incomplete records

Incomplete RecordsIncomplete Records

© Hodder Education 2008

Accounting ratiosIt is sometimes possible to use accounting ratios to calculate missing figures. Three common ratios are:MarginMark-upStockturn


Calculation of margin

Profit margin: This can be expressed as the ratio of gross profit to selling price. It is expressed in percentage terms.

Margin = Gross profit x 100 Sales


Calculation of mark-upMark–up: This is the amount by which the cost of a good has been increased to arrive at the selling price.

Mark-up = Gross profit x 100 Cost of goods sold


Calculation of stockturnStockturn: This is the number of times on average the stock changes throughout the year.

Stockturn = Cost of goods sold Average stock Average stock = Opening stock + Closing stock

2


The following information is available for Diane Davis:

Opening stock = £5,200Gross margin = 30%Closing stock = £5,600Sales = £160,000

Example: calculating purchases using ratios


We can now calculate the gross profit using the formula:

Gross profit = sales × 30%

Gross profit = 160,000 × 30%

Gross profit = £48,000

We can draw up a trading account.


Diane Davis trading account

We can now calculate the cost of sales and the purchases.

£ £Sales 160,000Opening stock 5,200Purchases

Closing stock 5,600Cost of salesGross profit 48,000


Diane Davis trading account

£ £Sales 160,000Opening stock 5,200Purchases 112,400

117600Closing stock 5,600Cost of sales 112,00Gross profit 48,000


Vicky Taylor is a retailer who can supply the following information relating to the past trading year:Mark-up = 25%Purchases = £27,000Opening stock = £2,450Closing stock = £2,650Calculate the sales.

Example: calculating sales using ratios


We can draw up a trading account.Vicky Taylor trading account

£ £SalesOpening stock 2,450

Purchases 27,00029,450

Closing stock 2,650

Cost of sales 26,800

Gross profit


We can now calculate the gross profit using the formula:

Gross profit = cost of sales × 25%

Gross profit = 26,800 × 25%

Gross profit = £6,700

We can insert the missing figures in the trading account.


Vicky Taylor trading account

£ £Sales 33,500Opening stock 2,450

Purchases 27,00029,450

Closing stock 2,650


Gross profit 6,700


Calculating purchases and sales using ratiosSimon Rock provided the following information regarding his business:

Opening stock £10,000Closing stock £14,000Stockturn 8 timesMark-up 25%

Calculate the purchases and sales.


Calculate the cost of sales using the stockturn ratio:

Stockturn = Cost of salesAverage stock

orStockturn × Average stock = Cost of sales8 × (10,000+14,000/2) 96,000

Cost of sales = 96,000We can now draw up a trading account.


Simon Rock trading account£ £

SalesOpening stock 10,000

Purchases

Closing stock 14,000


Gross profit


We can now calculate the gross profit using the mark-up formula:

Gross profit = 25% × 96,000= 24,000

We can work out the sales and purchases, when we put this figure in the trading account.


Simon Rock trading account£ £

Sales 120,000Opening stock 10,000

Purchases 110,000120,000

Closing stock 14,000


Gross profit 24,000


Calculation of sales and purchases using control accountsIn order to produce a set of accounts for a business, the total sales and purchases must be known. A business can often provide details of cash sales and purchases. In order to find the total credit sales and credit purchases, control accounts can be used.


Elizabeth Berry provided the following information:At the beginning of the financial year debtors were £5,610.During the year receipts from debtors amounted to £69,630.At the end of the year debtors owed her £7,710. We can find the total credit sales by constructing a control account.


Dr Sales ledger control account Cr

£ £

Balance b/d 5,610 Bank 69,630

Balance c/d 7,710

If we balance the account we can calculate the missing figure for credit sales.


Dr Sales ledger control account Cr

£ £

Balance b/d 5,610 Bank 69,630Credit sales 71,730 Balance c/d 7,710

77,340 77,340


It is also possible to calculate credit sales without constructing a control account.

Credit sales for the year = debtors at the end of year + receipts from debtors – debtors at the beginning of the year


Calculating credit purchasesMaz owed £1,910 to suppliers at the beginning of the year, £2,430 at the end of the year, and during the year he had paid £28,520 to suppliers.

Calculate the credit purchases for the year.


Dr Purchase ledger control accountCr

£ £

Bank 28,520 Balance b/d 1,910Balance c/d 2,430

If we balance the account we can calculate the missing credit purchases figure for the period.


Dr Purchase ledger control accountCr

£ £

Bank 28,520 Balance b/d 1,910Balance c/d 2,430 Credit

purchases 29,040

30,950 30,950


It is possible to calculate without drawing up a control account.

Credit purchases for the year = creditors at the end of year + total paid to creditors – creditors at the beginning of the year


Statement of affairsA statement of affairs is used to determine a business’s capital if the total of assets and liabilities is known. It lists assets and liabilities in a format similar to a balance sheet.


01/01/06 01/01/07

£ £Motor vehicle 30,000 25,000

Stock 18,000 16,000

Debtors 6,000 8,000

Bank 2,500 4,300

Creditors 5,000 6,200

Mark Hardy, a sole trader has provided the following information for his business.

During the year Mark withdrew £12,000 for personal use.No new capital was introduced.

Prepare a statement of affairs as at 1 January 2006 to calculate the opening capital.

Prepare a statement of affairs as at 1 January 2007 to calculate the closing capital.

Calculate profit using the formulaProfit = closing capital – opening capital – capital introduced + drawings


Statement of affairs for Mark Hardy as at 1 January 2006

£ £Fixed assets

Motor vehicles 30,000

Current assets

Stock 18,000

Debtors 6,000

Bank 2,500

26,500

Current liabilities

Creditors 5,000

Woking capital 21,500

51,500

Capital 51,500


Statement of affairs for Mark Hardy as at 1 January 2007

£ £Fixed assets

Motor vehicles 25,000

Current assets

Stock 16,000

Debtors 8,000

Bank 4,300

28,300

Current liabilities

Creditors 6,200

Woking capital 22,100

47,100

Capital 47,100

Profit = closing capital – opening capital – capital introduced + drawings

Profit = 47,100 - 51,500 + 12,000 = 7,600


Inadequate record-keepingInadequate record-keeping can cause problems. The business may not be able to access up-to-date information about:

DebtorsCreditorsSalesPurchasesExpensesEtc


The business may run out of stock if no records of stock are held.Debtors may not receive up-to-date statements.Delay in receiving payments may increase bad debts.The business may not pay creditors on time and supplies may be stopped. Banks may be reluctant to provide loans.


TipsIt is important to show calculations, particularly for purchases and sales, as marks are usually awarded for individual values, even though the final total may be incorrect.


TasksComplete task sheet and OCR exam question.

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