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Conversion Method


Preparation of Final Accounts from Incomplete Records

We have discussed 'net worth method' for ascertaining business results, i.e., profits. But under this method certain vital information (e.g., sales, purchases and operating expenses) is not available from incomplete records. We can get such information by adopting 'conversion method'. Conversion method means converting the accounts from single entry to double entry.

The steps involved in converting single entry into double entry are:
  1. Prepare cash and bank summary - If not available in proper form with both sides tallied, then ascertain the missing information.
  2. Prepare Total Debtors account - to ascertain missing information such as opening/closing balances, credit sales, cash received from debtors, Bills Receivable drawn).
  3. Prepare Bills Receivable Account - to ascertain the missing information such as opening/closing balances, Bills receivable drawn, Bills receivable collected, Bills Receivable endorsed).
  4. Prepare Total Creditors Account - To ascertain the missing information such as Opening/closing creditors, credit purchases, Bills Payable accepted, Bills Receivable endorsed, payment made to creditors.
  5. Prepare Bills Payable account to ascertain the missing information such as opening/closing balances, Bills Payable accepted, Bills payable discharged.
  6. Prepare Stock Account - To ascertain the missing information such opening/closing stocks, total purchases, cost of goods sold etc.
  7. Prepare Revenue Expense Account to ascertain the missing information such as opening /closing balances of outstanding/prepaid expenses, current year's expenses, and expense paid.
  8. Prepare Revenue Income Account to ascertain the missing information such as opening /closing balances of accrued/unaccrued income, current year's incomes or income received.
  9. Prepare Fixed Asset account to ascertain the missing figures such as opening closing balances, purchase/sale, profit or loss on sale, depreciation etc.
    One should bear in mind that the summary of the cash book will also reveal
    1. Purchases of fixed assets or investments
    2. Repayment of loans
    3. Sale of fixed assets
    4. Loans taken by the firm
      These do not concern the Profit and Loss account; the relevant balance sheet items will be adjusted.
  10. Prepare Opening Statement of Affairs to find out capital in the beginning
  11. Now prepare, Trading Account, Profit and Loss Account and Balance Sheet from the various information given in the question and from the computation made in above. Before preparing the final accounts, Trial Balance may also be prepared to check the arithmetical accuracy. 

Calculation of Missing Figures


Ascertaining Total Purchases- Total purchases are calculated by combining cash and credit purchases. Cash purchases, if not given in the question, can be ascertained by balancing cash book. Credit purchases are calculated by preparing - i. total creditors account or ii. Total creditors and bills payable account.

Illustration 1
From the following information calculate the total purchases-

 

Particulars

Rs.

Opening balance of Bills Payable

15,000

Opening balance of creditors

18,000

Closing balance of bills payable

21,000

Closing balance of creditors

12,000

Cash paid to creditors during the year

90,600

Bills payable discharged during the year

26,700

Purchases returns

3,600

Cash purchases

77,400

 

Solution:

BILLS PAYABLE ACCOUNT

Particulars

Rs.

Particulars

Rs.

To Cash/Bank A/c
To Balance c/d

26,700
21,000
             
47,700

By Balance b/d
By Creditors being bills accepted during the year (Balancing Figure)

15,000

32,700     47,700

   

TOTAL CREDITORS ACCOUNT

Particulars

Rs.

Particulars

Rs.

To Cash/bank A/c
To Purchases Returns
To Bills Payable (Figure taken from Bills Payable Account)
To balance C/d

90,600
3,600

 

32,700
12,000

              
1,38,900

By balance b/d
By Purchases (Balancing Figure)

18,000
1,20,900

 



             
1,38,900


Ascertaining Total Sales


The Total Sales are calculated by combining cash and credit sales. Cash sales are given in the cash book. Credit sales are ascertained by preparing i. Total debtors account or ii. Total debtors account and bills receivable account.

Illustration 2
From the following information, calculate total sales:

Particulars

Rs.

