Statement of affairs

Incomplete records
This chapter prepares you to answer incomplete records questions that often appear daunting, as it can be difficult to assess what information is of use to you and where it should be placed. In the first topic we will start by looking at why incomplete records occur, and how a statement of affairs can be produced to help calculate profit or loss without the need to complete a profit and loss account. Incomplete records mainly occur with sole traders but could also be a problem for partnerships and limited companies. The second topic brings together previous techniques you have completed at AS level. It is possible to produce a set of final accounts without a complete trial balance and you will learn how to do this by the end of the chapter.

Statement of affairs
In order to calculate the capital at the beginning of the financial year, we use the accounting equation: assets liabilities = capital

In this topic you will learn:

how to prepare a statement

Table 1 An example of a statement of affairs for J. Wimpenny as at 1 January 2008 Assets Machinery Stock Debtors Bank Liabilities Creditors Accruals Capital 3, 500 500 4, 000 14, 500 10, 000 2, 000 1, 000 5, 500 18, 500

of affairs and calculate profit or loss from changes in capital over time
the reasons for and

drawbacks of maintaining limited accounting records.

Calculating profits and losses from changes

in capital

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Link
See AQA Accounting AS, Chapter 1, to remind you of why accounting records are kept.

Background knowledge

When a business is started the owner or owners are often motivated by profit but dont have the experience of how it is calculated. The actual product or service of the business is usually what inspires and takes up the owners time rather than the keeping of accounting records. There are also circumstances where accounts are lost, stolen or damaged. Some businesses will prefer to simply store all financial information and keep very basic records and then rely on their accountant to prepare the final accounts at the end of the year. This is why we need to be able to take a detective-style approach to this area, looking at the information we do have and deciding what this can tell us and how it can then be used.

T F A

Total assets total liabilities = capital 18,500 4,000 = 14,500

So, we can calculate that at 1 January 2008, J. Wimpenny had 14,500 invested in his business.

A statement of affairs is useful to complete if we do not have a balance sheet for the previous year.

The reasons for incomplete records

Incomplete records range from partially completed accounts to a list of assets and a pile of bank statements. A sole trader or partnership often has neither the time nor expertise to keep a double entry book keeping system. Preparing accounting statements is essential for tax purposes and for numerous management decisions. With the cost of computers and software packages specifically for accounts becoming more cost effective it is increasingly easier for a non-accountant to keep basic records. This will then keep accountancy fees lower when the end of year accounts need to be prepared. Limited companies would usually employ a bookkeeper and larger companies have whole departments with a range of accounting staff. Many accounting software packages are generic, so unless the business pays for a tailor made package the system may only complete some of the required record keeping. Some sole traders might use a single entry system. This involves recording all payments, receipts and other transactions in one cash book. This is helpful but we still need to draw out items such as drawings and capital expenditure. Capital expenditure, spending or improving on fixed assets means that we need to calculate depreciation. Adjustments for accruals and prepayments will also need to be made.

Case study
Sophie Logan

Sophie Logan saw a gap in the market for a wardrobe tidying service. This involves sorting, colour-coding and boxing up items from wardrobes for people who do not have the time or organisational skills to complete this task themselves. Basing the business in London, it has grown rapidly, mainly through word of mouth. Sophie is great at organising other people, but has no interest in accounts and has little idea of how her business is performing, other than it having a healthy bank account.

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T F A
Key term Activities

Statement of affairs: this is a basic balance sheet which can be used to calculate missing figures such as profit, loss, opening or closing capital

1 Outline the reasons Sophie does not currently maintain full accounting records.  Explain two benefits Sophie could gain from keeping accounting records.

Using a statement of affairs to calculate profit or loss

It is possible to calculate profit without a trading profit and loss account. Unless capital has been introduced the only way capital can increase over the year is by profit being earned. You need to first calculate the opening and closing capital balances using two statements of affairs, for the start and the end of the year and then you are able to compare them to find any increase or decrease in capital which would represent profit or loss made over the period.

Activity
In pairs, discuss which accounting concepts need to be considered when an incomplete set of accounting records have been maintained.

Examiners tip
Extract the figures you definitely know when completing an incomplete records question and then look for the gaps you need to complete.

Chapter  Incomplete records

Illustration
How to calculate profit or loss using opening and closing capital
Table  Assets or liabilities Premises Vehicles Stock Debtors Creditors Long-term loan At 0 March 008 100,000 30,000 2,000 1,800 880 20,000 At 0 March 009 120,000 25,000 2,500 1,950 1,020 18,000

Examination-style questions
1 Sharon Segg started a woodworking business on 1 De cember 2001 with net assets valued at 87,000. She has been so busy she did not keep any financial records during the year. However, Sharon is able to give you the following information as at 30 November 2002.
Premises at valuation Machinery at net book value Van at net book value Money owed by customers Money owed to suppliers Stocks of timber, etc. Bank overdraft 47,000 21,600 12,000 1,090 7,450 5,700 640

Sophie Logan presented the above information. The opening capital as at 30 March 2008 is 112,920. We find this by totalling the assets (100,000 + 30,000 + 2,000 + 1,800) and then subtracting the liabilities (880 + 20,000). If we do the same for 2009 we find the closing capital to be 130,430. Closing capital opening capital = profit or loss 130,430 - 112,920 = 17,510 profit

Activity

Complete Figure 1 using Sophies previous information. She has also introduced 5,000, which was an inheritance, and has drawings of 10,000.

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Closing capital Add drawings Net profit

It is likely that a business will have had drawings of either stock or cash by the owners during the year and possibly have had capital introduced. In this case we need to adjust using a layout such as the following one:

Less opening capital

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(a) (b)

During the year Sharon withdrew 9,450 in cash from the business for her private use. She also used timber valued at 2,100 to make improvements to her home. Required Calculate her net profit for the year ended 30 November 2002. valuate the advantages and disadvantages of the method E that you used to determine net profit. (AQA 2003) Toms opening capital on 1 March 2003 was 32,000. His assets and liabilities at 29 February 2004 were:

Less capital introduced

Fig 1 Adjustment

Assessment of using a statement of affairs to calculate profit or loss

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T F A
46,000 34,000 20,000 380 180 1,870 640

Machinery at valuation Two vehicles at valuation Loan from Eliza, a friend Stock of cleaning materials Amounts outstanding for the purchase of cleaning materials Amounts owed by customers Bank balance

Examiners tip
If you are just told to calculate the profit then this should be possible using the method described in this chapter, rather than preparing a full profit and loss account.

This is a quick method to discover profit or loss without completing a full trading, profit and loss account. It is accurate as long as the figures provided are accurate such as the debtors, creditors and stocks etc.

Drawbacks 1 The method is not detailed enough for management purposes.  It would not be sufficient for tax or VAT purposes.

During the year, Tom: Took 14,184 cash from the business for his private use; took cleaning materials to the value of 96 for use in his home; received a gift of 15,000 from his mother, which he paid into his business bank account.