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Incomplete Records - Losses

When goods are lost due to fire, theft or whatever, it is still necessary to calculate their value to meet insurance and taxation requirements. In many businesses, full and proper records of stock are not kept. The monetary worth of the stock destroyed has to be determined somehow. The stock at the time of the loss is taken as the closing stock, and is computed in the trading account. Following are examples of how they are done.


1. Where sales and purchases records are not destroyed

The entire stock of Tracy Trading was stolen on 1st April 20X2. The only information available for preparing the trading account is as follow:

Closing stock as at 31 December 20X1 was $2,450 at cost.
Sales from 1st January 20X2 to 1st April 20X2 was $9,100
Purchases for the same period was $7,370
Margin on sales was 20%

Trading account for the period from 1st January 20X2 to 1st April 20X2

$ $
Sales 9,100
Cost of goods sold:
Opening stock 2,450
Add: Purchases 7,370

9,820
Less: Closing stock C B



A

A, B and C can be known if we know the gross profit margin is 20%.
A: The gross profit is therefore 20% of $9,100 = $1,820.
B: This is the cost of goods sold (difference between Sales and gross profit) = $9,100 – $1,820 = $7,280.
C: Closing stock is $9,820 – $7,280 = $2,540

We now have complete information for the preparation of the trading account.

Trading account for the period from 1st January 20X2 to 1st April 20X2

$ $
Sales 9,100
Cost of goods sold:
Opening stock 2,450
Add: Purchases 7,370

9,820
Less: Closing stock 2,540 7,280



1,820

The cost value of the goods stolen is $2,540.


2. Where sales and purchases records are destroyed

All the stock of S Stocky was completely destroyed by fire on 1st May 20X4. The sales and purchases books were also destroyed. The following records however were saved.

At financial year end on 31 December 20X3:
Stock: $13,680
Debtors: $15,450
Creditors: $8,820
On 1 May 20X4:
Debtors: $13,750
Creditors: $7,530
Period from 1 January 20X4 to 1 May 20X4:
Receipts from debtors: $32,250
Payments to creditors: $18,470
Margin on sales: 20%

Total Debtors

$ $
Balance b/d 15,450 Cash and bank 32,250
Sales* 30,550 Balance c/d 13,750
46,000 46,000


Total Creditors

$ $
Cash and bank 18,470 Balance b/d 8,820
Balance c/d 7,530 Purchases* 17,180
26,000 26,000


Trading account for the period from 1st January 20X4 to 1st May 20X4

$ $
Sales 30,550
Cost of goods sold:
Opening stock 13,680
Add: Purchases 17,180

30,860
Less: Closing stock F E


Gross profit D

D, E and F can be known if we know the gross profit margin is 20%.
D: The gross profit is therefore 20% of $30,550 = $6,110.
E: This is the cost of goods sold (difference between Sales and gross profit) = $30,550 – $6,110 = $24,440.
F: Closing stock is $30,860 – $24,440 = $6,420

We can now reconstruct the complete trading account

Trading account for the period from 1st January 20X4 to 1st May 20X4

$ $
Sales 30,550
Cost of goods sold:
Opening stock 13,680
Add: Purchases 17,180

30,860
Less: Closing stock 6,420 24,440


Gross profit 6,110

The cost value of the goods stolen is $6,420.

Last Updated (Friday, 03 September 2010 20:35)