Final Accounts Preparation for Sole Traders

This assignment involves the preparation of final accounts for a sole trader, which includes calculating closing balances on each partner's capital and current accounts, and preparing a statement of financial position. The task requires detailed calculations and explanations to provide a comprehensive picture of the sole trader's financial position.

FINAL ACCOUNTS FOR
SOLE TRADERS AND
PARTNERSHIPS

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Identify the reasons for closing off accounts and producing a trial balance....................1
1.2 The process, and limitations, of preparing a set of final accounts from a trial balance.. .1
1.3 Describe the methods of constructing accounts from incomplete records.......................2
1.4 Provide reasons for imbalances resulting from incorrect double entries.........................3
1.5 Provide reasons for incomplete records arising from insufficient data and inconsistencies
within the data provided.........................................................................................................3
TASK 2............................................................................................................................................3
2.1 Calculate opening and/or closing capital using incomplete information.........................3
2.2 Calculate opening and/or closing cash/account balance using incomplete information. .4
2.3 Prepare sales and purchases ledger control accounts to calculate sales, purchases and bank
figures.....................................................................................................................................4
2.4 Calculation of account balances using mark ups and margins.........................................5
TASK 3............................................................................................................................................6
3.1 Components of final Account...........................................................................................6
3.2 Profit and loss statement of Sole proprietor.....................................................................6
3.3 Balance sheet of the company..........................................................................................8
TASK 4............................................................................................................................................9
4.1 Key components of partnership agreement......................................................................9
4.2 Describe key components of partnership accounts.......................................................10
TASK 5..........................................................................................................................................11
5.1 Preparation of Profit and Loss Appropriation Account:.................................................11
5.2 Allocation of profit to partners after allowing for interest on capital, interest on drawings
and any salary paid to partner(s)..........................................................................................13
5.3 Preparation of capital and current accounts for each partner:........................................13
TASK 6..........................................................................................................................................14
6.1 Calculation of closing balances on each partner's capital and current accounts............14
6.2 Preparation of statement of financial position................................................................15

CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Final accounts prepare at the end of financial year and it shows the financial position of
the sole traders and partnership firm (Bull, 2014). These accounts include such as trading, profit
and loss account and balance sheet. It is prepare with the help of necessary records and
transactions. These statements will provide a base for the sole traders as well as for partners to
build strategies and take decision on the basis of available data. Trading accounts provide gross
profit of the company which is related to the operating activities and it is also called primary
accounts. Profit and loss account will include all the expenses and revenues of the company
which is generated by at the time of selling and distributing products. Balance sheet is the last
final accounts or it is also last process of identifying company's actual position. This report
include all the statements of final accounts in respect of sole traders and partnership firm. It is
also involve the legal requirements of partnership firms and it's components.
TASK 1
1.1 Identify the reasons for closing off accounts and producing a trial balance
For sole traders and partnership it is of utmost importance to close off accounts and
producing trial balance. Ledgers in sole proprietorship are closed at the end of the year so as to
check the balance amount that is available in a particular ledger. A trial balance is a list of all the
balances in the nominal ledger accounts. It helps to check that every ledger in the book is closed
and are matched with a counter entry if required. This helps the sole traders to prove the
arithmetical accuracy for the accounts that they have developed. Also this helps to locate if there
is no accounting errors while recording or at the time of book keeping process.
1.2 The process, and limitations, of preparing a set of final accounts from a trial balance.
The process of preparation of final statements to accounts from trial balance is crucial
task that helps the organisation to know the current position of the business that it operates in.
There are various steps that are followed to prepare final accounts from trial balance which
includes the following:
 First step includes the reading the list of items that are their in trial balance.
 After this for preparing income statement, the accountant has to record all the debit
entries in the trial balance which are of in the nature of expense to the debit side of
income statements and do the same for recording incomes.
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 All the items that are either on the debit or the credit side which is of asset or of liabilities
nature then record them in balance sheet.
 All the items or the entries in the trial balance should be recorded only once.
 After this income statement is closed and the balance of profit or loss is transferred to
asset or liabilities side of balance sheet.
With benefits their exist certain limitations also, so some of the limitations of trial balance are
illustrated below:
 If there is complete omission of transaction then it would result in wrong preparation of
final accounts of organisation
 If the posting of the debit or credit side of ledger is wrongly done in trial balance then it
would result in wrong preparation of final accounts
1.3 Describe the methods of constructing accounts from incomplete records.
Incomplete records are the set of transactions that are made due to not following the
double entry system of accounting. Some methods that are used to form accounts from
incomplete records as as follows:
 Statements of affairs method: It is the method that helps organisation to complete the
accounts and prepare the financial summary at the end of accounting year. Under this
method opening and closing capital is calculated. After this the profit and loss accounts is
prepared so as to find the profit and loss for the current year.
 Conversion into double entry method: This method is used to convert the single entry
or the incomplete entry into the double entry system. The steps that includes into this
system are:
▪ Preparing opening statements of affairs
▪ Preparation of subsidiary ledger accounts
▪ Open other accounts such as debtors accounts and creditors accounts.
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1.4 Provide reasons for imbalances resulting from incorrect double entries.
Imbalance may arise in the accounts of organisation if they have not followed the
sufficient principles or the policies while recording entries. If the entries that requires to be
credited or debited is recorded in a wrong way then it may result in wrong balance and due to
this the account would be imbalanced or provide a incorrect figure. This may arise due to clerical
error or it may arise to numerical error.
1.5 Provide reasons for incomplete records arising from insufficient data and inconsistencies
within the data provided.
As every small business owner has an intention to maintain accurate and complete
records but sometimes due to some error they may record incomplete transactions. Incomplete
accounting records would cause problems while reporting or creating final accounts of the
company. Incomplete system records occur most often when accountant neglect to record entries.
Often, small enterprise begin with the owner attending to nearly all accountancy matters.
TASK 2
2.1 Calculate opening and/or closing capital using incomplete information
i. Calculating closing capital of ABC Ltd for the year when:
Opening capital = £1000
Drawing = £600
Net Profit = £2600
Capital A/C
Particular Amount Particular Amount
To Drawings a/c 600 By Opening Bal. 1000
To Closing Bal. 3000 By Profit a/c 2600
3600 3600
ii. Calculating Opening capital of ABC Ltd for the year when:
Closing capital = £4200
Drawing = £800
Net Profit = £360
Capital A/C

