CHAPTER THIRTEEN - SINGLE ENTRY AND INCOMPLETE RECORDS

13.0 Learning Objectives……………………………………………………………….
13.1 Introduction……………………………………………………………………….
13.2 The Ascertainment of Profit from Incomplete Records…………………………..
13.3 Preparation of Detailed Final Accounts from Incomplete Records………………
13.3.1 Preparation of Statement of Affairs……………………………………………….
13.3.2 Preparation of Cash and Bank Summary………………………………………….
13.3.3 Analysis of unbanked Cash Sales…………………………………………………
13.3.4 Posting from the Cash and Bank Summary……………………………………….
13.3.5 Preparation of Trade Receivables and Payable Schedule…………………………
13.3.6 Extraction of Trial Balance……………………………………………………….
13.4 Summary………………………………………………………………………….

CHAPTER THIRTEEN

SINGLE ENTRY AND INCOMPLETE RECORDS

13.0   Learning Objectives

After you have studied this chapter you should be able to:

• Use accounting equation to calculate profit where only opening and closing net assets figures are available
• Convert single entry and incomplete records into double entry records
• Prepare detailed trading and statement of comprehensive Income from records that were not kept on double entry system
• Derive proprietor‟s cash drawings or additional capital as a missing figure where all other information relating to cash payments and receipts are known
• Determine the figures for purchases and sales from the purchases ledger control and the sales ledger control accounts
• Derive expenses incurred and revenue earned from incomplete records




13.1  Introduction

The term „single entry‟ is applied to any system, which does not provide for the two fold aspect of transactions; while the alternative term „incomplete records‟ is often applied to books of account kept on such a single entry or incomplete double entry system. Pure „single entry‟ recognises only the personal aspect of transactions, and, consequently, the only essential books are personal ledgers for recording transactions with receivables and creditors. In practice, however, a cashbook is invariably kept, but, with this exception, the impersonal aspect of transactions is usually left entirely unrecorded.

In this chapter you will learn the procedure involved in preparing the statement of Comprehensive Income and statement of financial position for an enterprise that has only opening and closing net assets and perhaps capital as the only known figures.
You will also understand and learn how to ascertain the proprietor‟s drawings and any additional capital contribution during an accounting period from the scanty information provided by a cash book summary.

Questions on incomplete records and single entry are popular for examiners because they enable them to test techniques, which are also relevant for other topics such as ledger control accounts. It also provides the basic information necessary to prepare final accounts but without the examiner presenting it in the form of a Trial Balance .

13.2  The Ascertainment of Profit from Incomplete Records
Generally speaking, profits (or losses) are ascertained, under the single entry system, by a comparison of the values of the net assets at two specified dates, after taking into account additions to, or withdrawals from, capital during the period. The difference between these two values represents the profit or loss, according to whether there is an increase or decrease in the figures.
Remember the accounting equation, which states that:
Business Assets = Owner’s Capital + Business Liabilities

The equation above can be restated as:
Owner’s Capital = Business assets – Business Liabilities

If during an accounting period, the business realised an excess of income over expenditure, the additional cash or assets generated belong to the owner(s), thus increasing the capital. The accounting equation will now become:
Opening capital + profit = opening net assets + increase in net assets.

The introduction or withdrawal of resources by the owner will also increase or decrease the Owner’s capital respectively. As a result profit can be calculated using the format below:

  ¢
Closing capital  XXX
Less opening capital     XXX
Increase in net assets  XXX
Owners‟ Drawings  XXX
Additional Capital  (XXX)
Net profit for the year     XXX

Illustration to Illustration 13.1:
Calculate the net profit for the year ended 31 December 2001 from the following information:
  31/12/2000
          ¢       31/12/2001
                ¢
    
Property      200,000  200,000
Equipment    60,000  90,000
Trade Receivables        40,000  80,000
Cash        10,000  15,000
Overdraft        60,000  90,000
Trade Payables   50,000  30,000

Drawings during the year were ¢45,000 and additional capital introduced during the year was ¢50,000.
Solution:
  31/12/2000  31/12/2001
  ¢  ¢
Total Assets  310,000  385,000
Total Liabilities  (110,000)  (120,000)
Net Assets  200,000  265,000
  ¢
Closing capital  265,000
Less opening capital
200,000
Increase in net assets    65,000
Owners‟ Drawings    45,000
Additional Capital  (50,000)
Net profit for the year
  60,000

13.3  Preparation of detailed final accounts from Incomplete Records
It is understandably certain that calculating the profit of an enterprise using the method as presented above is not satisfactory. It is important for you to note that the accountant does not only prepare the final accounts of an enterprise but also communicates accounting and financial information to stakeholders. It is therefore much more informative when statement of comprehensive Income is drawn. It is important for the accountant to convert these scanty and incomplete records into the acceptable double entry form.

