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Incomplete Records (A & B) Theory | LC Accounting
Incomplete Records (A & B) Theory | Accounting
Why keep records of the amounts taken out as drawings? (2018):
• If drawings are not treated correctly they may be entered in error as a business expense with
the result that the profit figure will be reduced/understated. It is also essential to control/monitor
how much is taken from the business in the form of drawings.
Explain the importance of double entry book-keeping. (2018):
• It provides a more accurate look at the financial position of a business than single entry
bookkeeping due to the matching principle which uses accrual accounting rules to record
revenue and expenses.
• It reduces errors by providing checks and balances.
• It reduces fraud because it allows transactions to be traced/audited.
• It can be used in the preparation of financial statements.
Explain what goodwill is and why it might arise. (2019 Examcraft mock):
• Goodwill is an intangible asset in the balance sheet of a firm. It arises when one business pays
more for another business than it appears to be worth as per the net asset value in its balance
sheet.
It is an asset that you cannot see or touch but it does have a value for the business.
• This may be due to a firm’s good reputation, excellent staff, good customer base, good
industrial relations, etc.
What additional information would be available in a sole traders a/c if they were prepared
using the double entry system?
• A double entry system would also produce a trial balance and this would give the users of
accounts greater assurance as to the accuracy and reliability of the figures in question.
Why are the records kept by the business unsatisfactory?
• They’re unsatisfactory because the accountant is relying on rough estimates to calculate profit.
• It is totally unsuitable to calculate profit by means of a missing figure in the balance sheet.
