CONVERSION METHOD
The Net Worth Method explained in the preceding pages does not provide a clear picture of the operational results of a business. It does not give information about sales, purchases, gross profit, operating expenses etc. of the business. As a result, a meaningful analysis of the financial statements cannot be done nor effective steps can be taken to improve the financial position of the business. It will, therefore, be better to collect all, such information ffom the books of accounts, and other sources which are necessary for preparing Trial Balance of the business. This is done by preparing a Total Debtors Account, aTotal Creditors Account, a Bills Receivable Account and a Bills Payable Account and Receipts and Payments Account etc., on the basis of double entry. Accounts relating to different expenses, incomes, fixed assets and fixed liabilities and outstandings are also prepared with the help of Receipts & Payments Accounts and additional information available. Thus, the closing balances of different accounts are found out and a Trial Balance prepared. Final accounts can then be prepared in the usual way. Such a method of collection information as per the requirements of the double entry system of book keeping, is termed as Conversion Method.
1. Ascertainment of sales. Sales may be of two types (i) Credit Sales, and (ii) Cash Sales. Credit Sales should be found out by preparing a Total Debtors Account while cash sales should be found out fromthe Cash Book.
2. Ascertainment of purchases. The purchases may be of two types (i) Credit Purchases, and (U) Cash purchases. The amount of credit purchases can be ascertained by preparing a Total Creditors Account.
3. Ascertainment of stocks. Stocks may be classified into two categoiies: (1) Opening Stock, and (ii) Closing Stock. The amount of Opening Stock or Closing Stock can be ascertained by preparing a Memorandum Trading Account.
4. Ascertainment of cash and bank balances. The amount of Cash in Hand or Cash at Bank can be ascertained by preparing a Receipts and Payments Account in case Cash Book completed in all respects has not been given.