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:

Profit

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		119000
Cost of sales
Opening inventory	25600
Purchases	77800
Closing inventory	-29800
		73600
Gross profit		45400
Admin expenses	30700
		-30700
Net profit		14700

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!