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Incomplete records
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Many small businesses do not keep full double-entry records. Accountants use clever techniques to work out the missing figures.
Profit from changes in capital
If only assets and liabilities are known, use capital (net assets):
Profit = closing capital − opening capital + drawings − capital introduced
Capital at a date = assets − liabilities (a statement of affairs).
Profit = closing capital − opening capital + drawings − capital introduced
Capital at a date = assets − liabilities (a statement of affairs).
Finding sales and purchases
Use control accounts (or the same logic):
Credit sales = receipts from customers + closing receivables − opening receivables
Credit purchases = payments to suppliers + closing payables − opening payables
Total sales = cash sales + credit sales.
Credit sales = receipts from customers + closing receivables − opening receivables
Credit purchases = payments to suppliers + closing payables − opening payables
Total sales = cash sales + credit sales.
Mark-up and margin
Mark-up is profit as a percentage of cost. Margin is profit as a percentage of selling price.
If cost of sales is £60 000 and mark-up is 25%, gross profit = 25% × 60 000 = £15 000, so revenue = £75 000.
If revenue is £80 000 and margin is 30%, gross profit = £24 000, so cost of sales = £56 000.
If cost of sales is £60 000 and mark-up is 25%, gross profit = 25% × 60 000 = £15 000, so revenue = £75 000.
If revenue is £80 000 and margin is 30%, gross profit = £24 000, so cost of sales = £56 000.
Opening capital £25 000, closing capital £31 000, drawings £9000, capital introduced £2000. Find the profit.
- 31 000 − 25 000 = 6000
- + drawings 9000 − capital introduced 2000
Answer: £13 000
Profit = closing capital − opening capital + drawings − capital introduced. Credit sales = receipts + closing receivables − opening receivables. Mark-up is on cost; margin is on selling price.
Check you have got it
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