Accounts from Incomplete Records

Preparing Trading and Profit and Loss and Balance Sheet

Preparing a trading account is the first stage in of final accounts of a trading concern. It determines the gross profit or gross loss of the concern for that accounting year. For determining the true result or the net result of the business, preparing the Trading and Profit and Loss account is necessary. We prepare these accounts on the last day of the accounting year. We consider only direct revenue and direct expenses in this account.

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Preparing Trading and Profit and Loss and Balance Sheet

Preparation of Trading Account

For preparing a Trading and Profit and Loss Account we need complete information regarding expenses, incomes, assets and liabilities of the concern. In incomplete records, some details are given and some are missing. Thus, we need to ascertain the missing details in an indirect manner by using the logic of double-entry.

How to Calculate Gross Profit in Trading Account?

In order to calculate the gross profit, it is necessary to know the cost of goods which are sold and its sales figures.

Gross Profit = Sales – COGS (Sales + Closing Stock) – (Stock in the beginning + Purchases + Direct Expenses)

Items that are included on the debit side and on the credit side give the resultant figure which is either gross profit or the gross loss.

Trading and Profit and Loss Account

A trading account is one that holds both stocks and cash. The main account of a trader is referred to as a trading account. Because investors’ accounts are subject to particular regulation because they often purchase and sell assets, their accounts are subject to special regulation. A trading account’s assets are segregated from those held in a long-term buy-and-hold strategy.

The profit and loss statement, abbreviated as P&L, is a financial statement that summarises revenues, expenditures, and expenses incurred during a specific time period, generally a fiscal year. The P&L statement corresponds to the income statement, which documents a company’s capacity (or inability) to create profit through growing sales revenue, lowering costs, or both. The P&L statement is also known as a profit and loss statement, income statement, statement of operations, and so on.

Missing Items:

The most common items that are missing and we have to find out for preparing Trading and Profit and Loss Account are:

  • Opening capital
  • Credit Purchases
  • Credit sales
  • Bills payable accepted
  • Bills receivable received
  • Payments to creditors
  • Payments to debtors
  • Any other cash/bank related items.

As we know that opening capital can be obtained by preparing the statement of affairs at the beginning of the year. For other items that are missing, we can easily obtain them by preparing accounts such as total debtors and total creditors, total bills receivable and total bills payable accounts and summary of cash.

Ascertainment of Credit Purchases

Generally, the credit purchase figure is not available from the incomplete records. It is possible that some other information related to creditors may also be missing. So, we will prepare the total creditors to account so that, credit purchases or any other missing figure related to creditors, as the case may be, can be ascertained as the balancing figure.

Ascertainment of Credit Sales

Generally, the figure of credit sales is also not available from incomplete records. Some other information which is related to debtors may also be missing. Therefore, we will prepare the total debtors to account so that the number of credit sales or any other missing figure, as the case may be, can be traced out as the balancing figure.

Ascertainment of Bills Receivable and Bills Payable

To find out the figure of the bills received during the year, we prepare Bill’s Receivable account. Also, to find out the figure of the bills accepted during the year, we prepare the Bills Payable account.

Ascertainment of Missing Information through Summary of Cash

Sometimes, it is possible that the amount paid to creditors or the amount received from debtors may be missing. Also, the opening or closing cash or bank balance may be missing. So to ascertain any missing item of receipt of payment, we prepare a cash book summary. It shows all receipts and payments during the year and the balancing figure is the amount of missing items.

In case both amounts paid to creditors and that received from debtors are missing. In that case, we will obtain the amount of any one of these first through the total creditors or total debtors account. And the other missing information we will ascertain from the cash book summary. After the missing figures are obtained, we can prepare the final accounts straight away or after the preparation of the trial balance.

Format of P&L Account for Companies

  Note no Current reporting period (Figures) Figures for the previous reporting period (Figures)
Income      
a)revenues from operations      
b) other income      
Total income      
expenses      
a)      Cost of materials consumed

 

     
Purchase of stock in trade      
Change in inventories of finished goods      
Employee benefits expense      
Finance costs      
Depreciation and amortization expenses      
Other expenses      
Total expense      
Profit/loss before exceptional items and tax      
Exceptional items      
Profit /loss before tax      
Tax expense      
Current tax      
Deferred tax      
Profit/loss for the period from continuing operations      
Profit/loss for the period from discontinued operations      
Profit/loss for the period      
Other comprehensive income      
1) Items that will not be reclassified to profit or loss      
2) Income tax relating to items that will not be reclassified to profit or loss      
 3) Items that will not be reclassified to profit or loss      
4) Income tax relating to items that will be reclassified to profit or loss      
Total comprehensive income for the period

Comprising profit/loss and other income for the period

     
Earnings per equity share(for discontinued operation)      
1)      Basic      
2)      Diluted

 

     
Earnings per equity share(for discontinued & continuing operation)      
1)      Basic      
2)      Diluted

 

     

Statement Of Profit & Loss

Horizontal Format

Company name          
Balance sheet          
For the period ended          
Liabilities Amount Amount Assets Amount Amount
Capitals and reserves     Fixed assets    
Opening capital balance     Land    
Reserves and surplus     Less: Depreciation    
Less: Drawings          
Capital balance     Building    
      Less: Depreciation    
Secured loans          
Long term debt     Investments    
Other long term liabilities     Long term investments    
Unsecured loans     Current assets loans and advancements    
Cash credit payable     Inventory    
      Cash and cash equivalents    
Current liabilities     Other current assets    
Trade payables          
Accrued interest     Prepaid expense    
Other current liabilities     Miscellaneous expenditure    
Total liabilities     Total assets    

