Final Accounts: Preparation, Analysis, and Reporting for Businesses

This report delves into the intricacies of preparing final accounts for both sole traders and partnerships. It begins by outlining the reasons for closing accounts and producing a trial balance, along with the processes and limitations of using trial balances to prepare final accounts. The report then explores the methods of constructing accounts from incomplete records and the reasons behind imbalanced results from incorrect double entries and incomplete records. Subsequent sections focus on calculating opening and closing capital and cash balances, preparing sales and purchase ledger control accounts, and determining account balances using markups and margins. The report further details the components of final accounts for sole traders, including the statement of profit and loss and balance sheet preparation. Finally, it examines partnership agreements, partnership accounts, profit and loss appropriation accounts, allocation of profits, and the preparation of partners' capital and current accounts, culminating in the preparation of a balance sheet for partnerships. The report references key accounting concepts and practices throughout, offering a comprehensive overview of final account preparation.

Prepare final accounts for
sole traders and partnerships

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Reasons behind closing off accounts and producing trial balance........................................1
1.2 Process and limitations of preparation of final accounts using the trial balance..................2
1.3 Methods of construction of accounts from incomplete records............................................3
1.4 Reasons behind imbalanced results from incorrect double entry..........................................4
1.5 Reasons for incomplete records due to insufficient data and inconsistency in provided data
.....................................................................................................................................................4
TASK 2............................................................................................................................................5
2.1 calculation of opening and closing capital using incomplete information ...........................5
2.2 calculation of opening and closing cash and bank balance...................................................5
2.3 preparation of sales and purchase lodger control account....................................................6
2.4 calculation of account of balances using marks ups and margins.........................................7
TASK 3............................................................................................................................................7
3.1 Components of set of final accounts of a sole trader............................................................7
3.2 preparation of statement of profit and loss ...........................................................................8
3.3 preparation of balance sheet to show the financial position.................................................9
TASK 4..........................................................................................................................................10
4.1 key components of partnership agreements........................................................................10
4.2 key components of partnership account..............................................................................11
5.1 preparation of profit and losss appropriation account.........................................................12
5.2 allocation of profit to each partenrs....................................................................................13
5.3 partners capital and current account....................................................................................13
TASK 6..........................................................................................................................................14
6.1 and 6.2 calculation of closing balances of partner's capital accounts and partner's current
account and preparation of balance sheet..................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Final accounts of any business shows the actual position of it. They are prepared at the
end of financial years. It provides all relevant informations of firm to its internal users like
owners, managers, etc. The present report includes needs for the preparation of final accounts,
along with the method of preparation of accounts, preparation of accounts using incomplete
records. This report also includes a process of final accounts of sole traders and preparation of
final accounts of partnership firm along with their legislative and accounting requirements.
TASK 1
1.1 Reasons behind closing off accounts and producing trial balance
Accounts are the ledger accounts prepared by a business in order to show the list of
transaction made by the business within a particular time period. At the end of each financial
year, accounts are being closed by each business by calculating closing balance of each account
of business entity (Closing Entries as Part of the Accounting Cycle, 2018).
Trial balance can be termed as an accounting including list of closing balances of all the
ledger accounts of the firm. It provides basic information to the business in order to prepare its
final accounts.
Major reasons to closing off accounts are:
Closing off business' all accounts is an important part of the company. It can be used to
detect the actual amount of retained earning of the firm which can provide the amount to be paid
to the shareholders of the company. With the help of closing off accounts, accountant makes the
balance of each accounts zero, which helps in easily start preparation of accounts in next year.
Closing off accounts also helps the firm in determining the net income of the business
during a specific time period (Azmat and Lymer, 2016). Therefore, main purpose of closing off
accounts is to use the balances while preparing its final accounts.
Reasons for preparation of trial balance
Trial balance is a key factor of preparation of final accounts of any business entity. As it
contains closing balances of all the accounts, it can be used to detect the unrecorded transactions.
