recording the financial transaction, different organisations maintain records as per their needs. Hence their accounts are not comparable. Multiple Choice Questions 1. (b) 2. (a) 3. (b) 4. (a) 5. (b) 6. (b) Theoretical Questions 1. Single entry system is an inaccurate and unsystematic method of recording business transactions. The procedures adopted are: Pure single entry; Simple entry and Queasy single entry. For details, Refer Para 1 and 2 of the chapter. 2. To understand the difference between Statement of Affairs and Balance Sheet, refer para 3.2 of the chapter. Practical Questions 1. Calculation of Credit Sales and Total sales 12 months Credit Sales for the year ended 2021-22 = Debtors x 1.5 months 12 months = `1,25,000 x 1.5 months = ` 10,00,000 100% Total sales for the year ended 2021-22 = Credit sales x 80% 100% = ` 10,00,000 x 80% =` 12,50,000 2. In the books of Mr. A Trading Account for the year ending 31st March, 2022 Particulars ` Particulars ` To Opening stock 2,80,000 By Sales (W.N. 3) To Purchases (W.N. 1) 3,64,000 Credit 4,80,000 © The Institute of Chartered Accountants of India  ACCOUNTS FROM INCOMPLETE RECORDS 9.41 To Gross profit (b.f.) 1,16,000 Cash 1,20,000 6,00,000 By Closing stock 1,60,000 7,60,000 7,60,000 Profit and Loss Account for the year ending 31st March, 2022 Particulars ` Particulars ` To Salary (2,000 x 12) 24,000 By Gross profit 1,16,000 To Rent 16,000 To Office expenses (1,200 x 12) 14,400 To Loss of cash (W.N. 6) 23,600 To Depreciation on furniture 4,000 To Net Profit (b.f.) 34,000 1,16,000 1,16,000 Balance Sheet as on 31st March, 2022 Liabilities ` Assets ` A’s Capital 4,04,000 Furniture 40,000 Add: Net Profit 34,000 Less: Depreciation (4,000) 36,000 Less: Drawings Stock 1,60,000 (500 x 12) (6,000) 4,32,000 Debtors 1,20,000 Creditors 1,46,000 Cash at bank 2,62,000 5,78,000 5,78,000 Working Notes: (1) Calculation of purchases Creditors Account Particulars ` Particulars ` To Bank A/c 3,00,000 By Balance b/d 82,000 To Balance c/d 1,46,000 By Purchases (Bal. fig.) 3,64,000 4,46,000 4,46,000 © The Institute of Chartered Accountants of India  1.42 9.42 ACCOUNTING (2) Calculation of total sales ` Sales for the year 2020-21 5,00,000 Add: 20% increase 1,00,000 Total sales for the year 2021-22 6,00,000 (3) Calculation of credit sales ` Total sales 6,00,000 Less: Cash sales (20% of total sales) (1,20,000) 4,80,000 (4) Calculation of cash collected from debtors Debtors Account Particulars ` Particulars ` To Balance b/d 1,00,000 By Bank A/c (Bal. fig.) 4,60,000 To Sales A/c 4,80,000 By Balance c/d 1,20,000