Not every business keeps a full set of books. A small trader may keep only invoices, receipts and a bank statement. A fire or flood may destroy the records. A dishonest employee may take cash or inventory and leave gaps. In each case the accountant must still produce a profit figure, and a statement of financial position, from whatever evidence exists. That is the work of Incomplete records.
This topic covers the simplest method, which needs no sales or purchases figures at all. It uses the accounting equation: if you know what the business owned and owed at the start and at the end of the year, and what the owner took out and put in, the profit is the difference.
The next topic covers the other methods, which rebuild sales, purchases and missing items from memorandum accounts and gross profit margins. The topic builds on the sole trader statements, because the result must agree with the statement of financial position.
In 30 seconds
Assets = liabilities + equity. Capital is net assets, which is assets less liabilities. Increase in net assets = profit + capital introduced − drawings, so Profit = closing net assets − opening net assets + drawings − capital introduced. To find opening capital where there are no books, list the assets at carrying amount and the liabilities at the start of the year in a Statement of affairs.
A missing balance, such as stolen cash, is found by working out what closing net assets should be (opening capital + profit − drawings) and comparing it with what is actually there.
What incomplete records are
Incomplete records are accounting records where information is missing. The owner may not have kept up-to-date accounts or may have no double-entry system, holding only invoices, receipts, copies of sales invoices and bank records. The accountant uses these, and information from the owner, to prepare the statements, in particular the statement of profit or loss, which gives the basis for the owner’s taxable income.
Other causes are the loss of records in a disaster such as a fire, and a dishonest employee stealing cash or inventory. This also explains the exam definition: records where information is missing because there is no double-entry system (November Diet 2023, Section A, Question 13).
The task is to piece together the missing figures. The approaches are:
- find the value of assets and liabilities to calculate capital, especially opening capital;
- use memorandum control accounts for receivables and payables to find sales and purchases;
- use a memorandum account for cash and bank to find a missing receipt or payment, such as drawings; and
- use cost structures (gross profit margin or mark-up) to find cost of sales or a missing figure such as inventory lost in a fire.
This topic covers the first approach. The next covers the other three.
The accounting equation and profit
The accounting equation is assets = liabilities + equity, so equity (capital) equals net assets. A change on one side is matched by a change on the other. The capital changes for only three reasons: profit increases it, capital introduced by the owner increases it, and drawings reduce it.
| Step | Working |
|---|---|
| Closing net assets | Closing assets − closing liabilities |
| Opening net assets | Opening assets − opening liabilities |
| Increase (or decrease) in net assets | Closing − opening |
| Add drawings | Cash and goods taken by the owner |
| Deduct capital introduced | New cash or assets put in by the owner |
| Profit or loss | The balancing figure |
Example (Tom). At 1 January 2019 the business had assets of ₦214,000 and liabilities of ₦132,000. At 31 December 2019 it had assets of ₦281,000 and liabilities of ₦166,000. Tom took ₦25,000 in cash and ₦3,000 in goods.
- Closing net assets are 281,000 − 166,000 = 115,000.
- Opening net assets are 214,000 − 132,000 = 82,000.
- The increase is 33,000.
- Adding drawings of 28,000 gives profit of ₦61,000.
The same equation answers a typical Section A item: opening capital ₦225,000, closing capital ₦260,000 and drawings ₦10,000 give profit = 260,000 − 225,000 + 10,000 = ₦45,000, which appears in several past diets (for example May Diet 2024, Section A, Question 2). The equation form is also tested directly (May Diet 2019, Section A, Question 19): profit = closing net assets + drawings − capital introduced − opening net assets.
Practice question. Net assets at 31 December Year 4 are 376,000 − 108,000 = 268,000 and at Year 3 are 314,000 − 87,000 = 227,000. The increase is 41,000. Drawings were ₦55,000 and ₦25,000 of capital was introduced, so profit = 41,000 + 55,000 − 25,000 = ₦71,000.
Opening capital: the statement of affairs
When no books exist, the opening capital is found by listing what the business owned and owed at the start of the year. Non-current assets are taken at carrying amount. The list is called a statement of affairs, a statement of assets and liabilities. It is a statement of financial position drawn up from evidence rather than from the ledger.