Bills Receivable in the beginning

15,600

Debtors in the beginning

61,600

Bills Receivable encashed during the year

41,800

Cash received from Debtors

1,40,000

Bad Debts written off

5,600

Sales Returns

17,400

Bills Receivable (Dishonored)

3,600

Bills Receivable at the end

12,000

Debtors at the end

51,000

Cash Sales

81,800

 

Solution:
BILLS RECEIVABLE ACCOUNT

Particulars

Rs.

Particulars

Rs.

To Balance b/d

To Debtors, being the bills received during the year (Balancing Figure)

15,600

41,800

 


            
57,400   

 

By Cash/Bank

By Debtors (Bills Receivable dishonored)

By Balance c/d

41,800

3,600

 


12,000     57,400     

 

     

TOTAL DEBTORS ACCOUNT

Particulars

Rs.

Particulars

Rs.

To Balance c/d
To Bills Receivable(dishonored)
To Sales (Balancing Figure)

61,600
3,600
1,90,600

 

                
2,55,800    

 

By Cash/bank
By Bad Debts
By Sales Returns
By Bills Receivable
By Balance c/d

1,40,000
5,600
17,400
41,800
51,000     
2,55,800  

 


Total Sales = Cash Sales + Credit Sales
= Rs. 81,800+Rs. 1, 90,600 = Rs. 2, 72,400.

 

Ascertaining Balances of Bills Receivable and Bills Payable


If the Opening or closing balances of these items are not given, the missing figures can be ascertained by preparing Bills Receivable or Bills Payable Account.

Illustration 3

Particulars

Rs.

Opening Balance of Bills Receivable

11,000

Closing Balance of Bills Payable

8,000

Bills Payable issued

35,000

Bills Receivable encashed

46,000

Bills Receivable received

49,000

Bills Payable paid in cash

36,000

Bills Receivable dishonoured

1,000

 

Solution:

BILLS RECEIVABLE ACCOUNT

Particulars

Rs.

Particulars

Rs.

To Balance c/d
To Sundry Debtors

11,000
49,000

 

 

60,000

 

By Cash/Bank
By Sundry Debtors
By Balance c/d (Balancing Figure)

46,000
1,000

 

13,000    

60,000

 

   
BILLS PAYABLE ACCOUNT

Particulars

Rs.

Particulars

Rs.

To Cash/Bank
To Balance c/d

38,000
8,000
                 44,000        

 

By Balance b/d (Balancing figure)
By Sundry Creditors

9,000

 

35,000      44,000      

 

Calculation of the Value of Opening and Closing Stock


Sometimes, the value of opening stock is not given in the question but closing stock, total purchases, total sale and percentage of profit on cost of goods are given, value of opening stock can be ascertained on the basis of these information. Similarly, sometimes value of closing stock is not given. In such situation, if opening stock, total purchase, total sale, percentage of profit on cost or percentage of profit on sales value are given, value of closing stock can be ascertained. The format of stock account will appear as follows:

From the following information, ascertain the value of opening stock-

Purchases

Rs. 22,000

Sales

Rs. 36,000

Closing Stock

Rs. 4,000

Wages

Rs. 700

Carraige Outward

Rs. 600

Rate of Gross Profit on Cost of Goods Sold

50%

 

Memorandum Trading Account

Particulars

Rs.

Particulars

Rs.

To Opening Stock (Balancing figure)
To Purchases
To Wages
To Gross Profit:
1/3*Rs.36,000

5,300

 

22,000
700

 

12,000        40,000        

 

By Sales
By Closing Stock

36,000
4,000

 

 

                
40,000       

 


Working Notes-
50% on cost will be 33.33% on sales (Let the cost of goods sold = Rs. 100; Gross Profit = Rs. 50; Sales = 100+50 = Rs. 150)

Cost of Goods sold = Opening Stock + Purchases+ Wages- Closing Stock

                            = Rs. 5,300+Rs. 22,000+ Rs. 700 - Rs. 4000 = Rs. 24,000.
 

Gross Profit = Rs. 24,000*50/100 = Rs. 12,000.




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