How to prepare accounts from incomplete records

Step by step

1. Find opening capital. Use assets − liabilities at the start of the year to calculate opening capital. This is a statement of affairs.
2. Reconstruct missing figures. Use control-account logic to find missing sales, purchases or expenses from the information given.
3. Use cash and bank summaries. Work through receipts and payments to find figures such as drawings or cash sales.
4. Prepare the income statement. Build the income statement from the reconstructed figures.
5. Prepare the statement of financial position. Use closing assets and liabilities to complete the picture and check capital.

Worked example

Closing net assets are RM48,000, opening capital is RM40,000 and drawings are RM5,000. Profit = 48,000 − 40,000 + 5,000 = RM13,000.

Understanding the method

Many small traders keep only receipts, a bank statement and a note of what they owe. You then rebuild the accounts from these. This works because the accounting equation and double entry are still true, even if nobody wrote them down.

If you know enough of the connected figures, you can work out the missing one.

The first tool is the statement of affairs. It is a list of assets and liabilities at one date, and assets minus liabilities gives capital. Draw one for the start of the year and one for the end.

The increase in capital equals profit, plus any capital the owner introduced, less drawings. Rearranged, this gives profit even when no income statement exists.

The second tool is a total account for a missing figure. Suppose you do not know credit sales. You know opening trade receivables, closing trade receivables and cash received from customers.

A total trade receivables account must balance, so credit sales is the figure that makes it balance. The same method finds credit purchases from a total trade payables account.

You are not inventing numbers. You are finding the only figure that fits the others.

If cash takings are missing, build a cash account with the opening balance, receipts and payments, and let the takings be the balancing figure. Decide what is unknown first, then choose the relationship that contains it.

Here is an example. Net assets are RM30,000 at the start of the year and RM44,000 at the end.

The owner introduced RM5,000 of extra capital and took drawings of RM12,000. The increase in capital is 44,000 − 30,000 = RM14,000.

Capital introduced is not profit, so take it off. Drawings were paid out of profit, so add them back. Profit = 14,000 − 5,000 + 12,000 = RM21,000.

To check, closing capital must equal opening capital + profit + capital introduced − drawings: 30,000 + 21,000 + 5,000 − 12,000 = RM44,000. If you found credit sales from a total account, re-run the account to confirm it reaches the known closing balance.

Common mistakes include reversing the treatment of drawings and capital introduced, which makes profit wrong by twice the amount. Another is leaving an accrual or prepayment out of a statement of affairs. Another is treating cash received from customers as sales. The two differ by the change in trade receivables.

Cash paid to suppliers is likewise not purchases. A balancing figure in a rebuilt cash account may be the very takings or missing cash the question asks for.

If incomplete records questions feel like puzzles with no starting point, we can help. One of our teachers can show you which account to open first, then practise with you on past papers. Book a trial class

Related skills

• How to prepare a statement of financial position
• How to prepare a sales ledger control account

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.