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.
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
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 sections below walk through each of the four techniques listed in the learning objective above.
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), the drawings made during the period, and any capital introduced, you can calculate profit.
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.
Step 1: Calculate opening capital (net asset) - find the difference between the total assets and total liabilities as at January 1, 2024.
Opening assets = $15,000 + $8,000 + $2,000 + $20,000 = $45,000
Opening liabilities = $6,000 + $10,000 = $16,000
Opening capital (net asset) = $45,000 - $16,000 = $29,000
Step 2: Calculate closing capital - find the difference between the total assets and total liabilities as at December 31, 2024.
Closing assets = $18,000 + $10,000 + $3,500 + $18,000 = $49,500
Closing liabilities = $7,500 + $8,000 = $15,500
Closing capital (net asset) = $49,500 - $15,500 = $34,000
Step 3: Calculate profit - use the accounting equation
Profit = closing net assets − opening net assets + drawings − capital introduced
Sarah introduced no new capital during the year, so that term is zero.
Profit = $34,000 - $29,000 + $25,000 - $0
Profit = $30,000
Answer: Sarah made a profit of $30,000 for the year.
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 and any capital introduced 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
- Irrecoverable debts written off: $2,000
- Discounts allowed to customers: $1,500
Required: Calculate total credit sales for the year.
Calculate the balancing figure:
Opening balance + credit sales = cash + discounts + irrecoverable debts + closing balance
$12,000 + credit sales = $85,000 + $1,500 + $2,000 + $15,000
$12,000 + credit sales = $103,500
Credit sales = $103,500 - $12,000
Credit sales = $91,500
Answer: Credit sales for the year were $91,500.
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.
Calculate the balancing figure:
Cash paid + discounts + returns + closing balance = opening balance + credit purchases
$76,000 + $1,200 + $500 + $9,800 = $8,500 + credit purchases
$87,500 = $8,500 + credit purchases
Credit purchases = $87,500 - $8,500
Credit purchases = $79,000
Answer: Credit purchases for the year were $79,000.
Use of cash and/or bank summaries
Many small businesses only keep a record of cash movements. You can summarise these receipts and payments in a single cash or bank account and use it the same way as any other ledger account: if you know three of the four elements (opening balance, receipts, payments, closing balance), you can solve for the missing one - often drawings, cash stolen, or cash takings banked.
Illustration: Calculating drawings from a cash summary
A trader keeps no formal cash book, but the following is known about cash held on the premises during the year:
- Cash in hand at January 1: $500
- Cash takings during the year: $42,000
- Cash paid for shop expenses: $6,500
- Cash banked during the year: $33,000
- Cash in hand at December 31: $800
Required: Calculate the drawings taken from cash takings during the year.
Opening cash + cash takings − cash expenses − cash banked − closing cash = drawings
$500 + $42,000 − $6,500 − $33,000 − $800 = drawings
Drawings = $2,200
Answer: Drawings for the year were $2,200.
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.
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:
For example, a 25% mark-up is a 20% margin: 25% ÷ (100% + 25%) × 100 = 0.2 × 100 = 20, so the margin is 20%.
From margin to mark-up:
For example, a 20% margin is a 25% mark-up: 20% ÷ (100% − 20%) × 100 = 0.25 × 100 = 25, so the mark-up is 25%.
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.
(1) Calculate cost of sales:
Cost of sales = opening inventory + purchases - closing inventory
Cost of sales = $15,000 + $95,000 - $18,000
Cost of sales = $92,000
(2) Calculate the profit since mark-up is on cost
With a 40% mark-up on cost: Profit = 40% x $92,000 = $36,800
(3) Calculate sales:
Gross profit = sales - cost of sales
Sales = profit + cost of sales
Sales = $36,800 + $92,000 = $128,800
Answer: Sales revenue for the year was $128,800.
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.
Step 1: Calculate gross profit
Gross profit = 30% × $200,000
Gross profit = $60,000
Step 2: Calculate cost of sales
Cost of sales = sales - gross profit
Cost of sales = $200,000 - $60,000
Cost of sales = $140,000
Step 3: Calculate purchases
Using the cost of sales formula:
Cost of sales = opening inventory + purchases - closing inventory
$140,000 = $25,000 + purchases - $28,000
$140,000 = purchases - $3,000
Purchases = $140,000 + $3,000
Purchases = $143,000
Answer: Purchases for the year were $143,000.
Illustration: Calculating missing inventory
A fire destroyed part of the 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 remaining after the fire on October 15, 2024: $30,000
- Purchases from January to October 15: $300,000
- Sales from January to October 15: $380,000
- The business consistently achieves a margin of 25%.
Required: Calculate the estimated value of inventory destroyed.
Step 1: Calculate gross profit
Gross profit = 25% × $380,000
Gross profit = $95,000
Step 2: Calculate cost of sales
Cost of sales = sales - gross profit
Cost of sales = $380,000 - $95,000
Cost of sales = $285,000
Step 3: Calculate closing inventory
Using the cost of sales formula:
Cost of sales = opening inventory + purchases - closing inventory
$285,000 = $42,000 + $300,000 - closing inventory
Closing inventory = $42,000 + $300,000 - $285,000
Closing inventory = $57,000
Step 4: Calculate the inventory lost
We expected that the closing inventory should be $57,000. However, the question indicated that the inventory after the fire was $30,000. Hence,
Inventory lost = $57,000 - $30,000 = $27,000
Answer: Inventory worth $27,000 was destroyed in the fire. This amount would be the basis for the insurance claim (subject to policy terms).