 

Vertical format

Company name      
Balance sheet      
Particulars Note no Figures (as per end of the current reporting period) Figures (as per end of the previous reporting period)
Equity and liabilities      
1)      Shareholders funds

a)      Share capital

b)      Reserves and surplus

c)       Money received against share warrants

 

     
2)      Share application money pending allotment      
3) Non-current liabilities

a)      Long term borrowings

b)      Deferred tax liabilities

c)       Other long term liabilities

d)      Long term provisions

     
4)      Current liabilities

a)      Short term borrowings

b)      Trade payables

c)       Other current liabilities

d)      Short term provisions

     
Total      
2.       Assets      
1) Non-current assets

a)      Fixed assets

1)      Tangible assets

2)      Intangible assets

3)      Capital work in progress

4)      Intangible assets under development

b) Non-current investments

c)       Deferred tax assets

d)      Long term loans and advances

e)      Other non-current assets

     
2)      Current assets

a)      Current investments

b)      Inventories

c)       Trade receivables

d)      Cash and cash equivalents

e)      Short term loans and advances

f)       Other current assets

 

     
Total      

Solved Example for You

Q: Miss Krati started business on 1st January 2017, with cash of ₹ 25,000, furniture of ₹ 5,000, goods of ₹ 1,000, and machinery worth ₹ 10,000. During the year she further introduces the capital of ₹ 10,000 by opening a bank account. From the following information extracted from her books required for preparing Trading and Profit and Loss Account and Balance Sheet

Receipt from debtors 28,750
Cash sales 22,500
Cash purchases 12,500
Wages 2,500
Salaries 8,750
Trade expenses 3,250
Electricity bill of factory 3,750
Drawings 1,500 p.m.
Cash paid to creditors 21,000
Discount allowed 600
Discount received 1,500
Bad debts written off 650
Closing cash balance 10,000

Miss Krati used goods worth ₹ 1,250 for the private purpose, which is not recorded by her in the book. Charge depreciation on furniture @10% and on machinery @20% p.a. On 31st March 2018, debtors, creditors, and stock in trade were valued as ₹ 35,000, ₹ 17,500, and ₹ 12,500 respectively.

Ans:

Trading and Profit and Loss Account                                         

Particulars Amount (₹) Particulars Amount (₹)
To opening stock 10,000 By Sales
To Purchases: Cash sales 22,500
Cash purchase 12,500 Credit sales(WN2) 65,000 87,500
Credit purchase(WN3) 40,000 By Closing stock 12,500
Less: Drawings of goods (1,250) 51,250
To Wages 2,500
To Electricity bill of factory 3,750
To Gross profit 32,500
1,00,000   1,00,000
To Salaries 8,750 By Gross profit 32,500
To Trade expenses 3,250 By Discount received 1,500
To Discount allowed 600
To Bad debts 650
To Depreciation:
Furniture @10%                     500
Machinery @20%               2,000 2,500
To Net profit 18,250
34,000 34,000

Balance Sheet as at 31st December 2017

Liabilities Amount (₹) Assets Amount (₹)
Capital (WN1) 50,000 Cash in hand 10,000
Add: Net profit  18,250 Cash at the bank(WN4) 6,500
Add: Additional capital 10,000 Stock 12,500
Less: Drawings  (1,250) Debtors 35,000
Cash  (18,000) Furniture                    5,000
Goods 59,000 Less: depreciation     (500) 4,500
Creditors 17,500 Machinery               10,000
Less: depreciation  (2,000) 8,000
76,500   76,500

 

Working notes:

1] Statement of Affairs as on 31st December 2017

Liabilities Amount (₹)   Assets Amount (₹)
Capital (balancing figure) 50,000 Cash 25,000
Stock 10,000
Furniture 5,000
Machinery 10,000
50,000   50,000

2] Debtors Account

Date Particulars Amount(₹)) Date Particulars Amount (₹)  
 

 

To Balance b/d NIL By Cash 28,750
 

 

 

To Sales  (credit) 65,000 By Discount allowed 600
(balancing figure) By Bad debts 650
By Balance c/d 35,000
    65,000     65,000

 3] Creditors Account

Date Particulars Amount(₹) Date Particulars Amount(₹)  
To Cash 21,000 By Balance b/d NIL
To Discount received 1,500 By Purchases credit 40,000
To Balance c/d 17,500 (balancing figure)
40,000     40,000

4] Summary of Cash

Receipts Amount(₹)   Payments Amount(₹)  
To Balance b/d 25,000 By Purchases 12,500
To Capital introduced (bank) 10,000 By Wages 2,500
To Debtors 28,750 By Salaries 8,750
To Sales 22,500 By Trade expenses 3,250
By Electricity bill for factory 3,750
By Creditors 21,000
By Drawings (1,500 p.m.) 18,000
By Balance c/d – cash 10,000
By Cash at Bank (Bal. fig.) 6,500
86,250   86,250

 

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jude

The Relevance of the Extraction of Financial Statements to a set of incomplete records

SABONA
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SABONA

requirements for incomplete records

victor
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it is used for each transoction

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