good day welcome to another session of fog accountancy tutorials today we are going to look at single entry and incomplete records now before we proceed i want you to subscribe to the channel please subscribe to the channel ring the notification bell so that whenever i upload any new video you'll get the notifications right on your devices it's very very important okay so let us proceed with our topic for the day single entry and incomplete records we know that in financial accounting we are guided by the double entry principle as our golden rule it means that for every transaction there should be a debit and a credit now it also means that the trial balance should be prepared after the double entry now single entry is the opposite of double entry it means that it is a situation where the double entry principle is not applied so instead of debiting for example if you pay cash for rent instead of debiting rent and crediting cash you may just record in your cash book as a rent to show that you have paid rent but the business owner or the accountant will not open the corresponding rent account because they don't see it necessary one of the characteristics of this system single entry system is that they usually keep a cash book and they put in their cash payments and receipts and that is all they don't care about opening the corresponding entries that is where we call it a single entry now incomplete records means that the information that you have prepared or made available for the year is not adequate to prepare final accounts okay it's not adequate to prepare final account in the normal way and so we have to use some means to be able to get your profits for the period now single entry and incomplete record is an interesting topic because it is more technical than we think it is a topic that requires you the accountant to be able to prepare profit statement out of incomplete records in a single entry system now there are so many reasons that may cause a business owner to operate this system the single entry and incomplete record system because most of the time it usually applies to sole traders and one-man businesses those who are not much knowledgeable about accounting they just keep a small notebook they are especially the markets those who sell in our local markets and other places who do not see the need to keep proper books of accounts we accountants we want to be principled and classify every accounts category but they they can just have one book and they write everything so if you come and buy from them they record you are owing them if you come and pay the record in that same book and if they pay their ranks they record in that same book so there's just one notebook where they keep receipts and payment and at the end of the period the interesting thing about this topic is that it requires you the accountant or the accounting student to be able to calculate the profit of such a business that does not keep proper books of account you know and when there are no proper books of account the implication is that you do not have information that is adequate to enable you prepare profit statement and so you have to apply your accounting principles and use a way to get profit out of the little information that you have okay now i'm not going to go too much into the theoretical aspect of the topic i want to focus on the practical aspect when it comes to the theory we can talk about advantages of this system and some disadvantages and then we can also talk about the reasons why people prefer the system one of them i have said it's because they don't see the need to employ a competent accounting staff others also are afraid that the accounting or accountants that you employ to keep proper books for them will steal their money fear of embezzlement there are a whole lot of reasons why people prefer to go by the single entry and incomplete record system they may not understand or they may not know that it is called a single entry system but we know that what they are doing is not the correct way that is why we call it a single entry and so i'm going to teach you how to determine profits using the single entry system now what i want you to understand is that there are two methods or approaches to estimating profits with the single entry and incomplete record system but it depends on the kind of information that you have that is what is going to tell you the approach or the method to use now we have the net worth method and then we have the conversion method so we are going to use the net worth method and the conversion method now i am aware that in some books they refer to the network method as single entry and then they refer to the conversion method as incomplete records so when i start solving you may see that but that is not my focus what i understand is that single entry and inco the conversion method it's also a single entry system most of the time that brings about that and so whether you call this single entry or incomplete record i call it the net worth method and then the second one i call it the conversion method and so what i'm going to do is that i'm going to start with the net worth method and then after that i'll look at the conversion method of estimating profits using the single and training complete records we are looking at the net worth method now the network method of calculating profit in a single entry and incomplete record session is used when the information that is given is not adequate to prepare final accounts take note we know that for a normal trading business to get a profits you need to prepare an income statement and a statement of financial position when the information that is giving you is adequate to prepare the income statement and then the statement of financial position then you use the conversion method but when the statement or the the information giving you is not enough you cannot get any sales you can not get purchases from the information you can't get almost anything it's just a very scanty state air sorry it's just a very scanty information that you have then the network method will do for you and so let us look at the networth method afterwards you look at the conversion method in an exam you may meet any of them so let us try and understand both of them now the net worth method look at the name net worth we only ascertain profit by comparing the opening capital and the closing capital and so let us assume that i started business with ten thousand dollars i don't keep proper books of accounts i just record in small notebooks whatever it is or i may not even keep any record at all then at the end of the year i realized that my capital is now fifteen thousand dollars so i started the business with ten thousand dollars but at the end of the year that is at the beginning of the year at the end of the accounting yeah i hold in my hand fifteen thousand dollars then what is the profit here how much did i make in addition within the year logically you could see that the capital that i put into the business which is ten thousand dollars has increased by an extra five thousand dollars