Incomplete records

This chapter introduces techniques for identifying missing accounting information when records are incomplete, enabling you to prepare financial statements.

Learning objective

By the end of this chapter, you should be able to:

• Apply techniques used in incomplete record situations:
  • Use of the accounting equation
  • Use of general ledger accounts to calculate missing figures
  • Use of cash and/ or bank summaries
  • Use of profit percentages to calculate missing figures.

Definitions

Incomplete records

A situation where a business does not maintain a full double-entry bookkeeping system, resulting in missing or incomplete accounting information.

This is common in small businesses that only keep basic records such as cash books, bank statements, or invoices.

Many small businesses, especially sole traders, don’t maintain complete accounting records. They may only record cash receipts and payments and keep invoices on file. However, for tax purposes, loan applications, or business analysis, they still need financial statements.

In these cases, accountants use specific techniques to reconstruct missing information and prepare complete financial statements from the records that are available.

Incomplete records techniques

Incomplete records situations typically arise when:

• A business maintains only a cash book without proper general ledger accounts
• Records are kept but are lost, stolen, or destroyed (e.g., fire, flood, theft)
• A new accountant takes over and finds inadequate records
• Small businesses transition from cash basis to accrual accounting

The main challenge is preparing accurate financial statements (Statement of Financial Position and Statement of Profit or Loss) or determining a particular ledger balance from limited information.

The following are techniques one can use to determine a missing balance or prepare a financial statement from incomplete records.

• Use of the accounting equation
• Use of general ledger accounts to calculate missing figures
• Use of cash and/ or bank summaries
• Use of profit percentages to calculate missing figures.

Use of the accounting equation

The accounting equation is a foundation for solving incomplete records problems. Refer to the earlier chapter on the accounting equation.

When you know the opening and closing net assets (Assets - Liabilities) and the drawings made during the period, you can calculate profit.

Try this on your own.

Illustration: Calculating profit using the accounting equation

Sarah runs a small retail shop. She doesn’t keep proper books but has prepared statements of her assets and liabilities:

At January 1, 2024:

• Inventory: $15,000
• Trade receivables: $8,000
• Cash: $2,000
• Equipment (net): $20,000
• Trade payables: $6,000
• Bank loan: $10,000

At December 31, 2024:

• Inventory: $18,000
• Trade receivables: $10,000
• Cash: $3,500
• Equipment (net): $18,000
• Trade payables: $7,500
• Bank loan: $8,000

Sarah withdrew $25,000 during the year for personal use.

Required: Calculate Sarah’s profit for the year ended December 31, 2024.

Do you know the answer?

Step 1: Calculate Opening Capital (Net Asset) - find the difference between the total assets and total liabilities as at January 1, 2024.

Step 2: Calculate Closing Capital - find the difference between the total assets and total liabilities as at December 31, 2024.

Step 3: Calculate Profit - Use the accounting equation

When to use this technique

The accounting equation method is most useful when:

• You have complete statements of assets and liabilities at two points in time
• Drawings are known
• No detailed income and expense information is available
• You need to calculate the total profit for the period

Use of general ledger accounts

When some information is available but certain figures are missing, you can reconstruct ledger accounts (T-accounts) to calculate the unknown amounts.

Every ledger account follows the format: Opening Balance + Increases - Decreases = Closing Balance

If you know three of these four elements, you can calculate the fourth (the missing figure).

Illustration 1: Calculating credit sales

John’s business has the following information for 2024:

• Trade receivables at January 1: $12,000
• Trade receivables at December 31: $15,000
• Cash received from customers: $85,000
• Bad debts written off: $2,000
• Discounts allowed to customers: $1,500

Required: Calculate total credit sales for the year.

Suggested solution

Do you know the answer? Use the general ledger.

Now, calculate the balancing figure.

Illustration 2: Calculating credit purchases

Maria’s business has the following information regarding suppliers:

• Trade payables at January 1: $8,500
• Trade payables at December 31: $9,800
• Payments to suppliers during the year: $76,000
• Discounts received from suppliers: $1,200
• Returns to suppliers: $500

Required: Calculate total credit purchases for the year. Suggested solution:

Do you know the answer?

1. Post all the items into the accounts payable ledger

Calculate the balancing figure:

Use of profit percentages (margins and mark-ups)

Many businesses work with standard profit margins or mark-ups. When these percentages are known, you can calculate missing figures such as sales, purchases, or cost of goods sold.

Mark-up

The profit expressed as a percentage of cost.

Formula:

$$\text{Mark-up \%}=\frac{\text{Profit}}{\text{Cost of Sales}}\times 100$$

Margin (Gross Profit Margin)

The profit expressed as a percentage of the selling price or sales.

Formula:

$$\text{Margin \%}=\frac{\text{Profit}}{\text{Sales}}\times 100$$

Sometimes you may need to convert a mark-up to a margin, or a margin to a mark-up, before you can calculate the missing figure. From Mark-up to Margin:

$$\text{Margin \%}=\frac{\text{Mark-up \%}}{100+\text{Mark-up \%}}\times 100$$

From Margin to Mark-up:

$$\text{Mark-up \%}=\frac{\text{Margin \%}}{100-\text{Margin \%}}\times 100$$

Illustration: Using mark-up to calculate sales

A retailer has the following information:

• Opening inventory: $15,000
• Purchases: $95,000
• Closing inventory: $18,000
• The business applies a mark-up of 40% on cost

Required: Calculate the sales revenue Suggested solution:

Do you know the answer?

(1) Calculate Cost of Sales:

(2) Calculate the profit since mark-up is on cost

(3) Calculate Sales:

Illustration: Using margin to calculate purchases

A business has the following information:

• Sales for the year: $200,000
• Gross profit margin: 30% on sales
• Opening inventory: $25,000
• Closing inventory: $28,000

Required: Calculate purchases for the year. Solution:

Do you know the answer?

Step 1: Calculate Gross Profit

Step 2: Calculate Cost of Sales

Step 3: Calculate Purchases

Illustration: Calculating missing inventory

A fire destroyed all inventory in a warehouse on October 15, 2024. For insurance purposes, the business needs to determine the value of lost inventory. Available information:

• Inventory at January 1, 2024: $42,000
• Inventory at October 15 (after the fire), 2024: $30,000
• Purchases from January to October 15: $285,000
• Sales from January to October 15: $380,000
• The business consistently achieves a margin of 25%.

Required: Calculate the estimated value of inventory destroyed. Suggested solution:

Do you know the answer?

Step 1: Calculate Gross Profit

Step 2: Calculate Cost of Sales

Step 3: Calculate closing inventory

Step 4: Calculate the inventory lost