Cambridge IGCSE Accounting · 0452
Chapter 5: Preparation of Financial Statements — Part 6
Section 5.6 · Incomplete Records
This occurs when a business does not maintain a full double-entry book-keeping system. Many small sole traders keep only a cash book and personal records, so accountants must reconstruct missing figures using the accounting equation and control accounts.
Why Businesses Keep Incomplete Records
Common reasons include limited accounting knowledge, cost savings, and the informal nature of very small businesses. The owner may record only cash received and paid without maintaining full ledgers.
- Advantages
-
- Cheaper and quicker to maintain day-to-day.
- Less paperwork for very small operations.
- Sufficient for basic cash management.
- Disadvantages
-
- Difficult to detect errors and fraud.
- Cannot produce accurate financial statements without reconstruction.
- No automatic check from the double-entry system (trial balance cannot balance missing figures).
- Harder to obtain bank loans without proper accounts.
Statement of Affairs
A Statement of Affairs is essentially a Statement of Financial Position prepared from available asset and liability valuations. It is used to find capital when full records are missing:
Capital = Total Assets − Total Liabilities
Comparing opening and closing Statements of Affairs allows profit to be calculated when no Income Statement exists.
Capital Comparison Method
Formula: Profit for the year = (Closing Capital + Drawings) − (Opening Capital + Additional Capital)
- Drawings are added back to closing capital because they reduced capital during the year.
- Additional capital introduced is added to opening capital because it was not earned as profit.
Control Account Reconstruction
Accountants reconstruct control accounts to find missing credit sales or credit purchases:
- Total Sales = Credit sales (missing debit in SLCA) + Cash sales.
- Total Purchases = Credit purchases (missing credit in PLCA) + Cash purchases.
The missing figure is always the balancing amount on the side that restores the account to its known closing balance.
Mark-up, Margin, and Inventory Turnover
- Mark-up: (Gross Profit ÷ Cost of Sales) × 100 — profit expressed as a percentage of cost.
- Margin: (Gross Profit ÷ Revenue) × 100 — profit expressed as a percentage of selling price.
- Rate of Inventory Turnover: Cost of Sales ÷ Average Inventory — how many times inventory is sold and replaced in a year.
Conversion rules:
- Margin 1/5 to Mark-up: 1 ÷ (5 − 1) = 1/4
- Mark-up 1/4 to Margin: 1 ÷ (4 + 1) = 1/5
If revenue and mark-up are known: Gross Profit = Revenue × Mark-up fraction; Cost of Sales = Revenue − Gross Profit. If cost of sales and margin are known: Gross Profit = Revenue × Margin fraction.
Worked Example 1: Capital Comparison and Statements of Affairs
Jonas — sole trader:
1 January 2025 (Opening Statement of Affairs): Assets $38,000; Liabilities $12,000; Capital = $26,000.
31 December 2025 (Closing Statement of Affairs): Assets $52,000; Liabilities $15,000; Capital = $37,000.
During the year: Drawings $8,500; Additional capital introduced $3,000.
Profit for the year:
(37,000 + 8,500) − (26,000 + 3,000) = 45,500 − 29,000 = $16,500
Worked Example 2: Control Account and Mark-up
Sales Ledger Control Account (extract):
| Details | $ | Details | $ |
|---|---|---|---|
| Balance b/d | 4,200 | Returns inwards | 800 |
| Credit sales (missing) | 42,600 | Bank (receipts) | 38,000 |
| Irrecoverable debts | 2,000 | ||
| Balance c/d | 6,000 | ||
| 52,800 | 52,800 |
Cash sales = $15,000. Total sales = 42,600 + 15,000 = $57,600.
Mark-up is 25% on cost. Gross profit = 57,600 × 25/125 = $11,520. Cost of sales = 57,600 − 11,520 = $46,080.
Opening inventory $9,200; Closing inventory $10,800. Purchases = 46,080 + 10,800 − 9,200 = $47,680.
Rate of inventory turnover = 46,080 ÷ ((9,200 + 10,800) ÷ 2) = 46,080 ÷ 10,000 = 4.6 times.
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