That is why the exam item asking how the equity at the start is found, where there are no proper books, is answered by a statement of financial position or statement of affairs (November Diet 2015, Section A, Question 15, and November Diet 2020, Section A, Question 10).
Example. At the start of the year a trader had a motor van at carrying amount ₦1,600, inventory ₦410, receivables ₦850 and cash ₦50, a total of ₦2,910. Liabilities were a bank overdraft of ₦560, trade payables ₦370 and other payables ₦90, a total of ₦1,020. Opening capital = 2,910 − 1,020 = ₦1,890.
Finding a missing balance
The same equation finds a missing closing balance. First work out what closing net assets should be, then compare. Example. Opening capital was ₦350,000, profit ₦200,000 and drawings ₦120,000, with no new capital. The closing net assets should be 350,000 + 200,000 − 120,000 = 430,000. The assets actually found are property, plant and equipment 95,000, inventory 85,000 and receivables 65,000, less liabilities 55,000, which is 190,000. The difference of ₦240,000 is the cash the cashier took.
Example (Odeku Enterprise). Assets at the end of 2024 were property 2,000,000, equipment 900,000, receivables 800,000 and cash 150,000, a total of 3,850,000, and liabilities were an overdraft of 900,000 and payables of 300,000, a total of 1,200,000, so closing capital is 2,650,000. At the end of 2023 the total assets were 3,100,000 and liabilities 1,100,000, so opening capital was 2,000,000. The increase is 650,000. Drawings were 450,000 and additional capital 500,000, so profit = 650,000 + 450,000 − 500,000 = ₦600,000.
The ideas in more depth
Drawings of goods. Cash and goods taken by the owner both count as drawings. A sole trader who uses the end-period inventory system and takes goods for personal use records Dr Drawings, Cr Purchases (November Diet 2018, Section A, Question 15). The single-entry system has no double entry, so the accountant must rebuild the accounts from the evidence (November Diet 2021, Section A, Question 16).
Background. This method gives only the total profit. It cannot show the sales, cost of sales or expenses that make it up. To prepare a statement of profit or loss with those lines, the accountant needs memorandum accounts and margins, which the next topic covers. The two methods cross-check each other: the profit from the statement of profit or loss should equal the profit from the net assets walk.
A difference points to an error or an unrecorded item such as theft.
Worked example: Awka Provisions
Scenario. Awka Provisions keeps no books. At the start of the year the owner had property, plant and equipment of ₦600,000, inventory ₦150,000, receivables ₦90,000 and cash ₦30,000. He owed payables of ₦120,000 and a loan of ₦100,000. At the end of the year he had property, plant and equipment of ₦560,000, inventory ₦180,000, receivables ₦110,000 and cash ₦60,000, with payables of ₦140,000 and a loan of ₦80,000. He took drawings of ₦150,000 and introduced ₦50,000 of new capital.
Required: opening capital, profit for the year, and the unexplained loss if the owner says profit was ₦200,000.
- Opening capital.
Assets 600,000 + 150,000 + 90,000 + 30,000 = 870,000.
Liabilities 120,000 + 100,000 = 220,000.
Capital = ₦650,000. - Closing net assets.
Assets 560,000 + 180,000 + 110,000 + 60,000 = 910,000.
Liabilities 140,000 + 80,000 = 220,000.
Net assets = ₦690,000. - Profit.
Increase 690,000 − 650,000 = 40,000, plus drawings 150,000, less capital introduced 50,000 = ₦140,000. - If the owner says profit was ₦200,000.
Closing net assets should be 650,000 + 200,000 + 50,000 − 150,000 = 750,000.
The assets actually found give 690,000.
₦60,000 is unexplained: perhaps theft, an unrecorded drawing or an unrecorded expense.
Common mistakes in the exam
- Forgetting to add drawings back, or adding capital introduced instead of deducting it.
- Using total assets instead of net assets (assets less liabilities).
- Using the original cost of non-current assets instead of the carrying amount in the opening statement.
- Leaving out a bank overdraft or accruals from the liabilities.
- Ignoring drawings of goods when the owner took inventory for personal use.
- Treating a loan from the owner as capital introduced, rather than a liability.