Particular Amount Particular Amount
To Drawings a/c 800 By Opening Bal.(b/f) 4640
To Closing Bal. 4200 By Profit a/c 360
5000 5000
2.2 Calculate opening and/or closing cash/account balance using incomplete information
DOUBLE COULMN CASH BOOK
Date Particular Cash Bank Date Particular Cash Bank
01/09/1
9
To Op balance
b/d 10940
06/09/1
9 By Rent a/c 135
02/09/1
9 To M. Boom 315
07/09/1
9 By Cash a/c C 50
04/09/1
9 To Sales a/c 802
23/09/1
9 By S. Wills 277
07/09/1
9 To bank a/c C 50
29/09/1
9 By Drawings a/c C 120
15/09/1
9 To Sales a/c 490
30/09/1
9 By Wages a/c 518
29/09/1
9 To bank a/c C 120
30/09/1
9 By Balance c/d 319 11298
972 11745 972 11745
01/10/1
9 To Opening Bal. 319 11298
2.3 Prepare sales and purchases ledger control accounts to calculate sales, purchases and bank
figures
Sales Ledger Control Account

Date Details £ Date Details £
01/01/20 To Balance B/d 23220 By Sales returns 8150
To Credit Sales (SDB) 162540
By Cash received from
customers 146610
By Bad Debts 4770
By Discounts allowed 3160
By Balance c/d 23070
185760 185760
Purchases Ledger Control Account
Date Details £ Date Details £
To Paid to Suppliers 109040 01/01/20 By Balance B/d 16400
To Purchases returns 2330 By Credit purchases 114800
To Discount received 1310
To Balance C/d 18520
131200 131200
2.4 Calculation of account balances using mark ups and margins
Margin: - There are two types of margin for the consideration of profitability one is gross
margin and second is net margin (Chappell and Dunn, 2015). It is helpful for the estimation of
product prices and calculate sale targets which help the organisation to achieve it's setting goals.
 Gross margin:- It is that profit which is left after subtracting cost of goods sold (COGS)
from net sales. It can be in dollar value or in percentage form, it is basically used for
production or manufacturing business. Because service organisations do not have COGS,
so they can't calculate gross margin. For example: -
Company have sales - 52000, COGS – 31200.
Gross profit = Sales – COGS
= 52000-31200 = 20800.
Gross margin = 20800/52000*100
= 40%

