Final Accounts Report: Sole Traders and Partnerships - Analysis

This report provides a detailed exploration of final accounts, covering both sole traders and partnerships. It begins with an introduction to the importance of final accounts, emphasizing their role in assessing a business's profitability and financial position. The report then delves into the practical aspects, including the process of preparing final accounts from a trial balance, addressing limitations, and methods for handling incomplete records. It also covers the reasons behind imbalances and the challenges arising from insufficient data. The report proceeds to illustrate the preparation of financial records from incomplete information, including calculations for opening and closing balances, the creation of sales and purchase ledger control accounts, and the application of markups and margins. Furthermore, the report produces final accounts for sole traders, outlining the components of a set of final accounts and demonstrating the preparation of profit and loss statements and balance sheets. The report further examines the legislative and accounting requirements for partnerships, detailing key components of partnership agreements and accounts. It includes the preparation of profit and loss appropriation accounts and the allocation of profit, along with the creation of capital and current accounts for each partner, and concludes with an analysis of the statement of financial position relating to partnerships.

Final accounts for Sole traders and
Partnerships

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1. Undertaking the need, process to prepare the final accounts...........................................1
1.1. Identifying the reasons for closing off accounts and producing trail balance......................1
1.2. Explaining the process, limitation of preparing set of final accounts from trail balance.....1
1.3. The methods of preparing accounts from incomplete records.............................................2
1.4. Reasons of imbalances occurs from incorrect double entries..............................................2
1.5. Reasons for incomplete records arising from insufficient and inconsistent data.................3
TASK 2. Preparing accounts records from incomplete information...............................................4
2.1. Calculating opening and/or closing accounts from incomplete information.......................4
2.2. Calculating closing and opening cash/bank accounts balance.............................................4
2.3. Preparing sales and purchase ledger control accounts with help of correct sales, purchase
and bank amount.........................................................................................................................5
2.4. Calculating account balances using mark ups and margins.................................................6
TASK 3. Produces final accounts for sole traders...........................................................................6
3.1. Describing the components of a set of final accounts for a sole trader................................6
3.2. Preparing statement of Profit and loss accounts..................................................................7
3.3. Preparing statement of financial position or balance sheet..................................................8
TASK4. Understanding legislative and accounting requirements for partnership..........................9
4.1. Describing the key components of partnership agreement..................................................9
4.2. Describing components of partnership accounts................................................................10
TASK5. Preparing statement of profit and lost appropriation account.........................................10
5.1. Preparing statement of profit and loss appropriation account of a partnership..................10
5.2. Identifying the allocation of profit to partners after giving interest for capital, interest on
borrowing and salary.................................................................................................................12
5.3. Preparing Capital ans current account for each partner.....................................................13
TASK 6. Statement of financial position relating to partnership...................................................14
6.1. and 6.2. Statement of financial position with drawing......................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Final accounts of a business are essential to give a general idea regarding the profitability
and financial position of company to its management and other stakeholders of a specific period.
These final accounts have to be prepared as per the specific guidelines and standards as per the
GAAP. Every business organisation which are registered has to prepare the final accounts. This
final accounts are prepared in all type of businesses whether sole trader or partnership. Final
accounts differers as per the difference in operations of organisation. The present report will help
in understanding preparation and needs of final accounts. The importance and requirement,
process of final accounts will be explained. report will elaborate the process of preparing trail
balance. Further, various calculation will be done of preparing accounting records from
incomplete information. The final accounts for the sole traders like profit and loss, balance sheet
will be produced. Furthermore, various calculation of the final accounts will be done for sole
trader and partnership business.
TASK 1. Undertaking the need, process to prepare the final accounts.
1.1. Identifying the reasons for closing off accounts and producing trail balance.
The closing entries are done for the temporary accounts such as revenue and expenses,
this are essential for the preparation of the financial statements of the company (Bellomo and
et.al., 2012). The reason to closing off such accounts is to be ensured that this accounts shows nil
balance at the starting of the following year. This closing entries are also the retained earning
accounts of company shoe increases from prior year and decreases from dividend payment and
expenses. Trail balance is the list of all closing balances of ledger accounts on a certain date.
Trail balance is the first step towards the preparation financial statement. Trail Balances acts a a
working sheet for the preparation of financial statement. The main purpose of preparing trail
balance is to locate any errors and to be ensures that the entries in accounts are mathematically
correct.
1.2. Explaining the process, limitation of preparing set of final accounts from trail balance.
Trail balance has some limitation as it only confirms that the amount of debit balance is
equals to the credit side balance. Trail balance shown no information if any transactions have
been recorded or not (What is a Trial Balance? , 2019). It can not detect any errors of double
posting has been done of an account.
1

