QUESTION 1). PARTNERSHIP FIRM TAXATION. A partnership i
Added on - 22 Sep 2019
QUESTION 1)PARTNERSHIP FIRM TAXATIONA partnership is a form of business where partners come together to carry out a business, In this caseDaniel and Olivia Smith are partners of a firm who have come jointly for the common purpose.To set up a firm is relatively cost effective and in this form partners share among them losses and profits.Key features of firm where partners have joint control:Profits and losses are shared proportionately on the basis of their share.The firm has a common identification number and has to file annually a return showing allincome and expenses.On firm profits the firm will not pay tax but the partner will pay tax on amount individually onthe basis of its share.Partners pay tax on their respective firm profit share amount on the basis of individual tax rateand also get other deductions.The firm must apply for common identification number and have to use for all of its businessdealings.The firm has to get itself registered if its annual turnover is $75000or moreThe amount drawn from the business cannot be claim as deduction from business and the amountwithdrawn are not wage for tax purpose.The Net profit of a partnership is to be calculated by preparing income Statement and then calculating taxon it. All the Revenues are added and expenses / deductions are deducted from the revenues to arrive atthe net income.In computing net income for tax purposes, accrual system of accounting is used and only the revenuesand expenses which are related with business purposes are considered. Personal expenses are not allowedas deduction.Let us calculate the Net Income of Daniel and Olivia Smith through Income Statement Method.
Daniel and Olivia SmithStatement of Partnership Net Income for the year ended30thJune 2017$$IncomeSales-Cash (W . N. 1)186925Sales-Credit (W . N . 2)31885Goods taken from stock3200222010Less: DeductionsCost of Goods Sold (W . N . 3)159713Motor Vehicle Running Expenses (W . N . 4)2364Power (80% of 1470)1176Rates (60% of 517)310Insurance1250Telephone (90% of 704)634Union Fees284Account Charges595Repairs and Maintainance (W . N . 5)290Interest on Loan (W . N . 6)5500Depreciation(W . N .7)6448.1TOTAL EXPENSES178564.1NET INCOME OF PARTNERSHIP FIRM43445.9WORKING NOTES:
W . N . 1) COMPUTATION OF CASH SALES:$Cash deposited into bank150170Add: Payment made directly from cash receipts31155Add: Withdrawals done for personal purposes5600TOTAL CASH SALES186925The Cash sales are those sales which the company has done in cash. In computing that cash receipts fromcustomers and cash deposited into bank are added and Any cash withdrawals which are for personalpurposes are deducted from it.W . N . 2) SALES DONE ON CREDIT:$Balance of Trade Receivables at the year end3010Add: Payment received from the Trade Receivables32800Less: Opening Trade Receivables3925TOTAL CREDIT SALES39735Any sales done on credit basis are computed by adding balance of trade receivables at the year end anddeducting opening balances of trade receivables to arrive at the credit sales figure.W . N . 3) COST OF GOODS SOLD$Inventory at the beginning of the year9120Add: PurchasesCash Purchases31155Credit purchases (NOTE)129188169463Less: Inventory at the end of the year9750TOTAL COST OF GOODS SOLD159713Cost of Goods sold is computed for computing Gross profit in Income Statement, this is to be deductedfrom the Revenues. Inventory at the beginning and total purchases (both cash and credit) are added andinventory at the yeat end is deducted from it to arrive at the cost of goods sold figure.