Small business accountants that are not well grounded in working with incomplete records or single-entry bookkeeping usually always disappoint their clients.
It is not that individual business owners do not appreciate the importance of accounting, they simply do not have the expertise of finance people and this is causing a lot of nightmare for accountants.
No one would ever blame a skilled professional in their field (say engineering) for not keeping their financial records well – although we do encourage small business owners to make the work of their small business accountant simpler by organizing the components of small business bookkeeping a litter better.
In my role as a business coach, I have seen numerous instances where the relationships between managers or owners and their small business accountant ended up in litigation simply because the accountant is not conversant with the concept of incomplete records method of accounting.
In today’s article on incomplete record or single-entry bookkeeping, we will help small business accountants by providing a stop solution to all the needed skill to handle the chaotic nature of their client’s books.
What is incomplete record beekeeping?
Double entry bookkeeping is in use in large organizations where there is a full-fledged accounting department. It is part of the functions of accounting department to keep proper books of account. This unfortunately is not the case in small businesses where a single individual performs almost all business processes.
Single-entry bookkeeping is a method of bookkeeping that does not comply with dual aspects concept for each business transaction thereby making the accounting records incomplete. Hence, the name incomplete record system of bookkeeping.
Oxford Dictionary of Accounting, incomplete records is defined as ‘accounting records from which some details are missing. For example, some transactions may not have been recorded at all or some may have been partially recorded….’
One of the major consequences of using an incomplete record system of bookkeeping is that a trial balance cannot be produced. The accountant would have to deduce all the figures needed to prepare a final account.
Deducing the figures are best done through the use of ‘statement of affairs. The remainder of this article on incomplete records would be used to explore ways of making sense from the incomplete and irregular financial records that sole proprietors are notoriously fond of keeping.
Note that the phrases ‘incomplete records’ & ‘single bookkeeping’ are used interchangeably in this article. This is deliberate as the difference between the two terms lies on the level of difficulty involved in dealing with one than the other – we are going to give examples of both in this piece.
Types of incomplete record
There are two types of incomplete records. Namely,
- Pure single-entry bookkeeping, and
- Conventional single-entry bookkeeping
Pure single-entry bookkeeping: under this scenario, the sole trader completely ignores double entry system. All that the one-man business owner cares to keep are those record that they feel are important. The records that are mostly kept by the small business owner are receivables and payables record.
No attempt is made to keep track of things like purchases, sales, assets or expenses. The absence of these records makes it extremely difficult for profit and loss account to be prepared in the normal way.
This is the beginning of the tasks that accountants who service the small business space starts to earn their fee. The best way and practical way to determine the profit is to ascertain the business’s capital at the start and at the end of the period.
Then compare the two figures so ascertained – the difference is the profit. Let’s have a look at a baby example to illustrate this concept.
Example of pure single-entry incomplete records
Accountant Next Door started a small business for its hybrid accountant outlet (we have all the resources to deploy full weight of small business accounting functions but we just want to test them, lol) on 01/01/2021 with a total capital of $7,980.00, at the end of the year, 31/12/2021 the following items were ascertained from the few records kept by this unit:
- Receivables (Debtors) $1,500.00
- Payables (Creditors) $2,000.00
- Inventory $3,500.00 – (is it a symptom of overtrading?)
- Prepayment $1,000.00
- Cash at hand $1,005.00
- Bank Balance $1,400.00
Required: Determine the profit or loss for the unit.
Solution:
Ascertainment of capital at year end:
Assets:
Inventory $3,500.00
Receivables $1,500.00
Prepayment $1,000.00
Cash at hand $1,005.00
Bank balance $1,400.00
Subtotal of assets $8,405.00
Less Liabilities:
Payables $2,000.00
Assets Minus Liabilities $6,405.00
Less Capital at start $7,982.00
Loss for the period $1,575.00
Note that we cleverly (or not that clever) used a variant of accounting equation (Assets – Liabilities) to ascertain the capital.
There are instances where the small business in question would have many transactions that we need to rumble through in the bid to ascertain the closing capitals. The best practice under this condition is to make use of a statement of affairs.
What is a statement of affairs?