- Confusing the net assets walk (total profit only) with a statement of profit or loss.
- Not checking that the closing net assets equal closing capital in the statement of financial position.
Quick revision
- Capital = assets − liabilities. Opening capital comes from a statement of affairs.
- Profit = closing net assets − opening net assets + drawings − capital introduced.
- Missing balance = expected closing net assets − actual closing net assets.
- This method gives total profit only.
Practice questions
These are original questions in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one first.
Section A style: multiple choice
Question 1. Incomplete records are:
- Records that contain arithmetical errors
- Records where information is missing, usually because there is no double-entry system
- Records that have all been lost
- Records that are audited
Show the answer
B. The information is missing, not necessarily wrong.
Question 2. Where there are no proper books, the opening capital is found by preparing:
- A statement of profit or loss
- A cash book
- A trial balance
- A statement of affairs listing assets and liabilities
Show the answer
D. Capital is assets less liabilities at the start of the year.
Question 3. Opening capital was ₦225,000, closing capital ₦260,000 and drawings ₦10,000. No capital was introduced. Profit is:
- ₦35,000
- ₦25,000
- ₦45,000
- ₦55,000
Show the answer
C. 260,000 − 225,000 + 10,000 = 45,000.
Question 4. Profit of a sole trader equals:
- Closing net assets + drawings − capital introduced − opening net assets
- Closing net assets − drawings + capital introduced − opening net assets
- Closing net assets + drawings + capital introduced − opening net assets
- Closing net assets − drawings − capital introduced − opening net assets
Show the answer
A. Drawings are added back and capital introduced is deducted.
Question 5. Closing assets are ₦376,000 and liabilities ₦108,000. Opening assets were ₦314,000 and liabilities ₦87,000. Drawings were ₦55,000 and ₦25,000 of capital was introduced. Profit is:
- ₦41,000
- ₦96,000
- ₦16,000
- ₦71,000
Show the answer
D. Increase 41,000 + 55,000 − 25,000 = 71,000.
Question 6. At the start of the year assets were ₦2,910 and liabilities ₦1,020. Opening capital is:
- ₦3,930
- ₦1,890
- ₦2,910
- ₦1,020
Show the answer
B. 2,910 − 1,020 = 1,890.
Question 7. Net assets rose by ₦33,000, and the owner took ₦28,000 drawings and introduced no capital. Profit is:
- ₦61,000
- ₦5,000
- ₦33,000
- ₦28,000
Show the answer
A. 33,000 + 28,000 = 61,000.
Question 8. Opening capital ₦350,000, profit ₦200,000 and drawings ₦120,000. The net assets found are ₦190,000. The missing amount is:
- ₦120,000
- ₦200,000
- ₦240,000
- ₦430,000
Show the answer
C. Expected net assets are 430,000. 430,000 − 190,000 = 240,000.
Question 9. Which of these may cause incomplete records?
- Use of double entry
- A fire that destroys the records
- A trial balance that agrees
- Accruals
Show the answer
B. Disasters, theft and failure to keep records cause gaps.
Question 10. A sole trader using the periodic system takes goods for personal use. The entry is:
- Dr Purchases, Cr Drawings
- Dr Drawings, Cr Cash
- Dr Sales, Cr Drawings
- Dr Drawings, Cr Purchases
Show the answer
D. Goods taken are drawings, and purchases are reduced.
Section B style: written questions
Question 11 (10 marks). (a) Explain what is meant by incomplete records and give three circumstances in which they occur. (4 marks) (b) Describe four approaches to establishing missing figures. (6 marks)
Question 12 (20 marks). Kwara Hardware keeps no books. At the start of the year the owner had premises ₦800,000, fittings ₦150,000, inventory ₦120,000, receivables ₦80,000 and cash ₦40,000, and owed payables of ₦90,000. During the year he introduced ₦100,000 and took drawings of ₦220,000. At the end of the year he had premises ₦800,000, fittings ₦135,000, inventory ₦150,000, receivables ₦95,000 and bank ₦60,000, and owed payables ₦110,000 and accrued expenses ₦15,000.
