Incomplete records

• Without full records it is hard to find profit, spot errors or theft, value the business, or support a loan or tax return.
• A statement of affairs lists assets and liabilities on a date; the difference is capital.
• Profit = closing capital − opening capital + drawings − capital introduced.
• Missing sales and purchases come from total trade receivables and total trade payables accounts.
• Mark-up, margin and the rate of inventory turnover find missing revenue, cost of sales or inventory.

Disadvantages of incomplete records

Many small sole traders keep only a cash book and a file of invoices. The disadvantages of not keeping a full set of double entry records are:

• profit cannot be calculated accurately, or only as a single figure with no detail of revenue and expenses;
• there is no trial balance, so errors are hard to find, and fraud or theft may go unnoticed;
• the owner cannot see which expenses are rising or how much customers owe at any time;
• it is hard to value the business, to obtain a bank loan, or to agree a figure with the tax authorities;
• an accountant takes longer (and charges more) to prepare the financial statements.

Capital = assets − liabilities

A statement of affairs is a list of a business’s assets and liabilities on a particular date; the difference is the owner’s capital. Prepare one at the start and one at the end of the year. Capital rises with profit and capital introduced, and falls with drawings, so:

Worked example

Lina Haddad’s assets and liabilities are shown below. During 2025 she took drawings of $15,600 and paid in extra capital of $2,000. Prepare the opening and closing statements of affairs and calculate her profit for the year.

Profit = 12,770 − 14,400 + 15,600 − 2,000 = $11,970

Total trade receivables and payables accounts

Using a known percentage

Mark-up cost of sales margin revenue