The Trading and Profit & Loss Account is a financial statement that shows a company’s revenue and expenses over a specific period, usually a year. It helps business owners to understand their profitability and identify areas for improvement. The Trading Account shows the company’s gross profit, which is calculated by subtracting the cost of goods sold from the total revenue. The Profit & Loss Account shows the net profit, which is calculated by subtracting all expenses, including non-operating expenses, from the gross profit.
The Balance Sheet is another critical financial statement that provides a snapshot of a company’s financial position at a specific point in time. It shows a company’s assets, liabilities, and equity. Assets are items of value that the company owns, such as cash, inventory, and property. Liabilities are amounts owed to creditors, such as loans, accounts payable, and taxes. Equity is the value of the company’s assets minus its liabilities, representing the owner’s investment in the company.
The primary purpose of preparing financial statements is to provide an accurate picture of a company’s financial performance and position. These statements are essential for businesses to make informed decisions, assess their profitability, and comply with legal requirements. Financial statements also help stakeholders, such as investors, creditors, and regulators, to evaluate the company’s financial health and make informed decisions.
Preparing Financial Statements in case of Incomplete Records
Incomplete records refer to situations where a business has not maintained complete and accurate records of its financial transactions. This may occur due to various reasons, such as lack of knowledge, resources, or time. Incomplete records make it challenging for accountants to prepare accurate financial statements, as they have limited information about the company’s financial transactions.
In such situations, accountants must rely on alternative methods to prepare the Trading and Profit & Loss Account and Balance Sheet. This may involve estimating the missing figures based on available information, using ratios and averages, or making assumptions based on industry standards. The accountant must use their professional judgment to ensure that the financial statements provide a fair and accurate representation of the company’s financial position and performance.
Ascertainment of Credit Purchases and Credit Sales
In preparing a trading and profit & loss account and a balance sheet in case of incomplete records, it is important to accurately ascertain credit purchases and credit sales. Credit purchases refer to purchases made on credit, which are not immediately paid for in cash. On the other hand, credit sales refer to sales made on credit, which are not immediately paid for in cash.
To ascertain credit purchases in case of incomplete records, there are several methods that can be used. One method is to use the total purchases figure and subtract cash purchases and the closing stock value. Another method is to calculate the increase in the amount payable to creditors during the year, and then subtract the opening balance of the amount payable to creditors. In this way, credit purchases can be calculated.
Similarly, to ascertain credit sales in case of incomplete records, there are several methods that can be used. One method is to use the total sales figure and subtract cash sales and the opening stock value. Another method is to calculate the increase in the amount receivable from debtors during the year, and then subtract the opening balance of the amount receivable from debtors. In this way, credit sales can be calculated.
Suppose a business has the following information:
Total purchases during the year: ₹ 100,000
Cash purchases during the year: ₹ 40,000
Closing stock value: ₹ 20,000
Total sales during the year: ₹ 150,000
Cash sales during the year: ₹ 60,000
Opening stock value: ₹ 10,000
Based on this information, we can calculate the credit purchases and credit sales using the following steps:
To calculate credit purchases:
Credit purchases = Total purchases – Cash purchases – Closing stock value
Credit purchases = ₹ 100,000 – ₹ 40,000 – ₹ 20,000
Credit purchases = ₹ 40,000
Therefore, the credit purchases made by the business during the year were ₹ 40,000.
To calculate credit sales:
Credit sales = Total sales – Cash sales – Opening stock value
Credit sales = ₹ 150,000 – ₹ 60,000 – ₹ 10,000
Credit sales = ₹ 80,000
Therefore, the credit sales made by the business during the year were ₹ 80,000.
Ascertainment of Bills Receivable and Bills Payable
In accounting, Bills Receivable refers to the amount owed to a business by its customers for the goods sold or services rendered on credit. In order to ascertain the Bills Receivable, businesses need to follow certain methods, particularly in cases where the records are incomplete. These methods include analyzing the bank statement for any receipts, reviewing invoices and other relevant documents to determine outstanding payments, and communicating with customers to get an accurate picture of their outstanding balances.
For instance, let’s say a business has incomplete records for the current accounting period. The accountant can look at the bank statement and identify any cash received from customers, as it would have been deposited into the bank. The accountant can also review any invoices that were sent to customers during the period and determine which payments have been made and which ones are outstanding. Additionally, they can contact customers to confirm the outstanding balances and update their records accordingly.
Similarly, Bills Payable refer to the amount owed by a business to its suppliers or vendors for the goods or services received on credit. To ascertain the Bills Payable in case of incomplete records, businesses can use similar methods such as reviewing invoices and other relevant documents, analyzing the bank statement for any payments made to suppliers, and communicating with suppliers to determine outstanding balances.
For example, if a business has incomplete records for the current accounting period, the accountant can review the invoices received from suppliers and identify the payments that have been made during the period. The accountant can also look at the bank statement to determine any payments made to suppliers during the period. Additionally, they can communicate with suppliers to determine the outstanding balances and update their records accordingly.
Ascertainment of Missing Information through Summary of Cash
The Summary of Cash refers to a statement that summarizes all the cash transactions of a business, including cash receipts and cash payments, for a given period. It is an important document that helps businesses to keep track of their cash flows and ensure that they have enough cash on hand to meet their financial obligations. In cases where the records are incomplete, the Summary of Cash can also be used to ascertain missing information by following certain methods.
One method for using the Summary of Cash to ascertain missing information is to analyze the beginning and ending cash balances. If the beginning and ending cash balances are known, then the net increase or decrease in cash can be determined by subtracting the beginning balance from the ending balance. This net increase or decrease in cash can then be used to identify the cash inflows and outflows that occurred during the period.
For example, let’s say a business has incomplete records for the current accounting period. However, the beginning and ending cash balances are known to be ₹10,000 and ₹15,000, respectively. By subtracting the beginning balance from the ending balance, we can determine that the net increase in cash was ₹5,000. This means that the business had cash inflows of ₹5,000 during the period, either through cash receipts or other sources. By analyzing the Summary of Cash and identifying the cash inflows during the period, the accountant can fill in the missing information in the records.
Preparation of Trading and Profit & Loss Account and Balance Sheet
In the case of incomplete records, the preparation of the Trading and Profit & Loss Account and Balance Sheet can be a challenging task. However, the following steps can be followed to prepare these financial statements:
- Ascertain the Opening Capital: The first step is to determine the opening capital of the business by calculating the capital at the beginning of the accounting period.
- Ascertain the Closing Capital: The next step is to determine the closing capital of the business by calculating the capital at the end of the accounting period.
- Prepare a Statement of Affairs: A statement of affairs is a summary of the assets and liabilities of the business. This statement can be prepared by comparing the opening and closing capital and making adjustments for any additional investments, drawings, or profits.
- Prepare the Trading and Profit & Loss Account: The Trading and Profit & Loss Account can be prepared based on the information available, such as sales and purchases. The gross profit can be calculated by subtracting the cost of goods sold from the net sales. The net profit can be calculated by deducting the indirect expenses from the gross profit.
- Prepare the Balance Sheet: The Balance Sheet can be prepared by using the information from the Statement of Affairs and the Trading and Profit & Loss Account. The assets and liabilities can be arranged in a systematic manner to provide a clear picture of the financial position of the business.
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