and that is my profit and so because we don't have any information we calculate profits by comparing the opening capital or the capital has start with a closing capital on the capital clues and then we get a profit and so in this case the opening capital was ten thousand dollars and the cruising capital fifteen thousand dollars so now opening capital is ten thousand dollars and the closing capital in this case is fifteen thousand so looking at these two figures i started the year having an amount of ten thousand i didn't bring in any additional capital i didn't take any money out of the business but at the end of the business i realized that i have fifteen thousand so what is my profit profit in this case will be the difference what the value that i have added within the year that is the profit and so in this case my profits will be five thousand dollars how did i get the five thousand dollars i had it by subtracting the opening capital from the closing capital and so for a situation where you cannot prepare final accounts that is the income statement and the statement of financial position you only calculate profit by comparing the two capitals the opening capital and the closing capital are we okay on that okay so we have established that the closing capital minus the opening capital is perfect now let us twist the scenario a little bit let us assume that i went i came there i'm the accountant the woman for the sake of tax purposes maybe called me to help her calculate the profit the trader the woman is a trader and does not keep proper books of accounts then she told me that she started a business with 10 000 in a year and at the end of the year she holds 15 000. so i tell her madam your capital is 5 000 now let us assume with the same uh information let us assume that i went with a different scenario she told me that okay within the year my son gave me two thousand dollars and i put it into the business we said that she started the business with ten thousand dollars ended the year with fifteen thousand dollars so it means that there was an increase of five thousand dollars and that is the profits so now let us take it like she gave us an additional information that within the year she got two thousand dollars from her son and she added it into the business money so she pushed two thousand dollars as additional capital into the business how much should be her profits for the year should it still be five thousand no it means that the extra five thousand that is added up two thousand dollars is an additional capital that was introduced and so to get this new profit we have to take out or subtract two thousand dollars which is additional capital and when we do that we are going to have a profit of three thousand dollars and so therefore even though i am telling you that you have to compare the opening capital and the closing capital you have to also be sure whether there was no additional capital into this if there was an additional capital introduced you have to also subtract the additional capital from the closing capital so that the difference would be your true profit other than that would have inflated the profit by the 2000 additional capital i hope we are okay on that and then let me look at the finance scenario let us also say that that is not all she told us that within the year she took out one thousand dollars from her business for private use in other words she used it to pay maybe her some school fees that is drawings she has taken business cash for priorities according to the business entity concept and so yes we have established the profit to be three thousand but if she told you that she has already taken out 1 000 then what is her profit or what was her profit for the year it means that if she had not taken out that 1 000 it would have still been in the business and i would have made their profits 4 000 and so it means that any drawings that is made within the year must be added back to arrive at the prophet so we add it back to the closing capital so it means that that drawings of 1000 would have been added to the closing capital it would have been 16 000 instead of the 15 000 but because she took it out the money that was left with their business was 15 000 and that was why we arrived at a profit of 3 000 so it means that any time there is drawings you have to add it back to the closing capital before you take it out of the opening capital or you take out the opening capital so we are going to use this scenario that i have created to draft a format and therefore i'm going to drag for you a profit statement format a format for finding the profit using the net worth method under the single entry and incomplete records and so let's look at the format and so we see statement of prophets for the year ended then we add whatever year it is and we underline now we are going to go by our simple way is the difference between the opening capital and the closing capital but remember that when there is drawings we add it to the closing capital before we take out the opening capital and then we also have to take out acne additional capital introduced and so you bring your currency sign so you start with the occlusion capital so you put your closing capital there and then you add any drawings so you add drawings from what i explained we are the drawings figure and then we can take out both the additional capital and then the initial capital increase and so unless opening capital so you can sum them up and then go and subtract and then the additional capital introduced so when we have these two they are all to be subtracted so it's either you are subtracting them direct or you are summing them up to subtract when you subtract that then you arrive at your net profit or loss it's very very very simple very easy so remember it is your opening capital plus drawings and then you take out additional capital and then the initial capital injuries that will give you the profit for the period because the person didn't keep proper books of accounts we cannot get sales we cannot get figure for purchases we cannot prepare any income statements so this is a simple way that we prepare and that is why we call it the net worth method we just compare the net worth of the person at the end and the net worth of the person at the beginning so when we compare the increase in net worth is what we call the profit and that is why we call it the net worth method we compare the net worth at the beginning the net worth at the end and then the difference is profit this is all about the net worth method as easy as it is all right thank you now take note the only thing that will make this a little more demanding is that most of the questions will not give you the closing capital and the opening capital most of the time the questions will not give you that so you prepare a statement called statement of affairs the reason why you are preparing the statement of affairs is to find your closing capital and the opening capital and so you prepare statement of affairs at the beginning of the year to find the opening capital and the statement of affairs