A balanced trial balance ensures that all the transactions have been recorded properly in the
business.
Trial balance also helps the firm in detecting appropriate follow up of double entry
system in the business while preparation of ledgers of company (Gordon, Raedy and Sannella,
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2016). Trial balance also provides help to the organisation in ensuring that balances of all the
accounts have been taken accurately.
The trial balance also helps the company in preparing rectification of accounts correctly
in order to prepare final accounts with exact figures of the business transactions.
In this order, both, closing off accounts and preparation of final accounts are helpful for
any business organisation in context to preparing its final accounts accurately and without any
major errors.
1.2 Process and limitations of preparation of final accounts using the trial balance
Trial balance are the basis of preparation of final accounts. It provides balance of all the
accounts prepared by the company in financial year.
Process of preparation of final accounts using trial balances
Although, procedure of preparing final accounts is different for all types of companies,
but the basic step for the preparation of final accounts from trial balance is:
 First of all business need to make the journal entry of each monitory transactions of
company.
 Firm prepares ledge accounts for entering all the transactions into a specific account with
the help of journal entries.
 At the end of each year, accountant calculates the closing balances of each account which
is entered into the trail balance.
 After balancing the trial balance, company prepares trading account with the help of
figures of the trial balance in order to determine gross profit of the business.
 For the purpose of determining net profit of the company, it prepares profit and loss
account by taking figures regarding indirect incomes and expenses from the trial balance.
 At the end organisation prepares balance sheet in order to determine the actual position of
the company (Kwok, 2017).
In this order, a business entity can prepare the final accounts from the trial balance.
Limitations of preparing final accounts from trial balance
preparation of final accounts with the help of trial balance is an easy way of preparation
and also reduces the risk of unrecorded transaction, but it also has some limitations as well:
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 Trial balance fails to detect the transaction that is completely missing in the books of
account, it may lead in determining wrong results from the final accounts (Objectives and
Limitations of Trial Balance, 2019).
 Trial balance also fails detect those transactions which has been entered into wrong
ledger at right side. It may result in determination of wrong gross profit or net profit of
the period, or even wrong balancing of the balance sheet.
 If any entry has been posted double in the books of accounts, it can not be determined by
the trial balance. It may lead in determination of excess or lower profit for the company.
1.3 Methods of construction of accounts from incomplete records
Incomplete records refers to preparation of accounts without using proper methods of
double entry system. These records are prepared by using single entry system of accounting. In
this method of accounting, income statements are prepared on the basis of cash receipts and
payments only.
Methods of preparation of accounts
For the construction of accounts in incomplete records, company generally uses the
informal methods of preparation of accounts like single accounting system. This method is used
by the business which are not spread at large level (Maynard, 2017).
In this method of accounting, only cash transaction are being recorded in the books of
accounts. Assets and liability balance at the end of specific period can not be tracked as it records
cash transactions only.
This system of accounting can not be termed as self balancing system. In this order,
mathematical errors are quite normal in the books of accounts if they are prepared using single
entry system.
In general, a set of accounts from incomplete record includes daybook, journal, etc.
Although, complete records of accounts like journal, ledgers, trial balance, trading and profit &
loss account, etc. can also be prepared using this system of accounting. However, chance of
wrong result determination from books of accounts of a firm enhances when they are prepared
through this system of accounting.
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1.4 Reasons behind imbalanced results from incorrect double entry
Books of accounts of a company formed from double entry system may provide wrong
result due to many reasons. Imbalance in final accounts occurs at the time of when its trial
balance does not match. Hence, for balancing final books of accounts of the company, it is
important that its trial balance must agree.
For example, if single entry has been posted two times, it may result in excess or
reduction of net profit of the company. In case, any transaction has been posted with wrong
numerical figure, it would result in imbalance of final accounts of company.
Further, if accounted has posted any entry in one side of accounts and failed to post it on
another side, books of accounts of the firm will definitely give wrong resul (Penman, 2016)t. If
any entry has not been posted at all anywhere in the books, it will influence the final result of the
books of business, in addition, this error is impossible to be detected.