A statement of affairs is simply a document showing assets and liabilities of a person or an entity who is bankrupt or in liquidation.
Example of pure single-entry incomplete records that involve the use of statement of affairs
You & Me Bakery only manages to keep single-entry records and has presented Disruptive Accountants with the following records of their business transactions:
01/01/2021 31/12/2021
$ $
Furnitures & Fittings 1,500.00 1,500.00
Investments (made on 31/12/2021) – 520.00
Micro Finance Bank Loan – 1,000.00
Inventory 1,800.00 2,400.00
Receivables (Debtors) 1,750.00 2,150.00
Payables (Creditors) 2,000.00 4,000.00
Cash and Bank 600.00 800.00
Other information:
- A bad debt provision of 4% was needed considering the level of default in the industry.
- Depreciation is on straight line basis over 5 years with a scrap value of $620.00
- Me & You took some money out for personal expenses $755.00
Required:
Prepare the appropriate statements needed to determine the profit and loss of the business. Hint: Start with statement of affairs preparation.
Solution to example 2
Me & You Bakery
Statement of affairs at 01/01/2021
| $ | $ | ||
| Liabilities: | Assets: | ||
| Capital | 3,650 | Furnitures & Fittings | 1,500 |
| Payables | 2,000 | Inventories | 1,800 |
| Receivables | 1,750 | ||
| Cash and Bank | 600 | ||
| Total | 5,650 | 5,650 |
Note: Capital is a derived figure (Total asset of $5,650 minus Total Liabilities of $2,000)
Statement of Affairs at 31/12/2021
| $ | $ | ||
| Liabilities: | Assets: | ||
| Capital | 2,370 | Furnitures & Fittings | 1,500 |
| Payables | 4,000 | Inventories | 2,400 |
| Loan | 1,000 | Receivables | 2,150 |
| Investments | 520 | ||
| Cash and Bank | 800 | ||
| Total | 7,370 | 7,370 |
Statement of Profit and Loss
| $ | $ | ||
| Opening Capital | 3,650 | Drawings | 755 |
| Depreciation Provision | 176 | Capital at year end | 2,370 |
| Bad Debt Provision | 86 | ||
| Net Loss | (787) | ||
| Total | 3,912 | 3,912 |
You can use the vertical method to present the statement of profit and loss as shown below if you are not a fan of ‘T’
Vertical presentation of statement of profit and loss under the pure single-entry incomplete records
| | $ | $ | |
| Capital year end | 2,370 | ||
| Add Drawings | 755 | ||
| Capital before Drawings | 3,125 | ||
| Less: | |||
| Capital at Start | 3,650 | ||
| Depreciation Provision | 176 | ||
| Bad Debt Provision | 86 | 3,912 | |
| Net Profit / (Loss) | (737) |
Conventional single-entry bookkeeping:
This happens when the sole trader (mostly people with some accounting knowledge) combines both the pure single-entry bookkeeping and the normal double entry bookkeeping.
This is very common in practice where the completeness assertion cannot be guaranteed thereby leaving the accountant to build and reconstruct the full picture from the little available information provided by the owner of the business.
The first step here is to convert the quasi double entry bookkeeping into normal double entry. And that is what we are going to do next.
Steps involved in converting conventional single-entry bookkeeping into a double entry bookkeeping
Step 1 is to extract all the accounts involved in the quasi single-entry bookkeeping into their various headings so that it will be easy to determine the totals
Step 2 is to utilize knowledge of double entry (refer to our earlier discussion on this with the title: what is double entry accounting?) to open up relevant ledgers.
Step 3 is to draw up a trial balance
Step 4 is to prepare the financial statements after making all the relevant accounting adjustments.
How to ascertain sales and cost of goods sold.
There are occasions when we need to ascertain sales figure and the cost of sales needed to successfully work with incomplete records. We can either use margin or markup to ascertain the sales and the cost of sales.
Margin & markup ratios calculation and uses is the topic of another article. Follow the hyperlinked text to access the full article.
Conclusion I hope you found what you are looking for in this article on incomplete records style of bookkeeping? If you are an accounting student or a small business owner who need further help with this, please do contact me through accountant@accountantnextdoor.com with any of your query or better still leave your questions or comment in the comment section below.
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