CMA Intermediate · Financial Accounting

Financial Statements from Incomplete Records: formula sheet

Full chapter guide

Key formulas

Capital from statement of affairs: Capital = Total assets − Total outside liabilities; Prepare it at the opening date and the closing date. Show each asset and liability separately.
Profit by net worth method: Profit = Closing capital − Opening capital + Drawings − Additional capital introduced; If the answer is negative, it is a loss. Add interest on drawings only if the question gives it.
Adjusted closing capital: Closing capital before adjustment = Opening capital + Additional capital − Drawings + Profit; Use this form to find the closing capital or drawings when profit is given.
Opening capital when not given: Opening capital = Opening assets − Opening liabilities; Always derive it from the opening statement of affairs. It is not a given figure.
Profit after adjustments: Corrected profit = Profit by net worth method ± Adjustments (provisions, depreciation, unrecorded items); Apply adjustments to the relevant assets and liabilities. They then change the capital figure.
Statement of affairs: Capital = Total assets − Total outside liabilities; Capital is the balancing figure. Do the same at the opening and the closing date.
Increase or decrease in capital: Change in capital = Closing capital − Opening capital; A positive figure is an increase, a negative figure is a decrease. This is not yet the profit.
Net profit (net worth method): Net profit = Closing capital − Opening capital + Drawings − Additional capital introduced; If the result is negative, it is a net loss. This is profit before appropriations and before interest on drawings.
Profit with interest on drawings, and profit after interest on capital: Profit for the year = Net profit above + Interest on drawings charged. Profit after allowing interest on capital = Profit for the year − Interest on capital; Use only if the question gives interest. Interest on capital is an appropriation, so it is deducted only to show profit available after appropriation.
Capital reconciliation (check equation): Opening capital + Net profit + Capital introduced − Drawings = Closing capital; Use this equation to check your answer, or to find any one missing item.
Total Debtors Account (balancing figure): Credit sales = Closing debtors + Cash received from debtors + Discount allowed + Returns inwards + Bad debts + Bills receivable received − Opening debtors − Bills dishonoured; Put opening debtors, bills dishonoured and credit sales on the debit side; the rest on the credit side. A dishonoured bill is debited to the debtor, so it reduces the credit sales figure. Use this form when bills are received from debtors.
Total Creditors Account (balancing figure): Credit purchases = Closing creditors + Cash paid to creditors + Discount received + Returns outwards + Bills payable accepted − Opening creditors; Opening creditors and credit purchases go on the credit side.
Bills Receivable Account: Opening B/R + Bills received during the year = Bills collected + Bills dishonoured + Bills endorsed or discounted + Closing B/R; If cash received on maturity is shown separately, do not count it again in the debtors account.
Bills Payable Account: Opening B/P + Bills accepted during the year = Bills paid + Closing B/P; Bills accepted are credited to creditors, not to purchases.
Total sales and purchases: Total sales = Cash sales + Credit sales; Total purchases = Cash purchases + Credit purchases; Cash sales and purchases come from the cash summary or from information given.
Opening balance of cash: Opening cash = Closing cash + Payments − Receipts; Use this if the opening cash balance is not given.
Statement of affairs: Capital = Total assets − Total outside liabilities; Used at the start and end of the year to find opening and closing capital.
Profit by capital comparison: Net profit = Closing capital − Opening capital + Drawings − Fresh capital introduced; Gives the profit without full accounts. Deduct any interest on capital or add back any other adjustments as the question states.
Total debtors account: Credit sales = Closing debtors + Cash received from debtors + Discount allowed + Bad debts + Returns inwards − Opening debtors; Include bills receivable dishonoured, if any, on the debit side. This is the balancing figure from the account.
Total creditors account: Credit purchases = Closing creditors + Cash paid to creditors + Discount received + Returns outwards − Opening creditors; Adjust for bills payable and cheques as given.
Cash sales and purchases: Total sales = Cash sales + Credit sales; Total purchases = Cash purchases + Credit purchases; Cash sales may be the balancing figure of the cash summary, or may be given.
Cost of goods sold: Opening stock + Purchases − Closing stock = Cost of goods sold; Gross profit = Sales − Cost of goods sold, when direct expenses are nil. Otherwise add direct expenses to cost.
Margin and markup: Gross profit on sales % = Gross profit ÷ Sales × 100; Markup % = Gross profit ÷ Cost × 100; Use these to find a missing sales, cost or closing stock figure.
Gross profit margin: GP margin = Gross profit ÷ Sales × 100; Base is sales. Cost of goods sold = Sales × (100 − margin%) ÷ 100.
Markup: Markup = Gross profit ÷ Cost of goods sold × 100; Base is cost. Sales = Cost × (100 + markup%) ÷ 100.
Margin to markup: Markup = Margin ÷ (100 − Margin) × 100; Example: margin 20% gives markup 20 ÷ 80 × 100 = 25%.
Markup to margin: Margin = Markup ÷ (100 + Markup) × 100; Example: markup 25% gives margin 25 ÷ 125 × 100 = 20%.
Cost of goods sold: COGS = Opening stock + Purchases (net of returns) + Direct expenses − Closing stock; Use this to find closing stock once COGS is known from sales and the rate.
Credit sales from debtors: Credit sales = Closing debtors + Cash received + Discount allowed + Bad debts + Sales returns − Opening debtors; This is the total debtors account balanced for the missing credit sales figure. Use sales returns (goods returned by customers), not purchase returns. Bills receivable are also adjusted if given.
Debtors turnover ratio: Credit sales = Debtors turnover ratio × Average debtors; Use only when the ratio is defined on average debtors in the question.