For one to be able to prepare the Income statement and a statement of financial position from single entry and incomplete records, the procedures detailed below are recommended:

 13.3.1 Preparation of statement of affairs
One must first construct a statement of financial position at the beginning of the accounting year. This means that the assets and liabilities of the business must be ascertained and calculated. The statement prepared to show the financial position of the business at the beginning of the year is technically called „statement of affairs‟.

In most practical situations the owner of the business will provide lists of values of non-current assets that he uses in the business together with the dates of acquisition. It should therefore be easy for one to calculate the accumulated provision for depreciation of the non-current assets from the date of their purchase to the date of reporting. Values of such items as inventories in trade, receivables and liabilities may have to be estimated with the help of the owner.

From the above information a journal should be opened and accounting entries with the aim of achieving the dual purpose of recording accounting transactions should be effected. This means that appropriate debit entries must be posted into assets account and credit entries entered into capital or liabilities accounts.

The difference between the assets and liabilities, which usually ends up with the assets exceeding the liabilities may be assumed to be the initial amount that the owner used in starting the business and therefore will be recorded as the capital of the business. It is possible that the owner may be able to mention the initial amount he used in commencing the business. Where this is the case then, any difference between such capital and the net assets estimated may be recorded as the balance on the Income statement retained in the business.

13.3.2  Preparation of Cash and Bank Summary
Ascertain the cash position of the business. This is usually done by carefully examining any available bank statement, any pay-in-slip and the cheque counterfoil. The bank statement together with the cheque counterfoil could reveal information concerning purchases, payment of rent, bank charges, wages, insurance, interest earned, the acquisition of non-current assets, and any personal withdrawals. Information extracted from the pay-in-slip will help determine the amount of money paid in by customers to whom goods were sold on credit and also direct sales by cheque instead of cash. The above information may be used to prepare a cash summary or a receipts and payments account for the business.
13.3.3 Analysis of unbanked cash sales
One must at this stage determine the amount of cash sales which have not been banked by the owner, but which might have been used by the owner to pay for business expenses, cash purchases, and personal drawings. It is possible that the owner might have made use of some of the physical inventories in trade for his or her personal use. In such a situation conducting an informal interview with the owner would confirm the existence of such occurrences and so will help the bookkeeper make an appropriate estimate for inventories drawings. Physical inventories taking by head counting of items in inventories at the close of business will give us the actual closing inventories figure and therefore may not need to be estimated.
13.3.4  Posting from the Cash and Bank Summary
After the analysis above has been made, one can now carry out the following postings into the ledger. Note that in step one opening entries were made through the ledger, and therefore some of these entries will be made into existing ledger accounts irrespective of how inaccurate they may be.

From the analysis of the debit side of the cash and bank summary and information obtained from the pay-in-slips:
a) All cash sales or takings should be credited to the trade receivables account in the sales ledger;
b) Any proceeds from the sale of non-current assets should be credited to the respective asset account;
c) Any interest or income from investment must also be credited to the appropriate revenue account;
d) Any other item should be posted to the credit of the relevant account;

From the analysis of the credit side of the cash and bank summary and information obtained from the cheque counterfoils:
a) All payments for goods purchased should be debited to the trade payables account in the purchases ledger account;
b) Payment of expenses should be debited to the relevant nominal account;
c) All purchases in connection with non-current assets should be debited to the appropriate asset accounts;
d) Any charges should be posted to debit of the bank charges account;
e) Any other item should be posted to the debit of the relevant account;

Where any difference exists on the cashbook summary entries should be posted to make it balance. If the difference is on the credit side then the cashbook should be credited and the proprietor‟s drawings account debited. If the difference is on the debit side then one can safely presume that the owner of the business has introduced additional capital. This difference should be debited to the cash and credited to the capital account of the business.
13.3.5 Preparation of Trade receivables and payables Schedule
At this stage one will have to determine year-end adjustment and balances.
A schedule will have to be compiled detailing all customers who are owing the business, as a result of goods sold to them on credit. The total of the schedule of receivables therefore represent debts owed to the business and as such must be carried forward to the credit of the total sales ledger control account. There is likely to be a missing figure in the debit side of the total receivables account, which represent total sales on credit for the period and should be transferred to the credit of the Income Statement as sales or turnover.

Another schedule that must be prepared is a list of amount owing by the business to its suppliers for goods purchased on credit. The total of this schedule represent total liabilities by way of trade payables outstanding at the end of the period and should therefore be carried forward to the debit of the purchases ledger control account. The total of purchases for the period will be derived from the credit side of the purchases ledger control account as a balancing figure and should be transferred to the debit side of the Income Statement.

