CHAPTER-10

ACCOUNTS FROM INCOMPLETE RECORDS

Learning Objectives
After studying this lesson you will be able to :
Define the concept of incomplete records.
Distinguish between Double entry system and Accounts from Incomplete
records.
Ascertain the amount of profit or loss using Statement of Affairs
method.
Differentiate between Balance Sheet and Statement of Affairs.
Prepare Statement of Affairs using given data.

Suggested Methodology
Illustration Method
Discussion Method
Some small size business entities do not follow the double entry system
of maintaining the accounting records because :
1. It is very costly system
2. It is a time consuming method, and
3. It requires expert staff to adhere to principles and accounting standards
of system.
Due to the above mentioned reasons, some business entities maintains
books of accounts under the system Accounting from Incomplete records. The
system in which no set rules of double entry system are followed is called

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Accounts from Incomplete records.
Under this system only the following accounts are maintained
cash book, and
The personal accounts
Some Real Account according to need
Note : Nominal accounts are not maintained under this system.
Under this system of maintaining accounts :
Both the aspects of only certain transactions are recorded e.g. cash
received from debtors or cash paid to creditors.
One aspect of some transactions are recorded e.g. cash paid for purchase
of goods.
Some financial events are not recorded at all e.g. depreciation charged
on fixed assets.

Points to Remember
Accounting Principles and Accounting Standards are not followed
properly under this system.
Original vouchers provide base for preparing the accounts.
This method is highly flexible because it can be adjusted according to
the needs of the orgnanisation.
Profit or less is ascertained by either Statement of Affairs method or
Conversion into Double Entry System Method.

Use of Incomplete Records

Books according to this system can be maintained only by those small
entities in the form of Sole Proprietorship or Partnership firms that are not
bound to keep records of business transactions as per double entry system.
Companies cannot maintain books under this system because of legal provisions.

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Limitations of Incomplete Records
1. Incomplete method : This method is incomplete method of maintaining
the accounting records as the aspects, debit and credit, of every
transaction are not recorded.
2. Unscientific System : This system is an unscientific system as not set
rules are followed for recording the business transactions.
3. Arithmetical Accuracy cannot be checked : Under this system no
real and nominal accounts are maintained. As such a trial balance cannot
be prepared to check the arithmetical accuracy of the books of accounts.
4. True Profit or Loss cannot be ascertained : In the absence of Trial
balance, a trading and profit and loss account cannot be prepared and
hence the profit or loss ascertained during a particular period is based
on estimates, hence cannot be relied upon.
5. True financial position of the business cannot be Judged : Since
real accounts are not maintained, it is not possible to prepare a balance
sheet showing the true financial position of the business. A Statement
of Affairs is prepared to show the financial position of the business
which itself shows the estimated values of assets and liabilities.
6. Chances of Errors and Frauds : Under this system the principles of
double entry system are not followed hence internal checking is not
possible. It leads to chances of errors and frauds. Also, it becomes very
difficult to detect them.

Ascertainment of Profit or Loss

The main objective of any business enterprise is to earn profits. Business
persons are always interested to know the amount of profit earned or loss
beared during an accounting period. 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.

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.

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Note :
1. When Capital at the end of an accounting is more than the capital in
the beginning of the Accounting period
Profits = Capital at the end Capital at the beginning
2. When Capital at the Capital at the Beginning is more than capital at
the End of an Accounting Period.
Losses = Capital at the Beginning Capital at the End
For ascertainment of profit or loss, the following steps shall be taken :
Step 1 : Calculate the amount of Opening capital (If not given in the
Question) by preparing Statement of Affairs at the beginning of the
accounting period.
Step 2 : Calculate the amount of Closing Capital by preparing Statement of
Affair at the end of the accounting period.
Step 3 : Calculation of Profit or Loss by preparing Statement of Profit of
Loss in the following manner :
Statement of Profit or Loss for the year ended on..
Particulars Rs.
Closing Capital xxxx
(As ascertained by closing statement of affairs)
Add - Drawings during the year xxxx
Less - Additional capital introduced during the year (xxxx)
Adjusted capital at the end xxxx
Less - Opening Capital
(As ascertained by Opening Statement of Affairs) (xxxx)
Profit or loss for the year xxxx