The process of trail balance is done at the end of the financial year, the trail balance is
prepared by extracting the ledger accounts (Graham, Raedy and Shackelford, 2012). Trail
balance is prepared by posting the closing balance of ledger accounts in the trail balance on debit
and credit side respectively. A trail balance is also been said that a statement of sum total of
credit and debit side of various accounts to review the mathematical exactness of the books. It is
foremost important that the trail balance balance is correct and free from any errors, as it is the
base on which the final accounts of the company will prepared.
1.3. The methods of preparing accounts from incomplete records.
In double book keeping method, incomplete record is the record of only one side
transaction or no entry of that transaction. In incomplete record, information regarding assets,
liabilities, expense and revenue is partially recorded (Saeys and et.al., 2012). In case of
incomplete records, following are the methods through which accounts can be prepared:
 In case of missing opening capital, it can be ascertained by preparing the statements of
affairs.
 In case of missing or incomplete credit purchase, it can be found by preparing the total
creditors accounts.
 Likewise, credit sales can be found by preparing the total debtors accounts.
 Total creditors amount will help in giving information of payment to creditors.
 Bank Reconciliation statement is also a method that assist in constructing accounts with
incomplete record.
 Cash and bank related accounts can be prepared by ascertained by preparing cash-book
summary that records all the payments and receipts
1.4. Reasons of imbalances occurs from incorrect double entries.
Trail balance is the the statement which balance the business book at the end of financial
or accounting year. This statement complies when all the transactions of business from journals
to ledger accounts (Fujita, 2017). Assets and expenses of accounts will be posted in debit side of
trail balance whereas liabilities, capital and income accounts will be posted to the credit side of
the trail balance. If the account are correctly extracted in ledger accounts and posted correctly in
trail balance. Than , the debit side of trail balance must be equal to or match to the credit sum
2

total of trail balance. In case of any imbalances occurs, it has to be omitted as trial balance is the
first step in preparing the final accounts of the company. The reasons for imbalances in trail
balance can be as follows:
 Imbalance can occur if any transaction has been posted on one side of an account and
omitted to posted on other side of account.
 Wrong entry of amount in ledger accounts will results in imbalance trail balance.
 Another reason of imbalance might be, wrong entry of credit amount in debit side or vice
versa in journals accounts.
1.5. Reasons for incomplete records arising from insufficient and inconsistent data.
There are two system of maintaining accounting records, double entry book keeping and
single entry book keeping, maintaining accounting records through single entry is known as
incomplete records. Under the single entry system only cash accounts, debtor and creditors
accounts are maintained properly (Toms, 2016). They the accounts of expenses, income, assets
and liabilities. The information provided through such incomplete records are incomplete and not
so reliable. Such incomplete records can cause problems to the company at the time of audit of
financial statement and for future year planning off business. It is essential to identify the reasons
of incomplete records in order to rectify them on time. Following are the reasons of incomplete
records:
Unintentional failure to records: most often such errors occurs when employee or accountant
forget to post any entry of transaction in book of accounts. It happens when on person is
responsible to manage all accounting procedures, it likely that such mistakes may occurs.
Data Loss: small business which depends on the paper work for recording data suffers from the
loss of data. Many companies are moved from paper work to computer process in order to record
transaction from data (May, 2013). It helps in preventing loss of data.
Intentional manipulation: Accountant sometimes trying to perpetrate fraud or wants to steal
from the company also neglect some transaction to get records in books.
TASK 2. Preparing accounts records from incomplete information.
2.1. Calculating opening and/or closing accounts from incomplete information.
Formula of closing capital: opening capital + profit margin - Borrowings
3

=1000 +2600- 600
=3000
Particular Amt.
Opening capital of ABC. Ltd. 1000
Borrowings 600
Profit Margin 2600
Formula for opening capital: Closing capital - profit margin + Borrowings
= 4200- 360 + 800
= 4640
Particulars Amount
profit margin 360
Closing Capital 4200
Borrowing 800
2.2. Calculating closing and opening cash/bank accounts balance.
2.3. Preparing sales and purchase ledger control accounts with help of correct sales, purchase and
bank amount.
Romelu's Purchase ledger accounts as of 31st December, 2020
4

