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Accounts from Incomplete Records
We have so far studied accounting records of firms, which follow the double entry system of book keeping. This gives us an impression that all business units follow this system. However, in practice, all firms do not maintain accounting records strictly as per the double entry system. Many small size enterprises keep incomplete records of their transactions. But, they also have to ascertain the profit or loss for the year and the financial position of the firm as at the end ofthe year. This chapter deals with the ascertainment of profit or loss and financial position of the firm that have not been maintaining records as per double entry bookkeeping or whose records are otherwise incomplete.
11.1 Meaning of Incomplete Records
Accounting records, which are not strictly kept according to double entry system are known as incomplete records. Many authors describe it as single entry system. However, single entry system is a misnomer because there is no such system of maintaining accounting records. It is also not a ‘short cut’ method as an alternative to double entry system. It is rather a mechanism of maintaining recordswhereby some transactions are recorded with proper debits and credits while in case of others, either one sided or no entry is made. Normally, under this system records of cash and personal accounts of debtors and creditors are properly maintained, while the information relating to assets, liabilities, expenses and revenues is partially recorded. Hence, these are usually referred as incomplete records.
11.1.1 Features of Incomplete Records
In complete records may be due to partial recording of transactions as is the case with small shopkeepers such as grocers and vendors. In case of large sized organisations, the accounting records may be rendered to the state of incompleteness due to natural calamity, theft or fire. The features of incomplete records are as under :
(a) It is an unsystematic method of recording transactions.
(b) Generally, records for cash transactions and personal accounts are properly maintained and there is no information regarding revenue and/ or gains, expenses and/or losses, assets and liabilities.
(c) Personal transactions of owners may also be recorded in the cash book.
(d) Different organisations maintain records according to their convenience and needs, and their accounts are not comparable due to lack of uniformity.
(e) To ascertain profit or loss or for obtaining any other information, necessary figures can be collected only from the original vouchers suchas sales invoice or purchase invoice, etc. Thus, dependence on original vouchers is inevitable.
(f) The profit or loss for the year cannot be ascertained under this system with high degree of accuracy as only an estimate of the profit earned or loss incurred can be made. The balance sheet also may not reflect thecomplete and true position of assets and liabilities.
11.2 Reasons of Incompleteness and its Limitations
It is observed, that many businessmen keep incomplete records because of the following reasons :
(a) This system can be adopted by people who do not have the proper knowledge of accounting principles;
(b) It is an inexpensive mode of maintaining records. Cost involved is low as specialised accountants are not appointed by the organisations;
(c) Time consumed in maintaining records is less as only a few books are maintained;
(d) It is a convenient mode of maintaining records as the owner may record only important transactions according to the need of the business.
However, the mechanism of incomplete records suffers from a number of limitations. This is due to the basic nature of this mechanism. Broadly speaking, unless a systematic approach to maintenance of records is followed, reliable financial statements cannot be prepared.
The limitations of incomplete records are as follows :
(a) As double entry system is not followed, a trial balance cannot be prepared and accuracy of accounts cannot be ensured.
(b) Correct ascertainment and evaluation of financial result of business operations can not be made.
(c) Analysis of profitability, liquidity and solvency of the business cannot be done. This may cause a problem in raising funds from outsiders and planning future business activities.
(d) The owners face great difficulty in filing an insurance claim with an insurance company in case of loss of inventory by fire or theft.
(e) It becomes difficult to convince the income tax authorities about the reliability of the computed income Questions for Practice
1. State the meaning of incomplete records?
2. What are the possible reasons for keeping incomplete records?
3. Distinguish between statement of affairs and balance sheet.
4. What practical difficulties are encountered by a trader due to incompleteness of accounting records?
1. What is meant by a ‘statement of affairs’? How can the profit or loss of a trader be ascertained with the help of a statement of affairs?
2. ‘Is it possible to prepare the profit and loss account and the balance sheet from the incomplete book of accounts kept by a trader’? Do you agree? Exlain.
3. Explain how the following may be ascertained from incomplete records:
(a) Opening capital and closing capital
(b) Credit sales and credit purchases
(c) Payments to creditors and collection from debtors
(d) Closing balance of cash. Numerical
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