Introduction to Incomplete Records

Explanation

Incomplete Records refers to a situation where a business does not keep its accounting records using the complete double-entry system. Typically such a business uses a single-entry system, where only part of the transactions are recorded, for example only a cash book, a list of debtors and creditors, or brief notes of sales and purchases. Because there is no complete Ledger and no account for every transaction, the business cannot prepare a Trial Balance, and therefore finds it difficult to prepare complete Financial Statements such as the Income Statement (Penyata Pendapatan) and the Statement of Financial Position (Penyata Kedudukan Kewangan) directly. Incomplete Records are most commonly found in small sole proprietorships such as grocery shops, food stalls and small traders.

There are several reasons why records are not kept completely. First, most small business owners lack basic accounting knowledge and do not know how to make double entries. Second, the cost of hiring a trained accountant or accounts clerk is high and not worthwhile for a small business with few transactions. Third, the small size of the business makes owners feel that full records are unnecessary. Fourth, owners are too busy managing daily operations to have time to record every transaction. Fifth, some source documents such as invoices, receipts and vouchers may be lost, damaged or destroyed by fire, flood or theft, making the records incomplete even though the original entries had once been made.

There are two main methods to determine profit or loss for a business that keeps incomplete records. The first is the Capital Comparison Method (Kaedah Perbandingan Modal), which uses a Statement of Affairs (Penyata Hal Ehwal) to calculate capital at the beginning and end of the period. Net profit is calculated using the formula: Net Profit = Closing Capital - Opening Capital + Drawings - Additional Capital. If the result is negative, it means the business made a Net Loss. The second is the Conversion to Double Entry Method (analysis method), where the partial information available is analysed and converted back into double entries so that a full Income Statement can be prepared. The capital comparison method is quicker and simpler, but it only gives the net profit figure without showing the details of income and expenses.

To use the Capital Comparison Method, the first step is to prepare a Statement of Affairs at the beginning of the period to obtain the Opening Capital, using the formula Capital = Total Assets - Total Liabilities. The same step is repeated at the end of the period to obtain the Closing Capital. The difference between the two capitals, after being adjusted for Drawings (which is added back because it reduces capital for reasons other than losses) and Additional Capital (which is deducted because it increases capital for reasons other than profit), gives the net profit or loss for the period. A Statement of Affairs looks like a Statement of Financial Position, but it is only an estimated list of assets and liabilities because the figures are drawn from incomplete records.

Incomplete records carry several negative implications for accounting information. The information produced is less accurate and cannot be fully relied upon because figures are obtained through estimation. The business cannot prepare a Trial Balance, so errors and fraud are hard to detect. The actual details of income and expenses are unknown, making it difficult for the owner to make good management decisions such as controlling costs or setting prices. In addition, outside parties such as banks find it difficult to assess the true performance of the business, making loan applications harder to approve, and tax computation also becomes complicated because the true profit cannot be determined with certainty.

Worked examples

Practice

Exam tips

Key terms

Incomplete Records (Rekod Tak Lengkap)

An accounting system that does not use complete double entry; only part of the transactions are recorded.

Single-Entry System (Sistem Catatan Tunggal)

A recording method that captures only one aspect of a transaction, without complete debits and credits.

Statement of Affairs (Penyata Hal Ehwal)

An estimated list of a business's assets and liabilities used to compute capital: Capital = Assets - Liabilities.

Capital Comparison Method (Kaedah Perbandingan Modal)

A method to determine profit/loss by comparing opening and closing capital, adjusted for drawings and additional capital.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 5

Other Content Standards in this chapter