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CA Foundation · Accounting · Accounts from Incomplete Records

Which statement about profit determination under incomplete records is correct?

The conversion method is correct: it uses the available information to prepare missing ledger accounts and the final accounts, effectively converting single entry into double entry. The other statements fail because net worth profit is only an estimate needing adjustments, and companies must keep proper double entry books.

  1. AProfit is always exactly accurate because the Statement of Affairs method uses actual cash flows
  2. BThe conversion method converts single entry records into double entry by preparing ledger accounts and final accountsCorrect
  3. CProfit under the net worth method is the difference between closing and opening capital, with no adjustments needed
  4. DIncomplete records are accepted by the Companies Act 2013 for all companies

Explanation

The conversion method uses available data to prepare the missing ledger accounts and then the Trading and Profit and Loss Account and Balance Sheet, effectively converting single entry into double entry. The net worth method is only an estimate and needs adjustment for drawings and fresh capital. Companies must maintain proper books on accrual basis with double entry.

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