Incomplete records

Most small businesses don't maintain full double-entry books. They may keep:

• A cash book / bank statements.
• Customer invoices and supplier invoices.
• An inventory count at year-end.
• An informal note of capital and drawings.

When accountants need to prepare financial statements, they must reconstruct missing figures using systematic techniques.

The key insight: every accounting figure is connected. If you know enough of the puzzle pieces, you can derive any one missing piece.

Formula:

$\text{Profit} = \text{Closing Capital} - \text{Opening Capital} + \text{Drawings} - \text{New Capital Introduced}$

Logic: Capital changes during the year for FOUR reasons:

• • Profit (or − Loss).
• − Drawings.
• • New capital introduced.

Rearranging: Profit = Change in Capital + Drawings − New Capital.

Capital can be expressed as Net Assets (= Total Assets − Total Liabilities).

Step-by-step:

1. List opening assets and liabilities → derive Opening Capital.
2. List closing assets and liabilities → derive Closing Capital.
3. Find Drawings and any new Capital introduced from the records.
4. Apply the formula.

This method gives only the profit figure — not a full income statement. Use other techniques to break it down.

Credit Sales from SLCA:

$\text{Credit Sales} = \text{Closing TR} - \text{Opening TR} + \text{Cash Received} + \text{Returns Inwards} + \text{Discount Allowed} + \text{Irrecoverable Debts}$

Credit Purchases from PLCA:

$\text{Credit Purchases} = \text{Closing TP} - \text{Opening TP} + \text{Payments} + \text{Returns Outwards} + \text{Discount Received}$

When to use: when records show receipts/payments + opening/closing balances but missing the underlying sales/purchases figure.

Combine with CASH SALES from the cash book to get TOTAL sales:

$\text{Total Sales} = \text{Credit Sales} + \text{Cash Sales}$

Mark-up = Gross Profit ÷ Cost of Sales (% on COST). Margin = Gross Profit ÷ Sales (% on SALES).

Conversion rules:

If Mark-up = 25% (sales 25% above cost):

• COGS is 100; Sales is 125; GP is 25.
• Margin = 25 ÷ 125 = 20%.

If Margin = 20% (GP is 20% of sales):

• Sales is 100; GP is 20; COGS is 80.
• Mark-up = 20 ÷ 80 = 25%.

Common conversions (memorise):

• Mark-up 25% ↔ Margin 20% (1/4 → 1/5).
• Mark-up 33.33% ↔ Margin 25% (1/3 → 1/4).
• Mark-up 50% ↔ Margin 33.33% (1/2 → 1/3).
• Mark-up 100% ↔ Margin 50% (1/1 → 1/2).

Using mark-up to find COGS from Sales: COGS = Sales ÷ (1 + Mark-up %) — e.g., £125 ÷ 1.25 = £100.

Using margin to find COGS from Sales: COGS = Sales × (1 − Margin %) — e.g., £100 × 0.80 = £80.

Standard procedure:

1. List what you have: opening/closing balances, bank statement, cash records, drawings, capital introduced, inventory count, mark-up/margin %.

2. Identify what's missing: profit, sales, purchases, expenses, COGS, etc.

3. Apply the appropriate technique:

   • Profit → Accounting equation method.
   • Credit sales/purchases → Control accounts.
   • COGS, Sales or GP → Mark-up/margin formulas.
   • Closing inventory → Rearrange COGS formula.

4. Build the Income Statement with the derived figures.

5. Cross-check using a second method where possible.

6. Build the SOFP from the known asset/liability list + closing capital.

Incomplete records aren't just an accounting exercise — they're often used to detect fraud.

Example scenario:

• Sales calculated from SLCA = £85,000.
• Bank deposits + till cash sales = £80,000.
• 'Missing' £5,000 likely indicates unrecorded cash sales or misappropriation by a cashier.

In extended-response questions, A* candidates SPOT the discrepancy and explicitly link it to internal control / fraud detection. This earns AO3 marks.

Common red flags:

• Sales > banked cash + till receipts.
• Inventory shortfall after physical count.
• Drawings 'unaccounted for' that match the missing cash.
• Customer payments received but no record in the ledger.