Similarly accruals and prepayments will be carried forward as closing balances in the appropriate expense accounts. The actual expense amount which has been incurred for the accounting period being accounted for as a balancing figure.

13.3.6  Extraction of Trial Balance
This is the final stage since all the transactions would have been recorded and the double entry will now have been completed and for that matter the business will be able to extract a Trial Balance  which will form the basis for the preparation of the statement of comprehensive Income and statement of financial position.

Illustration 13.2
Boakye, a sole proprietor, trading as KKB Enterprise requested Oko & Associates, a firm of Chartered Accountants, where you are employed as a trainee Accountant, to prepare the accounts of his business for the year ended December 31st, 2006.
Your audit Manager assigned this work to you. Your interview with Boakye revealed the following:
(i) He did not maintain double entry book-keeping system.
(ii) All sales were on credit basis. During the year Boakye received ¢9,025,000 and  ¢475,000 in cheques and cash respectively from his customers.
(iii) Suppliers of goods during the year paid ¢6,840,000 by cheque.
(iv) Boakye rented 2 premises at Dansoman and High Street for residential and business purposes respectively. In July 2005, he paid ¢480,000 as one-year rent in advance for his residence. In July 2006, he again paid a cheque of ¢600,000 to cover one year advance for his residence. The rent for the premises at High Street was ¢60,000 per month in 2006. Boakye always paid all his rent by cheque. (v) General business expenses paid by cheque amounted to ¢106,200 (vi) He took cash of ¢38,000 every month for his private use.


Boakye provided you with the following additional information.
  31/12/06  31/12/06
  ¢  ¢
Trade Receivables  1,254,000  1,045,000
Trade Payables  617,500  380,000
Rent Owing  60,000  120,000
Bank balance  3,000,000  1,073,500
Cash in Hand  60,000  76,000
Inventories  1,700,500  1,510,500
Fixture & fittings  -  920,000

(vii) Depreciation is provided annually at the rate of 20% on Fixture and Fittings.
(viii) Boakye agreed to pay ¢100,000 as accountancy fees.
(ix) Differences in cash and bank balances at the end of 2006 represents additional drawings and Capital respectively.
Required:
(a) Computation of the profit of Boakye using the net worth method
(b) Cash and Bank Summary for 2006
(c) Statement of comprehensive Incomes for the year ended 31st December 2006.
(d) Statement of financial position  as at 31st December 2006.

Solution to Illustration 13.2
You may like to try the question before reading this discussion.
The examiner has been fairly lenient with this question. Let us view the techniques to be used in answering it:

 (a)   Calculate opening net assets to arrive at opening capital
We need the opening capital to enable us calculate the closing balance in the nt in the statement of financial position.  All that is required is to pick up all opening balances not forgetting the opening cash balance. The information is presented clearly, and the examiner has even included the bank and cash opening balances in the tabulation of assets and liabilities.

Increase in net worth …………………….. ¢5,973,000 - ¢4,125,000 = ¢1,848,000

Computation of profit by the net worth method
¢
Increase in net worth        1,848,000
Add Drawings(456,000+600,000+35,000)        1,091,000
       2,939,000
Less Additional Capital        1,227,700
Net Profit        1,711,300



(b)   Construct a cash and bank summary
Even if some of the information in the question is given in the form of a cash or bank summary, it is usually necessary to build up one or both of these summaries to calculate a missing figure such as payment for purchases and Owner’s drawings

CASH BOOK SUMMARY
Cash Bank Cash Bank
¢ ¢ ¢ ¢
Bal  b/d     76,000    1,073,500  Suppliers -     6,840,000
Received from customers   475,000    9,025,000  Drawings   456,000 -
Capital(missing figure) -    1,227,700  Rent -        600,000
Gen. Bus. Exp.        106,200
Rent (w3) -        780,000
Drawings (missing figure)     35,000 -
Bal.  C/d      60,000     3,000,000
  551,000    11,326,200    551,000     11,326,200
Bal  b/d     60,000      3,000,000

(c)   Income statement for the year ended 31ST December 2006

¢ ¢
Sales / turnover         9,709,000
Cost of sales        (6,887,500) Gross profit        2,821,500
Less Expenses:
Depreciation         184,000
Rent         720,000
General Business expenses        106,200
Consultancy fees        100,000
       1,110,200
Net Profit        1,711,300