Quick revision

Closing capital − Opening capital + Drawings − Capital introduced = Profit (a negative result is a loss).
Statement of Affairs is prepared like a balance sheet, but values are often estimated, so it is not a true balance sheet.
Margin = Gross profit ÷ Sales. Markup = Gross profit ÷ Cost.
Markup of 25% on cost means margin of 20% on sales, and margin of 20% on sales means markup of 25% on cost.
Sales = Cost of goods sold + Gross profit.
Cost of goods sold = Opening stock + Purchases − Closing stock (adjusted for direct expenses where given).
Credit sales come from the total debtors account: Opening debtors + Credit sales − Cash received − Discount and bad debts − Returns = Closing debtors.
Credit purchases come from the total creditors account in the same way.
Cash and bank summary gives the missing receipts or payments, and the balancing figure may be drawings or an expense.
Find the profit from the profit and loss account only after the opening capital, drawings and adjustments are set out in working notes.
Single entry profit is less reliable than double entry profit because the records are incomplete.
In final accounts, apply outstanding and prepaid items, depreciation and provisions before closing the books.

Common mistakes

Treating the statement of affairs as an ordinary balance sheet that must tally. Fix: Remember that capital is the balancing figure in a statement of affairs. It is derived, not given.
Forgetting to add back drawings when finding profit. Fix: Write the full formula first. Profit = closing capital − opening capital + drawings − capital introduced.
Treating the increase in capital as the profit without adjusting for drawings and capital introduced. Fix: Always write the full bridge: change in capital + drawings − capital introduced. Check that each of the two items has been looked for in the question.
Adding capital introduced instead of subtracting it. Fix: Remember that it raised closing capital but is not earned. So it must be removed from the increase in capital.
Putting total cash received into the debtors account without removing cash sales Fix: Use only the amount stated as received from debtors. Treat cash sales separately. Also remember that bills dishonoured go on the debit side of the debtors account.
Putting the bills received on the wrong side of the debtors account Fix: A bill received from a debtor is a credit in the debtors account, since it settles the debt. It is a debit in Bills Receivable.
Treating all cash receipts as sales. Fix: Separate each receipt. Only cash sales go to sales. Receipts from debtors go to the debtors account. Capital introduced goes to capital.
Forgetting opening debtors or creditors in the total accounts. Fix: Always write the opening balance on its natural side first, then the other items, then find the balancing figure.
Applying the markup percentage to sales. Fix: Read the base. 'On cost' or 'markup' means cost is 100. 'On sales' or 'margin' means sales is 100.
Including purchases or sales before the last stock date or after the fire date. Fix: Use only transactions from the last known stock date up to the date of loss.

Exam tips

For a theory question, give a definition, features and limitations in separate bullet points. Use the heading words examiners look for.
Always present both statements of affairs in full, with a total line for assets and liabilities. This secures marks even if the final figure is wrong.
For a difference question, write at least five points in two columns: records kept, trial balance, profit calculation, reliability and acceptance by authorities.
Read the notes at the end of every numerical question. Adjustments for depreciation and provisions are common and change the closing capital.
In objective questions, remember that single entry is not a recognised system and accounts of nominal items are generally absent.
In the MCQs, the usual trap is whether capital introduced is added or subtracted, and whether drawings are added back. Run the bridge formula slowly before choosing an option.
In the written answer, draw the opening and closing statements of affairs separately, with headings and dates. Step marks are given for each statement and for the capital figure.
Show a separate Statement of Profit or Loss with each adjustment on its own line. Do not do it as one mental calculation.