at the end of the year to find the closing capital and when that happens you use them and then put them into this format arrive at your profit and then you are done now take notes that when i talk about statement of affairs it's not any big deal it's just an application of the accounting equation we know that assets minus liabilities equals to profit and so usually what the question will do is that the question will usually give you or you'll be given assets and liability balances at the beginning of the year and then assets and liability balances are the clues of the year your job is to apply the accounting equation in a statement form that is what we call it a statement of a face so you add up all the assets and then you take out all the liabilities that will satisfy the accounting equation that asset minus liabilities will give you the capital and so when you take out your liabilities from the asset at the end is the closing capital that you arrive when you take out your opening liabilities from the opening asset you get the opening capital that is the extra workings that you are going to do for this but apart from that there is no big deal so i'm going to show you how to go by the statement of our face all right okay so let's prepare the statement of our first so this is how it will look like statement of affairs assets okay so it depends on the date so it's like the accounting equation so you just put your currency sign here and then you list your assets so it's just about listing all the assets listing all the liabilities finding the totals of each and taking out the liabilities from the asset and so let us assume that we have motor vehicle as an asset here now what i usually advise that this one there is no need splitting a non-current asset portion from current asset portion you can list all your assets together but what i usually advise is that list the non-current asset first and then follow with their current assets so let us assume we have only motor vehicles and building as a non-current assets here so we bring the figures and then we can bring the inventories of stock if there is any receivables we add that and then if there is any cash we bring so let's assume these are our assets and so we are going to add up the assets and then we can say liabilities so we take out all liabilities so if the person is on any loan it's a liability any trade payables it's a liability so let's assume these are the only liabilities that we're giving so we add them bring the total and then finally subtract and so you see that we are just satisfying the accounting equation that assets should minus liabilities equal to capital so what has happened is that when we take out the liabilities from the assets then we have capital now whether it is the opening capital or the closing capital you are preparing the format is the same the only difference would be the date so if let's say if you are working in 2020 that we are preparing accounts for 2020 it means that if the statement of affairs is as first january 2020 then it means that it was at the opening or beginning of the year so this capital we have gotten at this date will be called the opening capital if it was our 31st december 2020 then it means that these balances were extracted at the end of the year so this capital we have gotten from the accounting equation will be called the closing capital so whether it is opening or closing capital the determinant is the date of the balances but apart from that i'm sure the format is not that difficult now one thing you can also do is that you can prepare them together you can just give the dates for the opening here the date for the closing year and then you prepare that together so that you can get both the opening and closing capital at a goal but that one is your own personal skill of presentation what i want from you now is for you to understand how to prepare the statement of a face and having understood the next thing we are going to do is to take a question and then solve it together so that it will enhance our understanding okay so let us look at this question together one more runs a grocery shop for which proper accounting records are not kept however you've been able to ascertain the following so we have balances at the beginning of the year january 2019 and then we have balances at the end of the year 31st december 2019. so we have payables for each of them 720 and 180 dollars receivables inventories for both the opening and the closing balance then we have bank the opening balance is one thousand five hundred and seventy dollars and then the closing balance is 120 dollars as an overdraft so the closing balance of bank is an overdraft so then we have a closing balance of 120 dollars which is an overdraft all right then we have cash vehicles and fixtures and fittings so these are the opening and closing balances of assets and liabilities for one one then we continue with the other information we are told that one more review 250 dollars in total of cash during the year and then 20 worth of groceries per week full stop you are required to prepare a statement of affairs as at first january 2019 and 31st december 2019 and the b a statement of profits for the year ended 31st december 2019 okay okay so looking at this question we are told to prepare a statement of profit now remember the format that i just gave you that we will need the closing capital and the opening capital before we consider if there were any drawings or any additional capital introduced but in this question we're not giving the capital but we've been given list of balances for opening balances and closing balances for assets and liabilities and like i told you we need to apply the accounting equation to take out our liabilities from the asset to get a capita and we are going to do so by preparing the statement of affairs fortunately we are tooled in the requirement to prepare statements of our face for both the beginning of the year and the end of the year however even if the question has not mentioned it we will still have prepared that as workings because we cannot prepare the statement of profit without knowing the opening capacity and the closing capital and so without wasting my time let us solve the question now we have to prepare statement of our face assats let's do for the beginning of the year first 1st january 2019 so so we put our currency sign here and that would be the dollar now like i told you this is just an accounting equation expressed in a statement form so we begin with our assets now in the question we have two non-current assets so let us write that first the non-current assets were motor vehicles and fixtures and fittings and so let's start with moto vehicles the moto vehicles figure was 7200 remember that this statement of affairs at the beginning of the year first january and so we are going to use the opening balances alone when we finish we prefer another one for the end of the year using the closing balances alone so it was two 7 and then there were fixtures and fittings which is also a non-current asset and the value at the