Page 3 - Chapter-11.pmd

Accounts from Incomplete Records 439

The limitations of incomplete records are as follows :
(a) As double entry system is not followed, a trial balance cannot be prepared
and accuracy of accounts cannot be ensured.
(b) Correct ascertainment and evaluation of financial result of business
operations can not be made.
(c) Analysis of profitability, liquidity and solvency of the business cannot
be done. This may cause a problem in raising funds from outsiders and
planning future business activities.
(d) The owners face great difficulty in filing an insurance claim with an
insurance company in case of loss of inventory by fire or theft.
(e) It becomes difficult to convince the income tax authorities about the
reliability of the computed income.

11.3 Ascertainment of Profit or Loss
Every business firm wishes to ascertain the results of its operations to assess its
efficiency and success and failures. This gives rise to the need for preparing the
financial statements to disclose:
(a) the profit made or loss sustained by the firm during a given period; and
(b) the amount of assets and liabilities as at the closing date of the accounting
period.
Therefore, the problem faced in this situation is how to use the available
information in the incomplete records to ascertain the profit or loss for the
particular accounting year and to determine the financial position of a entity
as at the end of the year. This can be done in two ways :
1. Preparing the Statement of Affairs as at the beginning and as at the end
of the accounting period, called statement of affairs or net worth method.
2. Preparing Trading and Profit and Loss Account and the Balance Sheet
by putting the accounting records in proper order, called conversion
method.

11.3.1 Preparing Statement of Affairs
Under this method, statements of assets and liabilities as at the beginning and
at the end of the relevant accounting period are prepared to ascertain the amount
of change in the capital during the period. Such a statement is known as
statement of affairs, shows assets on one side and the liabilities on the other just
as in case of a balance sheet. The difference between the totals of the two sides
(balancing figure) is the capital (refer figure 11.1). Though statement of affairs
resembles balance sheet, it is not called a balance sheet because the data is not
wholly based on ledger balances. The amount of items like fixed assets,
outstanding expenses, bank balances, etc. are ascertained from the relevant
documents and physical count.

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