Some times, businesses, especially small businesses do not maintain a full set of double entry records. Consequently, no trial balance will be produced and a complete set of final accounts cannot be prepared without further analysis of the records that do exist.
Where only records available are the assets and liabilities at the beginning of the year and at the end of the year, it is not possible to prepare a Trading and Profit and Loss account. The assets and liabilities are usually listed in a Statement of Affairs (Similar to a Balance Sheet). This would have been called a Balance Sheet if it had been drawn up from a set of double entry records. Like a Balance Sheet, a Statement of Affairs can be prepared horizontally or vertically
The only way the profit for the year can be found is by comparing the capital shown in the opening Statement of Affairs with the capital shown in the closing Statement of Affairs.
The basic formula is:
Profit Loss = Closing Capital – Opening Capital (Positive figure means Profit and Negative figure means Loss)
It may be that the owner has made drawings during the year, which will account for some of the difference in the capital figures. Similarly the owner might have brought in additional capital during the year, which will also account for some of the difference in the capital figures. In this case the formula must again be modified:-
Profit or Loss = Closing Capital + Drawings during the year – Additional Capital during the year – Opening Capital (Positive figure means Profit and Negative figure means Loss)
Calculation of Profit or Loss by converting the Incomplete Records into Double entry Records
In this case, in order to calculate the profit or loss of the business during the year, the Trading and Profit and Loss accounts are prepared. For preparing the Trading and Profit and Loss accounts, all necessary information is not available in the books. So first the missing items have to be calculated which are necessary for the preparation of Trading and Profit and Loss accounts.
Usual missing items are:-
Opening/ Closing balances of Debtors, Credit Sales, and Amounts received from Debtors. When any of these items is missing from the question, it can be calculated by preparing the Trade Debtors Account as follows.
Trade Debtors Account (Total Debtors A/C)
In another way Credit Sales = Closing Debtors + Bad debts written off + Return inwards + Discount Allowed + Receipts from Debtors (Cash and Cheques)- Opening debtors
Opening/Closing balances of creditors/ Payments to creditors/ Credit purchases. When any of these items is missing, it can be calculated by preparing the following Trade Creditors A/C
Trade Creditors Account (Total Creditors A/C)
Similarly Credit Purchases = Closing Creditors + Payments to Creditors (By cash and Cheques) + Discount Received + Return Outwards – Opening Creditors
Opening or Closing Bank Balance: To calculate any of these, the bank a/c is to be prepared in T form by showing the receipts on the debit side and payments on the credit side.
The closing bank balance can be calculated in another way also as follows:-
Closing Bank Balance = Opening Balance + All Receipts – All Payments
Opening Capital:- It can be calculated by preparing opening Statement of Affairs by incorporating all the assets and liabilities on the opening date and calculating it as a balancing figure.
Before solving the question, find out the missing items. The next step should be to find out the missing items from the given items in the question. After making sure that, all the items necessary for the for the preparation of the required account, then start preparation. The final accounts will be prepared as in the case of a sole trader’s final account.
The depreciation on fixed assets is calculated by comparing the opening and closing values of the concerned fixed asset.