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ACCOUNTANCY Chapter 11: Accounts From Incomplete Records
(1) 11 ACCOUNTS FROM INCOMPLETE RECORDS Accounts From Incomplete Records Meaning of Incomplete Records: Incomplete records are the accounting records that do not strictly follow the double entry system of accounting. For example: If one sided entry, or no entry for a transaction is recorded, it is classified as an incomplete record. Uses or Reasons for Keeping Incomplete Records: ▪ Simple Method: It is an easy and simple method as under this method one does not require any special knowledge of the accounting principles for recording of transactions. ▪ Less Expensive: As under this method only few accounts are prepared, therefore business firm does not require more staff for recording the transactions. ▪ Flexible Method: This method is highly flexible because it can be adjusted according to the needs of the organisation. ▪ Suitable for Small Concerns: This method is most suitable for small business concerns which have mostly cash transactions and very few Assets & Liabilities. ▪ Easy to calculate profit or loss: It is easier to calculate profit or loss under this method. Limitations of incomplete records Following are the limitations of incomplete records: ▪ Lack of proper maintenance of records: It is an unscientific and unsystematic way of maintaining records. Real and nominal accounts are not maintained properly. ▪ Difficulty in preparing trial balance: As accounts are not maintained for all items, the accounting records are incomplete. Hence, it is difficult to prepare trial balance to check the arithmetical accuracy of the accounts. ▪ Difficulty in ascertaining true profitability of the business: Profit is found out based on available information and estimates. Hence, it is difficult to ascertain true profit as the trading and profit and loss account cannot be prepared with accuracy. ▪ Difficulty in ascertaining financial position: In general, only the estimated values of assets and liabilities are available from incomplete records. Hence, it is difficult to ascertain true and fair view of state of affairs or financial position as on a particular date. ▪ Errors and frauds cannot be detected easily: As only partial records are available; it may not be possible to have internal checks in maintaining accounts to detect errors and frauds. Differences between double entry system and incomplete records:
(2) 11 ACCOUNTS FROM INCOMPLETE RECORDS Basis of distinction Double entry system Incomplete records 1. Recording of transactions Both debit and credit aspects of all the transactions are recorded. Debit and credit aspects of all the transactions are not recorded completely. For some transactions both aspects are entered, some transactions are partially recorded, and some transactions are omitted to be entered. 2. Types of accounts maintained Personal, Real and Nominal accounts are maintained fully. In general, only personal and cash accounts are maintained fully. Real and Nominal accounts are not maintained fully. 3. Preparation of trial balance Trial balance can be prepared to check the arithmetical accuracy of the entries made in the books of accounts It is difficult to prepare the trial balance to check the arithmetical accuracy of the entries made in the books of accounts as the accounts are incomplete. 4. Determination of true profit or loss Trading and profit and loss accounts can be prepared to find out the true profit and loss. Trading and profit and loss accounts cannot be prepared with accuracy as complete information is not available and hence profit or loss found out may not be accurate. 5. Determination of financial position Balance sheet can be prepared to know the true financial position. Balance sheet cannot be prepared with accuracy and true financial position cannot be ascertained, as the asset and liabilities are just estimates and incomplete. Ascertainment of Profit or Loss: The main objective of any business enterprise is to earn profits In case of organizations maintaining accounts under incomplete records the amount of profit or loss can be ascertained by Statement of Affairs method or Net Worth method
(3) 11 ACCOUNTS FROM INCOMPLETE RECORDS Statement of Affairs Method: Under this method, profits or losses of the business are ascertained by comparing the Capital at the end, Capital at the beginning of the accounting period. Statement of Affairs: A Statement of affairs is a statement showing the balances of assets (including cash and bank balance) on the right-hand side and the balance of liabilities on the left-hand side, on a particulars date. The difference in the total of two sides is known as capital. Capital = Total Assets – Total liabilities A statement of affairs is very similar to Balance Sheet as prepared for the business entities maintaining accounts under double entry system, though it should not be described as a Balance Sheet.