Friday, March 10, 2017 11:31 am
By Dada Adefolami
Accounting records are all of the documentation and books involved in the preparation of financial statements or records relevant to audits and financial reviews. Accounting records include records of assets and liabilities, monetary transactions, ledgers, journals, and any supporting documents such as checks and invoices
Accounting records are key sources of information and evidence used to prepare, verify and/or audit the financial statements. They also include documentation to prove asset ownership for creation of liabilities and proof of monetary and non-monetary transactions.
The double entry system of bookkeeping is based on the fact that every transaction has two parts: both a positive and negative entry, and will affect two ledger accounts.For instance, recording earnings of N100 would require making two entries: a debit entry of N100 to an account called “Cash” and a credit entry to an account called “Income.”
A single-entry bookkeeping system or single-entry accounting system is a method of bookkeeping relying on a one sided accounting entry to maintain financial information. Most businesses maintain a record of all transactions based on the double-entry bookkeeping system. However, many small, simple businesses maintain only a single-entry system that records the “bare-essentials.
A general ledger contains all the accounts for recording transactions relating to a company’s assets, liabilities, owners’ equity, revenue, and expenses.
The two main instances in which incomplete records can be found are where:
1. There are no records at all
2. Some records exist and information is available to calculate missing figures.
No records at all
It is still possible to calculate a profit or loss figure by using the fact that the profit of a business must be represented by more assets, list and value the opening and closing net assets, then calculate the profit as the difference between the two:
Profit = Closing net assets – Opening net assets
Allowance must be made for proprietor’s drawings and extra capital introduced, so the formula becomes:
Profit = Closing net assets – Opening net assets + Drawings – Capital introduced
This is a more common scenario, in practice. The following are standard techniques for calculating missing figures:
1. Opening capital
2. Missing figures for sales and purchases
3. Missing figures for cash.
We need to have the opening capital of the business at the beginning of a period to provide a starting point – the capital in the balance sheet account. We will have a list of opening assets and liabilities, and we use this to arrive at the opening capital.
Missing figures for sales and purchases:
If we have the opening and closing receivables/debtors of a business, and the cash received from customers, we can calculate sales. What you need to do is set up a sales ledger total account. Note that Accounts payable is money owed by a business to its suppliers shown as a liability on a company’s balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents.
Accounts receivable is a legally enforceable claim for payment held by a business against its customer/clients for goods supplied and/or services rendered in execution of the customer’s order. These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable is shown in a balance sheet as an asset.
FIGURE 1: SALES LEDGER TOTAL ACCOUNT
Opening receivables/debtors 38,600 Cash received 218,650
Sales (balancing figures) 221,250 Closing receivables/debtors 41,200
If any three of these figures is known, the fourth can be calculated.
Is to use the sales ledger control account format, but instead of proving the accuracy of the sales ledger, we are calculating what the sales must have been in order for the other figures to be what they are. The same technique may be used to calculate credit purchases. If the sales figure is given we can calculate the cash received.
There is another way to calculate sales, purchases or stock figures, and that is to use the trading account format, normally set up the trading account as
Less: cost of sales 10,000
opening inventory/stock 78,000
less: closing inventory/stock 13,000 75,000
Gross profit 25,000
Suppose the closing inventory/stock has been destroyed by fire, along with all the inventory/stock records. Then we wouldn’t have the closing inventory/stock total to include in our trading account. However, we can calculate it if we know the gross profit percentage on sales – or, the mark-up on cost of sales.
In the above example, gross profit is 25% of sales. If we are told this, we can insert the gross profit of N25, 000 and calculate the missing inventory/stock figure as a balancing item. We can also find a missing purchases figure, or even a missing sales figure.
Suppose we are given:
Cost of sales
opening inventory/stock 10,000
less: closing inventory/stock 13,000 75,000
If the gross profit percentage on sales is 25%. If gross profit is 25% on sales, cost of sales must be 75%. The sales total is therefore:
N75,000 x 100/75 = N100,000.
Whenever the gross profit percentage is given in incomplete recordsin question, you need to apply this technique.
Missing figures for cash:
You may be given details of cash receipts and payments plus details of opening and closing balances, but with one figure missing, often the proprietor’s drawings. We can calculate the missing figure by setting up a cash account to find the balancing item required.
Here are the incomplete records techniques:
Construct To calculate
1 Opening assets and liabilities Opening balance
2 Sales or purchases ledger total amounts Any missing figure
3 Trading profit (gross profit percentage must be given) Any missing figure
4 Cash account Any missing figure