Preparing Financial Statements From Incomplete Accounting Records

For many small businesses, record keeping can be a nightmare. Worse still, can be when financial statements are required and limited information is available. Small businesses are compelled by tax and banking laws to furnish financial statements on request. So there is no getting away from financial statement preparation.

Financial statements are hundred percent reliant on accurate records. So a bookkeeping and accounting system is imperative. Full advantage is not taken, of bookkeepers and accountants offering their services, it has been proven that up to 25 percent to 30 percent of small businesses still don’t engage the available accounting services on the market.

Invariably records would be incomplete in such a business. Creative methods, such as those used in forensic accounting or internal auditing will have to be enforced to reconstruct the records of a business. It is an arduous task but can turn out to be very fulfilling, when a clear picture emerges of the true state of the business.

Steps 1. Locate all the information of the businesses. Documentary proof of sales, purchases, bank statements, contracts, notes and correspondence. 2. Determine if a system of recording transactions is in place. 3. Verify if a computerized or manual system is being used for the recording of data.

Now the fun begins. Opening and closing debtors, creditors and bank balances will be extracted. Should not be too difficult, since every small business owner knows exactly how much money he/she is owed (debtors), and how many outstanding bills he/she has (creditors), and off course how much money is in the bank.

By adding the debtors closing balance, and the verified debtors deposits and payments, and deducting the opening debtors balance (payments+ closing debtors-opening debtors) the periods credit sales are determined.

Similarly the creditors balances are used to determine credit purchases.

The bank statement is then evaluated to determine cash sales and cash purchases. Cash invoices and bills are also checked and added to sales and purchases.

All expenses are then verified by tabulating bills. Salaries are checked. If time is lacking, one-month verification on salaries, rent and other recurring items are sufficient. Just double check if no increment or escalation occurred during the period. The one-month verification multiplied by the amount of months would equate to the full expenses for the year. The income statement can now be concluded.

The balance sheet items can be verified by separating cash asset purchases from normal expenses. All assets purchased on lease can be split between the liability and asset portion. Debtor’s creditors, and cash/bank balances (from balancesabove) are added, and we will have an asset and liability statement. Asset less liabilities will produce an equity figure, and voila, the balance sheet can now be finalized.

Check again how equity (capital funds-less profits), tie up to income statement profits. Source third party opinions to verify the integrity of figures, i.e. creditors for balances due, deeds and motor vehicle registration offices for value of assets etc.

It is no easy task, and figures will not be 100 percent accurate, but a fair picture will emerge of the financial position of the business. This article is not conclusive, but can give the business owner some insight to the kind of procedures his accountant will follow. After preparing the first set of financial statements from incomplete accounting records, the business owner should be strongly advised, to invest in the services of a bookkeeper or an accountant.

Contact the Author
Sean Goss
sgafc@mweb.co.za