Accounting from Incomplete Records
The common term to represent Accounting from Incomplete
Records is – Single Entry System.
Normally Small Businesses and Sole Traders follow this kind
of accounting system as it does not need any specific accounting knowledge and
is easy to maintain.
The term Single Entry is commonly used to define the method
of maintaining accounts which does not
follow the principles of double entry system of accounting. It does not mean
that there is only one entry for each transaction – i.e. only one effect is
given for each transaction. It simply means that the rules of double entry of
accounting are not followed.
Under this system usually only the Cash A/c and Personal A/c’s
are maintained. Nominal Accounts and Real Accounts (Except Cash) are not
maintained.
According to Kohler,
“A system of Book-Keeping in which as a rule only records of cash and personal accounts
are maintained, it is always incomplete double entry varying with the
circumstances.”
There are 2 methods of ascertaining the profit from
incomplete records, they are –
1.
Statement of Affairs Method
2.
Conversion Method.
Statement of Affairs Method
This method is also known as Method of Capital Comparison or
Net Worth Method. Under this method we are required to prepare a Statement of
Capital at the start of the period and also at the end of the period. Each
statement of affair would show the amount of Capital as on that date (as a
Balancing Figure).
In the absence of real accounts in the books maintained on
the single entry, it is not possible to prepare the Balance Sheet of the
Business. Therefore, to judge the financial position of the business a
statement known as the Statement of Affairs showing various assets and
liabilities on a particular date is prepared from such information as may be
available.
A statement of Affairs is very similar to a Balance Sheet as
far as its preparation is concerned. However there are some technical differences
between the two.
Differences between Statement of Affairs and Balance
Sheet
The Financial position as disclosed by Balance Sheet is more
reliable then that by the Statement of Affairs.
In statement of Affairs is the Balancing Figure, wherein the
Balance Sheet balances and the capital is derived from the Capital A/c.
As the statement of Affairs is prepared from incomplete
records it is possible that some assets/liabilities are omitted, in case of
Balance Sheet such omission is not possible.
As we are aware that the books maintained under single entry
system all the information is not available, so we need to prepare various
accounts to identify some missing figures with the help of which we would be
able to prepare Trial Balance and Final Accounts – Trading A/c, Profit &
Loss A/c and Balance Sheet.
Under this method we need to prepare the following Accounts
along with Opening Statement of Affairs.
1.
Cash A/c
2.
Total Debtors A/c
3.
Bills Receivable A/c
4.
Total Creditors A/c
5.
Bills Payable A/c
Note: Bills
Receivable account is always to be closed before closing the Total Debtors and
the balancing figure (Not the Closing Balance) in the Bills Receivable account
is to be transfered to Total Debtors A/c
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