The Basic Idea of the Analysis Method
The analysis method rebuilds complete accounts from incomplete records so that full financial statements can be prepared. Missing figures such as credit sales, credit purchases and cash balances are found using control accounts and the cash book.
Key idea
Credit sales = Closing debtors + Receipts from debtors − Opening debtors
Credit purchases = Closing creditors + Payments to creditors − Opening creditors
Rebuilding the Control Accounts
The debtors control account helps find credit sales; the creditors control account helps find credit purchases. Add the closing balance to the payments/receipts during the year, then subtract the opening balance.
A Worked Example
Example
Debtors: opening RM5,000; receipts from debtors RM40,000; closing RM7,000.
Credit sales = 7,000 + 40,000 − 5,000 = RM42,000.
Creditors: opening RM4,000; payments to creditors RM30,000; closing RM6,000.
Credit purchases = 6,000 + 30,000 − 4,000 = RM32,000.
Rebuilding the Cash Book
Besides the control accounts, the cash book is also rebuilt to find missing figures such as cash drawings or the closing bank balance. All receipts are recorded on the debit side and all payments on the credit side; the balance becomes the cash or bank figure at the end of the period.
Example
Opening debtors RM12,000, receipts from debtors RM90,000, closing debtors RM15,000. Credit sales = 15,000 + 90,000 − 12,000 = RM93,000. This figure is then taken to the trading account to work out gross profit.
Once all the figures are found, a full trading and profit and loss account and a statement of financial position can be prepared in the usual way. As a check, total closing assets must equal total liabilities plus owner's equity under the accounting equation. The analysis method needs more work than the comparison method, but it gives a more detailed picture of profit because revenue and expenses are shown one by one.
Remember
Receipts from debtors add to credit sales, but the opening debtors balance must be subtracted because it belongs to last period's sales. The same principle applies to creditors and purchases.