(d)   Statement of financial position  as at 31 December 2006

Current Assets
Inventories             1,700,500
Trade Receivabes             1,254,000
Cash                  60,000
Bank             3,000,000
          6,014,500
Current Liabilities
Trade payables                617,500 Rent owing                  60,000
Accountancy fee owing                  100,000
             777,500
             5,237,000
             5,973,000

Financed by
Capital at 1/1/06                4,125,000
Add Additional capital                1,227,700
             5,352,700
Add Profit for the year               1,711,300
             7,064,000
Less Drawings                1,091,000
             5,973,000




WORKINGS
(1) Construct sale and purchases ledger control accounts
In a double entry- system, control accounts are used to confirm the arithmetical accuracy of the sales and purchases ledger system. This technique will be used to calculate sales and purchases as a missing figure.
Purchases Ledger Control Account
¢ ¢
Bank    6,840,000 Bal.  B/d      380,000
Purchases (missing figure)   7,077,500
Bal.   C/d       617,500
   7,457,500          7,457,500
Bal,  b/d          617,500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
(2) Workings for accruals and prepayments
In addition to these four techniques it will be necessary to construct figures for the Income statement by adjusting cash paid for expenses for opening and closing accruals and prepayment.





 
Computation of Depreciation  ¢
Fixture and fittings at cost(1/1/06)  920,000
Less Depreciation  (20% @ ¢920,000)  184,000
Net book value (31/12/06)  736,000


Illustration 13.3
Damask is a retailer who deals in spare parts at Kokompe. He pays into his bank account the amount of his cash takings, after retaining ¢10,000 per week for personal use and after payment of wages and expenses, which for the accounting period of 31st December 2006, were as follows:
¢
Staff wages    1,200,000 Goods       220,000 Cleaning         75,000
Carriage         35,000
Others         20,000

The transactions in his Bank Account during the period were:
¢
Balance as at 1st January 2006    2,000,000
Lodgements:
from takings (cash)  30,100,000
Bulk sales account (cheques)    4,800,000
Interest on treasury bills         30,000
 36,930,000



Withdrawals: ¢
Goods  30,830,000 Rent       400,000
Rates in connection with store       345,000 Rates in connection with own house         55,000 Air conditioner expenses for store       200,000 Air conditioner expenses for house         20,000 Telephone and electricity       150,000 other expenses for store         70,000
Fire insurance         60,000
Life assurance policy         30,000
Repairs       150,000
Fixtures and fittings       600,000 Consultancy fees         70,000 Income tax       900,000
Owner's current account       180,000
Balance as at 31st December 2006    2,900,000
 36,960,000




The following information were also provided:
 


You are required to prepare statement of comprehensive Income for the year ended 31st December 2006 and a Statement of financial position as at that date.

Solution to Illustration 13.3

Calculate opening net assets to arrive at opening capital
You have to calculate the capital of the business by using the information on assets and liabilities at the opening and closing dates. This is done by preparing a statement of affairs of the business by picking up all opening balances and calculating the net asset of the business as at 31st December 2000. The information is presented clearly, and the examiner has even provided information on the bank and cash balances in the presentation of assets and liabilities.  The statement of affairs of Damask as at 31st December 2006 is as follows:

Construct sale and purchases ledger control accounts
In a double entry- system, control accounts are used to confirm the arithmetical accuracy of the sales and purchases ledger system. This technique will be used to calculate sales and purchases by way of missing figure. This calculation will explore the horizontal format of determining the sales and purchases figures as missing figures instead of the usual „T‟ account that you are familiar with.
The sales figure will be determined as follows:

 The amount for Purchases is determined as follows:

Prepare the final accounts
Statement of comprehensive income for the year ended 31/12/2006










Statement of financial position as at 31/12/2006


Workings for accruals and prepayments
In addition to the above techniques it will be necessary to construct figures for the Income statement by adjusting cash paid for expenses for opening and closing accruals and



Drawings 
¢ ¢
Bank    180,000 Bal.  c/d    775,000
Cash    520,000
Rates      55,000
Air condition exp      20,000
   775,000      775,000

Bal.  b/d      775,000 

13.4  Summary
In this chapter we have explained the difference between a double entry accounting system and single entry system. We have also learned how to use the closing and opening capital figures to calculate the net profit of a trader that is not keeping his books of accounts on the double entry system.

We have learnt how to convert from a single entry system to a double entry one and also the means by which statement of comprehensive income and statement of financial position are prepared from records that are kept on single entry basis. We mentioned that figures such as sales and purchases could be calculated as missing figures from the sales ledger control account and purchases ledger control account respectively.
It is imperative for students to note that as with all accounting topics, frequent practice of incomplete record questions is essential to develop speed and confidence. What is the cost of goods sold, given the sales figure as ¢800,000 with a mark-up of 25%?