Prepare Final Accounts for Sole Traders & Partnerships (Doc)
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Added on 2020-10-22
Prepare Final Accounts for Sole Traders & Partnerships (Doc)
Added on 2020-10-22
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Prepare final accountsfor sole traders andpartnerships
Table of ContentsINTRODUCTION...........................................................................................................................1TASK 1............................................................................................................................................11.1 Reasons for closing off and producing trial balance.............................................................11.2 Process and limitation of preparing final accounts...............................................................21.3 Methods of constructing accounts from incomplete records................................................21.4 Reasons for imbalance resulting from incorrect entries........................................................21.5 Reasons for incomplete records arising from insufficient data.............................................3TASK 2............................................................................................................................................32.1 Calculation of opening and closing capital...........................................................................32.2 Calculation of opening and closing cash/ bank account.......................................................42.3 Preparation of sales and purchase ledger control account....................................................52.4 Mark ups and margins...........................................................................................................6TASK 3............................................................................................................................................63.1 Components of a set of final accounts..................................................................................63.2 Statement of profit and loss...................................................................................................73.3 Statement of financial position..............................................................................................7TASK 4............................................................................................................................................94.1 Key components of partnership agreement...........................................................................94.2 Key components of partnership accounts.............................................................................9TASK 5..........................................................................................................................................105.1 Statement of profit and loss appropriation account.............................................................105.2 Allocation of profits to the partners....................................................................................115.3 Capital and current account for each partner......................................................................11TASK 6..........................................................................................................................................116.1 Calculation of closing balance of each partner's capital and current account.....................116.2 Statement of financial position............................................................................................12CONCLUSION..............................................................................................................................12REFERENCES..............................................................................................................................13
INTRODUCTIONFinal accounts are the financial statements that are required to analyse organisationalperformance, position and financial health. It guides the owners to make appropriate decisions sothat business can be operated effectively. Final accounts of partnership firms and soleproprietorship are same but the profits are divided differently. Profits in partnership firm profitsare distributed to the partners on the pre-decided rate (Bain and Band, 2016). In soleproprietorship all the profits are acquired by owner of the company. In partnership firm profitand loss account, profit and loss appropriation account, partner's capital and current accounts andbalance sheet are generated as final accounts. Sole proprietor is the only owner of the companyhence income statement and balance sheet is generated in sole proprietorship. This report isbased on the final accounts of sole trader and partnership. This assignment aims at need andprocess of preparing final accounts, preparation of accounting records from incompleteinformation, final accounts of sole trader and legislative and accounting requirements forpartnerships. Statement profit or loss appropriation account and financial position relating topartnership have also been created under this report. TASK 11.1 Reasons for closing off and producing trial balanceThe companies close their revenues and expenses accounts so that all the accounts can becreated next year with zero balance. Main reason for closing off is to transfer the balance oftemporary accounts to the permanent accounts because those accounts are used for a specificperiod of time and mainly used for one financial period. In closing process only expenses,revenues and dividend accounts are closed because if their balance is being carried forward bythe organisation than this may create more liabilities (Barrow, Barrow and Brown, 2012). Trial balance if prepared by the companies to detect mathematical errors in journal orledgers. It is also created to prove that all the debit balances are equal to credit balances. If thetotal of both the amounts does not match than it depicts that there is an error in the ledgeraccounts. Partners or owner of the firm formulate trail balance to analyse arithmetical accuracyof the transactions.1
1.2 Process and limitation of preparing final accountsTrial balance is a statements in which all the balance of account are recorded. First of allthe accountants have to close all the ledger accounts, subsidiary and cash as well as bank accountor book. Now a three column statement is generated in which all the account names are recordedwith their closing balance whether it is credit or debit. At last total of both debit and credit side isdone to determine arithmetical accuracy (Bennett, Schaltegger and Zvezdov, 2013). Limitations of preparing a trial balance:Trial balance is only able to show the error but cannot depict the cause of the error.Accountant cannot discover the error which has been occurred due to not following theappropriate accounting principles. It is also not able to detect such type of errors that are made by recording correct amountin wrong ledger account 1.3 Methods of constructing accounts from incomplete recordsThere are various methods that are used to formulate accounts with the help ofincomplete record. These methods are :The accounting equation: If the value if capital is provided by the client than in thissituation accountants can use this method. Total liabilities can be subtracted from total assets asit is equal to capital according to accounting equations (Chambers, 2014).Control accounts: If balance of different accounts are missed than control accountmethod can be used in this condition. In this method a control account is being completed by theaccountants for example in bank control account the account will be created with the help ofavailable information and the balance of credit and debits side will be assumed as the missinginformation.Markup or margin method: in this method markup or margin percentage is used by theaccountant in which missing information is gathered with the help of margin percentage. If theamount of sales and percentage of margin is available then cost of sales can be calculated withthe help of both the information. 1.4 Reasons for imbalance resulting from incorrect entriesThere are various reasons that create the problem of imbalance from incorrect entries.These reasons are as follows:2
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