The accounting records of many smaller nonprofit organizations, such as clubs, cultural societies, and small businesses, are often kept using a single-entry bookkeeping system. However, the details of the financial activities of such organizations and companies are available in different documents such as bank statements, invoices, accounts, wage sheets and minute books.
There are two main disadvantages to such incomplete accounting records (no double-entry basis): (1) a great deal of useful information can be lost. It is possible to prepare financial accounting statements from available information, but this may be more difficult than when complete records are available. Certain transactions may not be accounted for and there is also no continuity in the recording of financial and other useful information. (2) The benefits of the controls inherent in a double-entry bookkeeping system are lost.
A discussion of dealing with incomplete records is useful for several reasons. First of all, it emphasizes the advantage of a complete double accounting system. Also, it is practical because accountants often have to prepare financial statements from such incomplete records, primarily for income tax purposes. In practice, therefore, converting from single-entry to double-entry accounting information is an analytical exercise. It may also happen that a company’s double-entry accounting records are lost (eg, as a result of fire damage) and need to be reconstructed by the accountant from incomplete records. Consequently, attention is paid to certain practical issues and procedures that arise as a result of incomplete accounting records.
Suppose a trader has been in business for some time and wants to determine his interest in the engagement on a specific date. For this he must determine the total interest in the business and against this, take into account any external interest. This can be done by building a statement of wealth. (Basically, it contains the same information as the balance sheet, but it is not prepared from the account balances in a double-entry accounting system.)
The statement of assets should be prepared by reference to any available applicable information. Bearing in mind that, companies that do not have formal accounting systems will find it necessary to keep records of certain basic information to carry out their business. For example, records of cash received and paid and amounts owed, both to and by the business, are essential. Cash in hand can be determined from a cash count, cash in the bank from the bank statement, and amounts owed to the business from invoices. Stocks can be physically counted and valued. The cost of purchased fixed assets can be determined from supporting documentation. The owner’s equity will be the difference between the values assigned to assets and liabilities.
The most practical method of determining net profit or loss from incomplete accounting records is to look at the change in owner’s equity during a specified period. Obviously, the owner’s equity increases if profits are made and when the owner makes additional investments in the business. Rather, the owner’s equity decreases as a result of losses and withdrawals by the owner.