Final Accounts for Unincorporated Businesses: A Comprehensive Guide

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Prepare final accounts for unincorporated businesses
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Table of Contents
Introduction......................................................................................................................................3
1. Be able to prepare sole trader accounts.......................................................................................4
2. Be able to prepare partnership accounts......................................................................................9
3. Understand how financial statements are used to monitor business performance....................11
4. Understand the users of the accounts.........................................................................................14
Conclusion.....................................................................................................................................15
Reference List................................................................................................................................16
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Introduction
Preparations of “Final Accounts” are very significant for the organisations. These help the
business organisations in recording all the financial transactions of the business in the daily life.
It has been observed that there are different aspects that are present in the business that are
necessary for them to follow. The structures of the accounts change with the change in the type
of business they are into. There are number of businesses that operate in the world. Some are
“sole proprietorship, partnership firm, companies” and many more. These are significant for the
business entities to perform as per their requirements.
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1. Be able to prepare sole trader accounts
1.1 Prepare in accordance with GAAP (Generally Accepted Accounting Practices) the
following for a sole trader:
The calculations that are provided below consists of “the profit and loss account of sole trader
and statement of financial position for them”. This will give a clear idea how the accounts of a
sole trader are performed. These are necessary for the business entities to work on and perform
well to get the exact amount return from the business.
•” Profit and loss account”
• “Balance sheet”
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1.2 From an initial trial balance take into account any accounting adjustments to produce
a:
• “Profit and loss account”
• “Balance sheet”
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1.3 Calculate the accounting equation
Assets= Liabilities + Shareholders’ equity
49407 = 5189 + 44218
49407 = 49407
1.4 Describe how the items within a profit and loss and balance sheet contribute to the
value of the business
There are number of items that are present in the “profit and loss account and the balance sheet”
that implies to the works of the business. These are all the recordings of the business entities that
are done in their daily operations. These affect in the working of the business. This helps them to
check the “profit or loss” that is earned by them and as well as “the standing of the position of
finance” of the business so that they work well in the business. These show the value of the
“profit and loss account and the balance sheet” on the business.
1.5 Explain the main differences between accounts prepared in accordance with GAAP to
accounts prepared under cash accounting
The accounts those are prepared based on the GAAP follows “double entry system of book
keeping” that helps the business entities in recording all types of transactions. All types of
transactions are recorded whether those are cash transactions or credit transactions. On the
contrary, the cash accounting is such type of accounting that is done in “single entry form of
book keeping” that enables the business entities to record on those transactions that involve cash
in it.
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2. Be able to prepare partnership accounts
2.1 Prepare a profit and loss account and balance sheet for a partnership from an
initial trial balance taking into account any relevant accounting adjustments
2.2 Outline how profit will be apportioned between the partners:
The profits will be apportioned as per the memorandum of association signed by the partners of
the business. In this scenario, it is Harry and Jones, who have signed the memorandum of
association and decided to divide all the items equally among them. This will ensure that they
perform well and show the same intent in the business.
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2.3 Explain the effect on the current and capital accounts where a new partner joins or an
existing partner leaves the partnership
This is also mentioned in the memorandum of association as to what will happen if there is a new
partner who joins the business. It has been decided that there will be equal treatment for any
number of partners no matter what amount of capital they are bringing.
2.4 Explain what goodwill is and how it is treated in partnership accounts
Goodwill is something that the business has earned from the market. This is provided to the
business because they have done well in the market and has satisfied the needs of the people.
Goodwill is generally kept in the books of accounts till the time of winding up of the business or
if the goodwill of the business finishes.
2.5 Prepare capital accounts for each partner at the balance sheet date
2.6 Prepare current accounts for each partner at the balance sheet date
2.7 Explain how partners’ salaries, interest on capital and interest on drawings could be
determined as part of the partnership agreement
The partners Harry have decided this and John will share equally amount of salaries but they will
share interest on “capital and interest on drawings” as per the amount of capital contributed by
the partners.
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3. Understand how financial statements are used to monitor business performance
3.1 Explain the importance of measuring the performance of unincorporated businesses
There are lot of importance based on the performance of the business. This help the business
entities to monitor their performances well. These are necessary for them to perform. The strong
aspects and the weak aspects get clear with the performance of the “statement of finance”. These
help them in solving a lot of issues that might affect the workings of the business. These are
necessary for the business entities in solving any kind of issues that are related to the finance of
the business and rectify them so that the issues do not erupt again. These are significant for them
to work properly.
3.2 Explain the advantages and disadvantages of using ratio analysis to monitor business
performance
“Ratio Analysis” helps the business entities in solving the issues of finance. They also help the
business entities in checking the areas that are strong for them and as well as those areas that are
weak for them. This helps them to check which part needs more enhancements to perform. These
are necessary for the business organisations to perform. On the other hand, it is also seen that the
use of ratio analysis to check the trend of some aspect sometimes goes wrong. The reason behind
this is that there are some reasons that affects the working of the business in those years and
counting those aspects can be wrong trend for the business,.
3.3 Define the following ratios:
• “Gross profit Margin”
This is such an aspect that helps the business entities in checking the margin of gross profit that
is earned from the business from the revenue they have earned by selling the product or services
for them. These are necessary for the business to perform as they give the “margin of gross
profit.”
• “Net Profit Margin”
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The “margin of net profit” is such item that is used by the business entities to check the amount
of net profit that is earned by the business from the revenue they have earned by selling the
products or services. These are other important aspects of the business.
• “Current Ratio”
Current ratio helps the business organisations in checking the ability of the current assets of the
business to pay off all the current liabilities of the business. These are beneficial for the business
entities as these help them in solving the issues of finance for the business. This shows the
control over the current liabilities so that they do not cross the mark of the profit.
•” Quick Ratio (Acid Test)”
Quick Ratio helps the business entities to check the exact amount of prepaid expenses of the
business along with the inventories to check closing stock of the business. The closing stock
cannot be considered as cash. This is the reason cash is not considered in the business. These are
necessary for the business entities to work appropriately so that the concerns are solved and they
perform well.
• “Inventory Turnover”
Inventory Turnover is such type of aspect that enables the business organisations in checking the
inventories present with the business. These are significant for them in solving the issues of
finance of the business. These are important for the business organisations in solving the
financial aspects of the business so that the issues are solved.
• “Trade Receivable Collection Period”
This is such an area that is not followed by many business organisations. It has been observed
that there are certain timings that help the business entities to give products on credit. The
process that is used by the business entities is the collection of trade receivables and the whole
system is known as the “Trade Receivable collection period”.
• “Trade payable Payment Period”
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