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

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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.
A Statement of Affairs is prepared as follows :
Statement of Affairs
as on...................
Liabilities Rs. Assets Rs
Bank Overdraft xxxx Cash in hand xxxx
Sundry Creditors xxxx Cash at bank xxxx
Bills Payable xxxx Bills Receivables xxxx
Outstanding Expenses xxxx Sundry Debtors xxxx
Income Received in Advance xxxx Stock xxxx
Prepaid Expenses xxxx
Capital xxxx Accrued Income xxxx
(Balancing figure) Furniture xxxx
Q. 1 Anil who keeps his books on single entry, tells you that his capital on
31-12-2013 was Rs. 18,700 and his capital on 1-1-2013 was Rs. 19,200.
He further informs you that during the year he withdrew for his
household purposes Rs. 8,420. He sold his investments of Rs. 2,000 at
2% premium and brought that money into the business. You are required
to calculate Profit or Loss for the year 2013.
Ans. Statement of Profit & Loss
For the year ended on 31-12-2013
Particulars Rs.
1. Statement of profit and loss 18,700
Add : Drawing during the years 8,420
27,120
Less : Capital introduced during the years 2,040
(2,000 102/100)

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 25,080
Less : Capital in the beginning 19,200
Net profit for the year (B/F) 5,880

Q. 2 Ms. Anna started firm with a capital of Rs. 4,00,000 on 1st July 2013.
She borrowed from her friends a sum of Rs. 1,00,000 @ 10% per
annum (interest paid) for business and brought a further amount to
capital Rs. 75,000. On Dec. 31, 2013, her position was :
Particulars Rs.
Cash 30,000
Stock 4,70,000
Debtors 3,50,000
Creditors 3,00,000
She withdrew Rs. 8,000 per month during the year. Calculate profit or loss for the year
2013 and show your workings clearly.
Solution :
Statement of Affairs
as on 31st Dec. 2013
Particulars Rs. Assets Rs
Creditors 3,00,000 Cash 30,000
Loan 1,00,000 Stock 4,70,000
Closing Capital (B/F) 4,50,000 Debtors 3,50,000
8,50,000 8,50,000
Statement of Profit & Loss
For the year ended 31st Dec. 2013
Particulars Rs.
Capital at the end 4,50,000
Add : Drawing during the years (8,0006) 48,000
4,98,000
Less : Additional Capital introduced during the year 75,000
4,23,000
Less : Capital in the beginning 4,00,000
Net profit for the year (B/F) 23,000

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 Q. 3 Mr. Rajesh keeps his books by Single Entry Method. His position
on 31st December, 2012 was as follows :
Cash in hand Rs. 500, Cash at Bank Rs. 6,000, Stock Rs. 5,000, Debtors
Rs. 3,300, Furniture Rs. 1,200, Creditors Rs. 4,000. During the year he
introduced Rs. 4,000 as further capital in the Business, and withdrew Rs.
9,000 out of which he purchased a machine for Rs. 6,000 for the business.
On 31 Dec., 2013 his position was as follows :
Cash in hand Rs. 500, Cash at Bank Rs. 5,000, Stock Rs. 6,000, Debtors
Rs. 4,600, Furniture Rs. 1,500 and Creditors Rs. 6,000.
Prepare necessary statements showing the Profit or Loss earned by Mr.
Rajesh during the year and a Balance Sheet as at 31st December, 2013 after
making the following adjustments :
Depreciate Furniture and Machine at 10% (on closing balance), write off
bad debts Rs. 200 and provide 5% for doubtful debts.
Solution :
Statement of Affairs
as on 31 Dec., 2012
Liabilities Rs. Assets Rs
Creditors 4,000 Cash in Hand 500
Opening Capital 12,000 Cash at Bank 6,000
(B/F)
Stock 5,000
Debtors 3,300
Furniture 1,200
16,000 16,000

Statement of Affairs
as on 31st Dec. 2013
Liabilities Rs. Assets Rs
Creditors 6,000 Cash in Hand 500
Machine 6,000

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 Less : Dep. 600 5,400
Opening Capital (B/F) 16,430 Cash at Bank 5,000
Stock 6,000
Debtors 4,600
Less : Bad Debts 200
4,400
Less : Provision 220 4,180
Furniture 1500
Less : Dep. 150 1,350
22,430 22,430

Statement of Profit & Loss

For the year ended on 31st Dec., 2013
Particulars Rs.
Capital at the end 16,430
Add : Drawing during the years (9,0006,000) 3,000
19,430
Less : Capital introduced during the years 4,000
15,430
Less : Capital in the beginning 12,000
Net profit for the year (B/F) 3,430

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