(a) Calculate the opening capital. (4 marks) (b) Calculate the profit for the year. (6 marks) (c) Prepare the closing statement of financial position. (10 marks)
A further written question
Question 13 (10 marks). At the start of the year a trader’s capital was ₦500,000. Profit for the year was ₦300,000 and drawings ₦180,000, with no capital introduced. A count shows net assets of ₦560,000. (a) Calculate what closing net assets should be. (4 marks) (b) Calculate the amount unaccounted for. (3 marks) (c) State two possible explanations. (3 marks)
Model answers
Show the model answer to Question 11
(a) Incomplete records are accounting records where information is missing because a double-entry system has not been kept. They occur when the owner has kept only invoices and bank records, when records are destroyed by fire or flood, and when a dishonest employee steals cash or inventory. (b) Calculating capital from the value of assets and liabilities. Using memorandum control accounts for receivables and payables to find sales and purchases.
Using a memorandum cash and bank account to find a missing receipt or payment such as drawings. Using gross profit margin or mark-up to find cost of sales or missing inventory.
Show the model answer to Question 12
(a)
- Assets 800,000 + 150,000 + 120,000 + 80,000 + 40,000 = 1,190,000.
- Liabilities 90,000.
- Opening capital = ₦1,100,000.
(b)
- Closing assets 800,000 + 135,000 + 150,000 + 95,000 + 60,000 = 1,240,000.
- Liabilities 110,000 + 15,000 = 125,000.
- Closing net assets 1,115,000.
- Increase 15,000, plus drawings 220,000, less capital introduced 100,000: profit = ₦135,000.
(c) Non-current assets: premises 800,000 and fittings 135,000, total 935,000. Current assets: inventory 150,000, receivables 95,000, bank 60,000, total 305,000. Total assets 1,240,000. Capital: 1,100,000 + 100,000 + 135,000 − 220,000 = 1,115,000. Current liabilities: payables 110,000 and accruals 15,000, total 125,000. Total equity and liabilities 1,240,000.
Show the model answer to Question 13
(a) 500,000 + 300,000 − 180,000 = ₦620,000. (b) 620,000 − 560,000 = ₦60,000 unaccounted for. (c) Two of: cash or inventory stolen, drawings not recorded, expenses not recorded, or profit overstated.
Pathfinder on Incomplete records: statement of affairs and the capital method
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
From the previous syllabus. A trader’s records are destroyed by a flood. From the balances recovered, asks you to calculate the capital at the start of the year (6 marks), prepare the statement of profit or loss (8 marks) and the statement of financial position (6 marks).
Revise first: Opening capital: the statement of affairs
From the previous syllabus. A bookshop owner kept incomplete records. From his passbook, notebook, bank statements and oral information, asks you to find the profit or loss for the year (8 marks) and prepare the statement of financial position (12 marks), showing workings.
Revise first: The accounting equation and profit
From the previous syllabus. Part (a) (6 marks) gives a net worth at the start and end of a year, shares sold and a bank loan put into the business, and private drawings, and asks for the profit. Part (b) (14 marks) gives the balances of a distribution company at two dates, with drawings, extra capital from a private dividend and write-downs of furniture and the motor van, and asks for a statement showing the profit or loss.
Revise first: The accounting equation and profit
From the previous syllabus. Asks what is prepared to find the equity at the start of a period where there are no proper books of account.
Revise first: Opening capital: the statement of affairs
From the previous syllabus. Asks for the equation that calculates a sole trader’s profit, and, in the repeated item, the profit when opening capital is ₦225,000, closing capital ₦260,000 and drawings ₦10,000.
Revise first: The accounting equation and profit
From the previous syllabus. Asks the entry when a sole trader takes goods for personal use, the basic features of the single-entry system, and the best description of incomplete records.
Revise first: The ideas in more depth
Source: ICAN Pathfinder, Financial Accounting. Diets covered: May Diet, 2016, May Diet, 2018, November Diet, 2015, November Diet, 2018, May Diet, 2019, November Diet, 2020, May Diet, 2021, November Diet, 2021, November Diet, 2022, May Diet, 2023, November Diet, 2023 and May Diet, 2024 (the later ones are not all on the previous syllabus). Diets before November 2014, and November Diet, 2024 onwards, are not covered here.
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