Saturday, 20 February 2016

Incomplete records - the net assets approach

Incomplete records - the net assets approach

Another area of incomplete records that students struggle with is solving incomplete records questions which require you to adopt the net assets approach.

Essentially, this approach relies on your knowledge (and understanding) of the Accounting Equation:

Assets - Liabilities = Capital

Let's look at a scenario:

Jayne has asked you to find the following figures:

}  Opening capital (at the beginning of the financial year)
}  Cash book summary for the year
}  Purchases for the year
}  Sales for the year
}  Profit for the year and a year end statement of financial position

Let's look at each one in turn:

Opening capital. 

Using the accounting equation we can quickly work out the capital at the start of the year:

 Cash book summary for the year (from the bank summary):

All we need to do here is take the information in the bank summary and transfer it to the Cash book (Bank t-account). You will see that the balancing figure is the balance c/d at the end of the year:

Sales and Purchases for the year:

Here we just reconstruct the Sales Ledger Control Account (SLCA) and the Purchases Ledger Control Account (PLCA) from the information provided using the control account method (see my blog post on this subject). While we're at it, we may as well work out the Administration expenses for the year:


Now we can turn to the final figure needed - the profit for the year. Taking all the figures we've established, we can no draw up a statement of profit or loss for Jayne Perry for the year ended 31 December 2012:

Sales revenue
Cost of sales
Opening inventory
Closing inventory
Gross profit
Admin expenses
Net profit

Finally, we can draw up a statement of financial position for Jayne Perry as at 31 December 2012:

As with the control account method from my earlier blog post, all we've done is taken what we already know and use that knowledge to solve a riddle. Incomplete records is basically a jigsaw puzzle - requiring us to fit together all the pieces we have been given then, using our best judgement and knowledge, drawing in the missing parts of the picture to help us see the whole picture in all its balancing glory.

Don't fear these questions - take a methodical approach:

  • What did we start with?
  • What has happened during the year?
  • What information have we gleaned to be able to establish the end of year picture?

Happy days!

Incomplete records - the control account method

Incomplete Records

One area students seem to have difficulty with is Incomplete Records.

What you need to remember that, for this part of your assessment, all you're doing is taking what you should already know and putting it to use.

For example, you may be given a scenario like this:

Ammar operates an incomplete system of accounting records for his business, from which the following information is available.



Day-book summaries for the year

Net £
Total £

General expenses



(a)  Prepare the sales ledger control account for the year ended 31 October 20X2 and calculate the discounts allowed

(b) Prepare the rent account showing the rent for the year ended 31 October 20X2. Included in the rent paid during the year is £1,500 for the quarter ending 31 December 20X2.

(c)  Prepare the VAT account showing the closing balance.

(d) Prepare the payroll account showing the payroll expenses for the year.


The way to tackle this type of task is to take each element of the task in turn. Don't try to rush in and try to solve the whole thing - you'll end up in an awful mess!

It's also good practice to tick off items as you use them - so, for example, if you were to take the bank opening balance to adjust it, you would tick of the Bank figure at the start of the period. This means that, when you come to drawing up the final accounts, you don't reuse something you've already used.

So, let's get started.

(a)  Prepare the sales ledger control account (SLCA) for the year ended 31 October 20X2 and calculate the discounts allowed.

 What you need to think of is 'where would I find information for this account?'

As I said before, you're not doing anything new, you're just taking something you already know to solve the problem. So, here we're asked to prepare the SLCA and calculate the discounts allowed. 

What does the information does the SLCA normally contain? Well, hopefully, your work at level 2 and in Accounts Preparation will help you here:

So, can we find any information to help us? Where would you look?

Balance b/d - you could find this on last year's financial statements (specifically the Trade receivables figure on the Statement of financial position)
Sales per sales day book - Sales Day Book
Dishonoured cheques - notified by your bank
Returns per returns day book - Sales Returns Day Book
Cash from debtors - Cash book (receipts)
Discounts allowed - Cash book (receipts)
Bad debts written off - Journals
Contra - Journals

So, let's see if we can out together the SLCA for Ammar:

Sales Ledger Control Account
Balance b/d 
(from balances as at 31 October 20X1)
(from Bank summary)
(Gross figure from Sales day book)
Balance c/d 
(from balances as at 31 October 20X2)

Discounts allowed
(This is the balancing figure)



Now we've done that, let's look at the next part:

(b) Prepare the rent account showing the rent for the year ended 31 October 20X2. Included in the rent paid during the year is £1,500 for the quarter ending 31 December 20X2.

Again, you need to think, 'where can I find information about this account?'

Tasks like this often include prepayments and accruals so the opening and closing balances can provide information on Balances b/d & c/d.

The bank summary, bank statement or cash book can be used to find out what happened during the year (see my blog entry on accruals and prepayments.

Again, let's have a look at the solution:

Prepayment b/d 
(from information given)
Prepayment c/d
(This will be a current asset on this year's statement of financial position
(from Bank summary)
Transferred to Statement of profit or loss (SPL)



(c)  Prepare the VAT account showing the closing balance.

As before, you need to think about what goes where in the VAT account. Remember, VAT always travels with the goods so, if your purchases figure is a debit then your VAT on Purchases must be a debit also. Also remember to use the bank as your anchor - payments made to HMRC are Credit Bank, Debit VAT.

Again, let's look at the completed VAT account:

VAT Control
(from the Bank summary)
b/d (remember VAT payable is a liability so must be credit balance b/d)
General Expenses (from the information in the table below the day books)
(from the day books)
(from the day books)

Balance c/d (appears as a current liability on the statement of financial position at the end of the year)



(d) Prepare the payroll account showing the payroll expenses for the year.

This element of the task is another accruals task:

Bank (from the bank summary)
Accrual b/d (from the list of opening balances)
Accrual c/d (from the list of closing balances and will show as a current liability in the Statement of financial position at the end of the year)



Hopefully, you can now see that just taking what you know, you can pull together the information you’ve been given to help you find missing figures. This part of the Level 3 Final Accounts for Sole Trader and Partnerships assessment is not as hard as you think – it’s more a case of taking time to think about where to find information.

I hope this blog entry has been useful for you.