Chapter 15 - Incomplete records

 Lets move to another major topic of mypoateacher.blogspot.com :- Incomplete records.

💨Basically, there are 3 methods under this method:-

1. Capital comparison method;

2. Account analysis method ;& 

3. Financial ratios analysis method.

💨In incomplete records, the question will give you bits & pieces of information such as cash at bank acc, the opening capital, sales returns, to find figures such as net profit , Total inventory purchase , Total Sales amount and cost of sales. 

1. Capital Comparison method

💥Let us all understand more on Capital comparison method. we all know that Capital is also termed as Owner's Equity which can be calculated by :-

Capital/Owner's Equity = Total Assets - Total Liabilities 

And for Capital/Owner's Equity, we can further break it down by:- 

Ending Capital/owner's Equity = Opening Capital/Owner's equity + Additional Capital contributed by owners + Net profit - net loss - drawings for the period.

Using the capital formula, we can then calculate the net profit/(loss) for the periods:- 

if we have these 3 elements :-

• Opening & Ending Capital
• Drawngs
• Additional contributed by owners into the business

☝Lets try it with a question :-

 

2. Account analysis method , the question will normally ask you to find out total purchases or total sales amount.

💨As we have learned under the previous chapter on trade receivable & payable control accounts, we are able to find the Total credit Sales & purchase figure from the Trade receivable & payable control accounts.

**Note: Remenber to add total cash purchase or Total cash sales to your credit purchase or credit sales in order to derieve the Total Sales/purchase for the period. 

Total Sales Revenue = Total Credit Sales + Total Cash Sales

Total purchases = Total Credit Purchases + Total Cash purchases

☝Let's try a question to find out the Total Credit Sales amount:- 

Total Net Sales Revenue =  $32,000 + $20,000 - $3,000 

        = $49,000

**Note: for Sales returns, the sales revenue is not affected  only the sales returns account and Trade receivable account are adjusted. This is a common mistake which a lot of students make!

Therefore in finding net sales revenue, we need to deduct the sales returns for the period.

☝Similarly, for total purchase, we can find the credit purchase from the total trade payable account 

 

Total Net purchases = $23,500 + $20,000 - $3,000

=$40,500 

*Remember: the few tips when doing the question, Debtor is Debit side and Creditors are Credit side, do not put wrongly the sides of debtors and creditors when doing a trade payable or trade receivable account. 

**For Sales returns & Purchases returns, pls deduct from total purchases & Sales amount to find the net amount:)

Apart from Sales & Purchases figures, the exam may also test on total expenses for the period by giving you a prepaid expenses or accrued expenses acc. 

☝Lets try one on Prepaid acct also on mypoateacher Pte Ltd:-

Note: 

1. The ending balance for the expenses and revenue account has to be nil. 

2. For the balance transfer on the 1 Jan 21, it is a prepaid amount for the previous period but the expenses are paid for the current period which is $2,000, therefore when it transfer down, it is a Debit balance.

3. Financial ratios analysis method.

💨Next we move on to the next method- the financial ratios analysis method which is using financial ratio to find missing amounts: -

For e.g. we all know that Inventory turnover ratio is given by : Cost of Sales / Average inventory 

& Average inventory is calculated by (opening + closing inventory)/2,

☝Qns: If Company A Inventory turnover for Yr 2020 is 5 times and its Average inventory is $30,000 for the same period, can we find the cost of sales?

Since Inventory turn over ratio = Cost of sales/ average inventory, we can substitute the figures into the formula 

Ans:  Inventory turnover = 5 times

Average inventory = $30,000

Therefore, Cost of sales = Inventory Turnover ratio X average inventory 

= 5 times X $30,000

= $150,000 

☝Qns:Using the cost of sales figure calculated, if we have have the Gross profit margin, we are able to find the Net Sales amount too.

Let say Company A has a gross profit margin of 20%,  given cos of sales of $150,000 , can you find the net sales amount?

Yes, Since we know Gross profit margin is 20% therefore the cost of sales margin has to be (100%-20%) 80%, 

therefore if $150,000 represents 80% being cost of sales, can we find 20% which is the nett sales revenue?

Nett Sales Revenue : $150,000/80% X 20% 

= $37,500

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