 Net margin: - It is that profit which is pay before paying any tax, it means tax is
excluded in this profit. Remaining amount after deducting overhead expenses from gross
profit is called net profit. For example: -
Gross profit – 20800, Overhead expenses – 15600.
Net profit = 20800-15600 = 5200
Net margin = 5200/52000*100 = 10%
Markup: - It is that amount which is higher than the cost of product manufacture in the
organisation. Price of products need to cover all the cost of goods sold and overheads expenses.
It is generally used for sales of products not for services.
For example: -
Markup percentage value = Sales - COGS / COGS * 100
= 52000-31200 / 31200 *100
= 66.67%.
TASK 3
3.1 Components of final Account
 Trading Account: - It is primary account in the trader's a/c it helps in find out gross
profit or gross loss of an organisation. Which is prepare through trading activity and it
involves buying and selling of raw material. In this account Cost of goods sold is
subtracted from net sales (COGS) at the time of calculating gross profit/loss. It includes
the direct expenses and revenues which is related to the business. It is separated from
other investment accounts on the basis of different activities, purpose and risk which is
involved (Doering, P., Neumann, S. and Paul, S., 2015Goede, G. W., 2015. Hoenig and
Morris, 2014).
 Profit and Loss account: - In this statement organisation summarize the cost, expenses
and revenue at a particular time period. In the profit and loss account, gross profit is
added in the credit side. After deducting all expenses they get net profit or net loss of the
company. It can prepare quarterly or monthly which is totally depend upon the
organisation. It is very important to compare P&L statements of different year for
effective analysis. On the basis of analysis management build strategies for the company
and take appropriate decision.

 Balance sheet: - It shows the financial position of the firm through it's assets, equity
capita, debt and liabilities. Management analyse this statement on the basis of available
information and take decision according to it. This statement can prepare for individual
such as sole proprietors as well as for organisation and it include partnership firm,
companies and public or private sector both. It shows the clear picture of all items like
how much fund have from debt or from equity. No of shareholders and the market value
of shares. Generally balance sheet prepare on every quarter, six month or yearly basis. It
provide accurate information regarding their transactions which is going to help in the
future. Comparison of balance sheet will show the differences among the items, so
management can analyse that and make strategies according to it.
3.2 Profit and loss statement of Sole proprietor
Trading and Profit and loss statement

3.3 Balance sheet of the company
Working note:

TASK 4
4.1 Key components of partnership agreement
In the partnership agreement there is high chances of having family members, good
friend, any investor or it can be stranger as a partner. Agreement is prepare for the future aspects
or for the clarification duties and rights. Because every business have ups and downs so the
partners will prepare for that through this agreement. It includes all the related information which
can create disputes in the future (Horngren and Harrison, 2015). It includes some points which is
written in the partnership deed and it is follow by the partnership firms.
 Percentage of ownership: - In the agreement, it is already listed that how much profit
percentage will distributed between partners. There is no particular formula to calculate
percentage, it is fully depend upon the ownership. For example: - There is two partners in

the business, first one is work full time in the company and second one is not regular as
first partner. So it is possible that percentage of sharing profit might be changed.
 Allocation of profit and loss: - In the organisation, profit is divided in the proportion
same as losses of the company is also distributed between the partners. Because in the
beginning of partnership company is usually bear losses. So partners already decide that
the portion of profit and loss of the partners.
 Authority of signature: - It is also written in the partnership agreement that which
partner have power to sign. It is sounds like normal thing but is very important in the
business. Think if single partner have authority to sign than there is a chances of take
advantage of that power. This is normally happen in the partners that's why it is necessary
to give authority to the partner. Also both partners have authority to sign, in that case to
pass any contract of any other legal work required both partner's signature.
 Decision making: - In the partnership deed, it is very important to describe the process of
decision making. Due to lack of that process in the firm, most of the business face the
failure because they don't follow any procedure for taking decision.
 Death of partner: - Death of any partner or firm leave by the partners, to become safe
from this situation partners mention this option in the agreement. It is depend upon the
partners to close the firm or to continue with new partner (Maynard, 2017).
 Resolving disputes: - Main purpose of making agreement is to avoid disputes between
the partners. When company is entered in the profit making zone than partners think that
this is because of my efforts. After that they start fighting regarding profit share and all.
4.2 Describe key components of partnership accounts
 Statement of profit and loss: - This statement is a part of final accounts and it will provide
the net profit of the firm. It includes the all expenses and income of the organisation
which provides the profit of firm.
 Partnership appropriation accounts: - It is a intermediary account of profit or loss account
and individuals capital account. This account include all the adjustment related to the
salary, interest on capital, loss on capital, drawings etc. these items will to make
partnership appropriate accounts.
 Goodwill: - Goodwill will help at the time of that when any company acquire any other
company. It is also have a value which is recorded in the companies accounts such as

balance sheet. Goodwills value find-out by it's cost of purchase and less the market value
of tangible and intangible assets.
TASK 5
5.1 Preparation of Profit and Loss Appropriation Account:
Trading and Profit & Loss Account for the year ended 31 May, 2012
Particulars Amount Particulars Amount
To Opening Stock A/c 65280 By Sales A/c 812540
To Purchases A/c 626130 By Closing Stock A/c 64200
To Carriage Inwards A/c 2800
To Wages A/c 66220
To Heat and Light A/c 4260
To Vehicle Expenses A/c 7450
To Insurances A/c 1400
To Rates A/c 36200
To Operating Expenses A/c 16800
To Gross Profit A/c (Bal.
Figure) 50200 876740
Particulars Amount Particulars Amount
To Interest On Capital: By Gross Profit b/d 50200
Ryan 8000 By Interest On Drawings:
Vera 6000 Ryan 1000
Total Interest 14000 Vera 600
Depreciation:
Fixtures and Fittings 500
Vehicles 9600
Total Depreciation 10100
To Partner's Current A/c