beginning was four thousand dollars and then there were inventories or stock so inventories the value for inventories at the beginning was 840. so we add that as well and then there were receivables which is that is figure that us balance so the receivables figure in the question was 300 dollars and then there was bank the bank balance was a positive balance but in the closing balance the bank will be an overdraft remember that so the bank balance was 1570. and then finally the cash was 230 and so when we add all the assets we are going to have 14 140 and then we will take out our liabilities now in this question the only liability we had was payables from trade creditors okay and that was 720 dollars 720 and so when we take that out we are going to have a capital of thirteen thousand four hundred and twenty so this is going to be our opening capital this is going to be our opening capital for one month and then we look at statement of affairs at the end so statement of our first assets 31st december 2019. we put our currency sign we use the same procedure we start with our assets now so the assets we had motor vehicles and fixtures and fittings just like we have for the opening balances but in this case the values were different the value for motor vehicles at the end of the year was four 5400 and then the value for fixtures and fittings had also reduced to three thousand dollars all right and then finally we are the non-current assets so there was stock or inventories now the value of inventories at the end of the year was 1140 and then receivables being the receivables from trade debtors also was 550. now at the end of the year the bank balance was an overdraft and because it's an overdraft it cannot be added to the asset it will go down as a liability and so we can only add the cash balance which is the cash in hand and the value for cash in hand was 246 dollars and so when we add that up we have a total current and non-current that says sorry two thousand of thirty thousand three hundred and thirty six so that is our total assets and then we can confidently take out our liabilities now so you see that it's a very simple way of preparing to find your capital very very easy payables from trade creditors will begin and over here we have more than one liability so we can list them here and then bring the total the payables figure is 1180 in the question and then there was a bank overdraft of 120 dollars and when we add the bank overdraft to payables we are going to have 1300 as total liabilities which we are going to subtract from the total assets to arrive at our capital and therefore the capital at the end of the year was 9036. that is our closing capital okay so we have been able to calculate for the capital at the beginning of the year and the capital as a close of the year remember that i told you that even if the question had not asked you to prepare these two statements and they did not give you the capitals you would still need to prepare them in order to arrive at the capitals now the capital that we had using the opening balances is what i would call the opening capital and the capital that we got using the closing balances is what i would call the closing capital so we are going to use these two figures to prepare our profit statement that is what the net worth method is all about okay so now having known our opening capital inclusion capital we can go ahead and prepare our statement of profits for the year ended 31st december 2019 so we bring our currency signs now from the former that i gave you we start with our closing capital and from the calculations we just did the closing capital figure was 9036 that was the closing capital figure and then we say we add drawings so we have to find out if there was any drawings in a question now looking at additional information we are told that guanoa made drawings of 250 cds cars in total for the whole year so in the year he made cash drawings of 250 cities and that was not the only drawings there were stock drawings as well so he made drawings of groceries but he made twenty dollars drawings of stock per week okay so we have stock drawings and we have cash dramas now when it comes to the drawings that we are adding we have to incorporate both the cash drawings and the stock drawings cash drawings is 250 dollars for the whole year but when it came to the stock drawings okay it's 20 dollars per week and so you have to multiply the dollars for the number of weeks in the year because you are preparing for a whole year that is a trick now you can go to an example they can give you the drawings per week they can give it to you per month or even per day you should know the number of days that form a year if it's in the leap year you should know it's 366 days if it is um a normal year is 365 days if it is given to you in week is 52 weeks that you multiply by every single month it is 12 months so you just have to be careful so 20 times 52 weeks will give us the total drawings of stock for the year and that is going to give us 1040 and so when we add the cash drawings and the stock drummings we are going to have 1290 as two thousands which will add to the closing capital and then that is going to give us ten thousand 326 all right so that is what we do and then from the format we say we take out both the opening capital and any additional capital introduced in this question there was no additional capital introduced and so we are not going to factor that but if there was it would still have been subtracted from this figure in order to arrive at the profit and so straightaway will last the opening capital because there was no additional capital introduced from our workings the opening capital figure was thirteen thousand four hundred and twenty that is bigger than even the total of the closing capital and the drones thirteen thousand four hundred and twenty and therefore that is going to give us a net loss of thirty thousand and ninety four and so we call it net loss this is not a profit it's a loss because the opening capital is bigger than the total of both the occlusion and the drums and therefore we arrive at a nest loss of 3094. ladies and gentlemen this is how we go by the network method of single entry and incomplete records profit estimation i know the question could have added another requirement for us to prepare a statement of financial position but that is not a problem because we know the format of a statement of financial position that we can prepare my focus in this video was to help you understand how to estimate the profit in the part two of this video what we are going to do is that we are going to look at the conversion method and i will take a question as well and then from there we'll look at how to add the statement of financial position to any of this and so that is what i'm going to do for that what i want from you right now is to share this video like this video subscribe to the channel and let others also have a benefit together we learn together we grow fog accountancy tutorials we see difficulty made easy it is bye for now until we meet again