The bookkeeping of many smaller non-profit organizations such as clubs, cultural associations and small businesses is often done using a single entry accounting system. However, details of the financial activities of such organizations and companies are available in various documents such as bank statements, bills, accounts, pay stubs and log books.
There are two main disadvantages with such incomplete accounting records (without double entry): (1) a large amount of useful information can be lost. It is possible to generate financial accounting reports from the information available, but this can be more difficult than when full records are available. Certain transactions may not be accounted for, nor is there continuity in the recording of financial and other useful information. (2) The benefits of the controls inherent in a double entry system are lost.
A discussion of the treatment of incomplete records is useful for a number of reasons. First, it emphasizes the benefit of a comprehensive double-entry bookkeeping system. In addition, it is convenient because accountants often need to prepare financial statements from such incomplete records, mainly for income tax purposes. In practice, therefore, converting single-entry accounting information to double-entry accounting is an analytical exercise. It can also happen that a company’s double-entry bookkeeping is lost (e.g. due to fire damage) and the accountant has to reconstruct it from incomplete records. Therefore, attention is paid to certain aspects and practical procedures arising from the maintenance of incomplete accounting records.
Suppose a trader has been in business for some time and wants to establish his interest in the business at some point. To do this, he must determine the overall interest in the transaction and offset this against external interests. This can be done by preparing an equity statement. (This contains basically the same information as the balance sheet, but is not created from double-entry bookkeeping account balances.)
The statement of equity must be prepared by reference to all available applicable information. Bearing in mind that companies that do not have formal accounting systems will find it necessary to maintain records of certain basic information in order to conduct their business. For example, records of cash received and paid and amounts owed, both to and by the Company, are essential. Cash balances can be determined by a cash count, bank balances from the bank statement and receivables from and by the company from invoices. Inventory can be physically counted and valued. The acquisition costs of the acquired fixed assets can be found in the supporting documents. Equity is the difference between the values assigned to assets and liabilities.
The most practical way to determine the net gain or loss from incomplete accounting records is to analyze the change in equity over a period of time. Obviously, equity increases when a profit is made and when the owner makes additional investments in the company. Conversely, equity is reduced by losses and drawings by the owner.