(Bal. Figure)
Ryan Current A/c 16620
Vera Current A/c 11080 27700
Total 51800 Total 51800
Working Notes:
1. Calculation of Depreciation for Vehicles and Fixtures & Fittings :
Particulars Amount
Cost of Vehicle 75000
Less: Accumulated Depreciation (given) 27000
Written Down Value of Vehicle as at 1 April 2011 48000
Less: Depreciation @ 20% 9600
Written Down Value of Vehicle as at 31 May 2012 38400
Fixtures and Fittings A/C
Particulars Amount Particulars Amount
To balance b/d 5000 By Depreciation 500
By Balance c/f 4500
5000 5000
2. Table showing adjustments made for accrued and prepaid expenses in Heat & Light,
Rates, Operating Expenses :
To Heat and Light A/c
Particulars Amount
Current Expense 3240
Add: Accrued Expense 1020
Total expense as at 31 May 2012 4260
To Rates A/c
Particulars Amount

Current Expense 25200
Less: Prepaid Expense 11000
Total expense as at 31 May 2012 36200
To Operating A/c
Particulars Amount
Current Expense 16400
Add: Accrued Expense 1600
Less: Prepaid Expense 1200
Total expense as at 31 May 2012 16800
5.2 Allocation of profit to partners after allowing for interest on capital, interest on drawings and
any salary paid to partner(s)
On the day of formation of partnership, the partners formulate a document called
'Partnership Deed' that entails all the information regarding the allocation of profits, expenses,
salaries to be paid to partners, commission they are entitled to and any rate of interest that is to
be charged on their individual capitals introduced and drawings made.
In the given project, it has been mentioned that Interest on Capital for Ryan and Vera
will be charged at the rate of 4% per annum on 200,000 and 150,000 respectively. Hence, the
interest amount shall amount to 8,000 and 6,000 respectively for them. Interest on Drawings
shall be charged on Ryan and Vera's Capital Account with amounts 1,000 and 600 respectively
as mentioned. There has been no salary payment mentioned in the given information therefore it
will not be included in the preparation of profit and loss appropriation account.
After preparation of profit and loss appropriation account, the allocation of net profit is
done on the basis of a 60-40 ratio given in the information furnished. Hence, the net profit of
24,500 has been allocated to Ryan and Vera's Capital Account as 14,700 (=60% of 24,500) and
9,800 (40% of 24,500) respectively.
5.3 Preparation of capital and current accounts for each partner:
Capital Accounts of Ryan and Vera for the year ended 31st May, 2012:
Ryan's Capital Account for the year ended 31st May, 2012
Particulars Amount Particulars Amount

To Balance c/f (given) 200000
By Balance b/d (Bal.
Figure) 2320000
To Drawings A/c 32000
Total 232000 Total 232000
Vera's Capital Account for the year ended 31st May, 2012
Particulars Amount Particulars Amount
To Balance c/f (given) 150000
By Balance b/d (Bal.
Figure) 174000
To Drawings A/c 24000
Total 174000 Total 174000
Current Accounts of Ryan and Vera for the year ended 31st May, 2012:
Ryan's Current Account for the year ended 31st May, 2012
Particulars Amount Particulars Amount
To Balance c/f (given) 1250
By Balance b/d (Bal.
Figure) 9630
To Interest on Drawings 1000 By Interest on Capital 8000
To Drawings A/c 32000 By Net Profit 16620
Total 34250 34250
Vera's Current Account for the year ended 31st May, 2012
Particulars Amount Particulars Amount
To Interest on Drawings 600
By Balance b/d (Bal.
Figure) 5920
To Drawings A/c 24000 By Interest on Capital 6000
By Net Profit 11080
To Balance c/f (given) 1600
Total 24600 Total 24600

TASK 6
6.1 Calculation of closing balances on each partner's capital and current accounts
Closing balance of Current account of Ryan:
Opening balance (DR.): 1250
Add - Net profits: 16620
Add- Interest on capital: 8000
Less- interest on drawings: 1000
Less- Drawings: 32000
Closing balance= 9630
Closing balance of current account of Vera:
Opening balance (CR.): 1600
Add: Interest on capital: 6000
Add- Net profit: 11080
Less- Interest on drawing: 600
Less- Drawing: 24000
Closing balance=5320
6.2 Preparation of statement of financial position