Date Particulars Amount Date Particulars Amount
Cash sales 1490 Discount allowed 3160
invoice 23220 Sales return 8150
Credit sales 162540 bad debts written-
off 4770
Cash from cr
edit customers 146610 Doubtful debt 660
Balance cd 317120
Total 333860 Total 333860
Ramelu's Sales ledger accounts as of 31st December 2020
Date Particulars Amount Date Particulars Amount
Discount achieved 1310 Unpaid bill 16400
Purchase return 2330 Purchases (Credit) 114800
Suppliers (Credit) 109040
Balance cd 236600
Total 24024 Total 240240
2.4. Calculating account balances using mark ups and margins.
In order to determine the profitability of a firm, it is very essential for a firm to define the
pricing structure of its product. It can be realised by evaluating the margin vs markup as they are
important in determining the revenue and bottom line in financial statements.
 Margin are also known as gross margin is the amount which can be determined by
deducting cost of good sold from revenue. Example, if a product sells for 600 pounds
5

cost its costs 450 pounds to manufacture than the margin will be 150 pounds. Gross
margin usually expressed in percentage.
 Mark-up is the amount that has to be added to the manufacturing cost of product in order
to determine the selling price of that product (Corlett, 2015). Example, a markup of a
product is 150 pounds which cost is 450 will be sold at 600 pounds.
Both margin and markup is different accounting which has different perceptive of
considering business profit.
TASK 3. Produces final accounts for sole traders.
3.1. Describing the components of a set of final accounts for a sole trader.
A sole-proprietorship is the business that is owned and run by an individual. It is the
simplest form of a business as it is not a legal entity (Weygandt, Kimmel and Kieso, 2015).
There is only one person who is responsible for all the loss and profits. A sole trader is
responsible for:
 Keeping all the records of the business sales and expenses.
 Sending the self-assessment tax every year.
 Paying income tax on the profit earned.
Final accounts of sole-trader are prepared the end of each accounting year, it assist in
providing the idea of the financial performance and position of a company. The main three
components of final accounts of sole-trader are as follows:
 Trading accounts: This accounts help in ascertaining the gross profit or gross loss
arising from the buying and selling of goods (Hall, 2012). This accounts helped in
tracking the net sales and direct cost of good sold and balance of this accounts which help
in ascertaining the gross profit or loss.
 Profit and loss accounts: it is one of the important final accounts which is calculated to
determine the net profit or loss of the company in an accounting year. Profit and loss
account are also known as income statement. Under this account, the gross profit or loss
determined in trading account and net profit is determined by deducting all the indirect
6

expenses from the gross profit which will results in finding the net profit or loss occurred
in a particular financial year to sole trader.
 Financial position statement: It is the important statement which shows the financial
position of a company at particular time. This statement is known as balance sheet which
on one side shows the trader's property and possessions and on the other side all his
liabilities. The Statement reflects the assets and liabilities side which determine what the
company have what it owe to others (DRURY, 2013). Balance sheet of the company will
be said to be accurate when the asset side will match to the liability side.
3.2. Preparing statement of Profit and loss accounts.
Income statement as per 31st December 2020
Particulars Details (£) Amount (£)
Total revenue 557500
Less COGS
Opening inventory 50000
Add Purchases 420000
Less Closing inventory 42000 428000
Gross Profit 129500
Business Expenses
Wages of shop minus payment of shop
wages 33300-200 33100
Amount of shop 6200
Telephone cost minus accrual of
phone cost 600 500
Payment of interest 8000
Travel cost 550
Discount achieved 900-450 450
Disposed Non-current asset 250
depreciation building 15000-5000 10000
7

depreciation shop 14400-6400 8000
Bad debt written off 500
Allowance of doubtful debt 250
adjustment related to allowance for
doubtful debt 50 800
Sum of business expenses 67850
Operating profit 61650
Less Value added tax 3250
Net profit 58400
3.3. Preparing statement of financial position or balance sheet.
Balance sheet as on 31st December 2020
Assets
Liquid assets
Inventory 428000
Opening inventory 50000
add purchases 420000
less closing stock 42000
sales ledger 10000 9200
Less Bad debt 500
Add Allowance (doubtful debt) 250
Add doubtful debt (adjusted) 50
Bank 2650
Total Liquid assets 439850
Fixed assets
Building 250000
Depreciation (accumulated) 15000
Charges of depreciation 5000 240000
8

Cost for fitting shop 40000
less Depreciation (accumulated) 14400
less Charges for depreciation 6400 32000
Total fixed assets 272000
Total Assets 711850
Liabilities
Current liabilities
purchase ledger control 11250
VAT 3250
Borrowing 130000
Total current liabilities 144500
Non-Current 407950
Total Liabilities 552450
Equities 125000
less Borrowing 24000 101000
Net profit 58400
Total Liabilities and equity 711850
TASK4. Understanding legislative and accounting requirements for
partnership.
4.1. Describing the key components of partnership agreement.
Partnership can be defines as the relation between two or more persons who have agreed
to share profit and loss from the business that are carried by them. Partnership agreement is
designed to protect the interest of the partners, these agreement have two most important purpose
are dispute resolution and the business structure. The main components of partnership agreement
are:
9