If accountant enters an imbalance entry in the books, it would result in imbalance of the
final books of the organisation. Although, this error is less probable in case of computerised
system of accounting.
1.5 Reasons for incomplete records due to insufficient data and inconsistency in provided data
When the accounts are prepared without maintenance of records as per double entry
system of accounting, it is termed as incomplete records, as it fails to provide complete
information about business' transactions. Rather, it provides details regarding cash transactions
only.
In case, accountant fails to determine the actual data from the books of business, it would
influence the preparation of final accounts because, accountant would be unable to record the
accurate data in the books.
Consistency in the recording helps in better understanding the data. In case of frequent
inconsistency in the way of recording data, accountant may fail to understand the actual
information from the books, which would lead in recording of wrong data in the final accounts.
For the purpose of recording actual and complete figures in the books, it is important to
provide sufficient and accurate information to the accountant. In case, insufficient information is
provided to the accountant or wrong information provided to accountant, in would result in
wrongly understanding the transactions of the business, which would make the accountant in
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recording wrong transactions in the books of accounts due to which they may provide negative
result for the business of company (Sunder, Sunder and Zhang, 2018).
Further, accounts can provide wrong results due to improper knowledge and skills of the
accountant. It may cause recording of wrong transaction in the books due to which, books may
provide wrong and improper results. Which would lead in maintenance of incomplete record by
the accountant.
Due to insufficient data, accountant may fail to interpret the accounts properly. Which
may result in preparation of incomplete final accounts or incomplete recording of transactions in
the books.
Hence, it can be interpret that if an accountant gets insufficient data or frequently gets
inconsistency in data provided, it may lead in providing incomplete records and books by the
accountant.
TASK 2
2.1 calculation of opening and closing capital using incomplete information
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2.2 calculation of opening and closing cash and bank balance
2.3 preparation of sales and purchase ledgor control account
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2.4 calculation of account of balances using marks ups and margins
Margin can be determined by deducting cost of goods sold from sales amount. Let for
example, if a company has made a sales amounting 15000 and has incured a cost in selling the
goods amounting 5000, its margin difference betwenn these two i.e. 15000-5000 which would be
100000.
Marksup is an increase in cost of product to determine the selling price for example, if
Marksup is 50 and incresed in cost is to 80 from 70, marksup will be 10.
TASK 3
3.1 Components of set of final accounts of a sole trader
Sole traders
Sole traders are those business units which are owned by the single owner only.
Individual entrepreneurship, proprietorship, etc. are the terms which can be used at the place of
sole traders. It is a business structure run by a single individual who is entirely liable for all
debts, legal provisions, financial problems, etc. of the business.
Components of final accounts
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Final accounts of a sole traders business majorly includes trial balance, trading account,
profit and loss accounts and balance sheet, etc.
trial balance
Sole traders prepares it by recording all the closing balances of ledger accounts of
business operations. It shows a brief summary of all the ledgers of the company. In addition, a
balanced trial balance ensures that all the transactions have been properly recorded in the books.
Trading accountant
Trading account is a component of final accounts of sole traders which shows the gross
profit of the proprietorship. It includes all the direct expenses incured by the business along with
all the direct incomes of it. Gross profit is determined by deducting total direct incomes from
total direct expenses (Tassada and Malik, 2015).
Profit and loss accounts
It is a major component of sole entrepreneurship, which determines the net profit earned
by the business in a specific time period. This profit is the actual profit earned by trader in the
specific time. The profit and loss account of the business includes all the indirect incomes and
indirect expenses for the purpose of calculation of net profit of the business for a particular time
period.
Balance sheet
Balance sheet is helpful in determining the actual financial position of the company. It
shows the closing balance of ll the assets and liabilities of the business organisation. Balance
sheets of any proprietorship can be used by the owner of sole traders for determination of actual
performance of the business at a particular time period. In addition, it can also help in
determination of liquidity of the business.
3.2 preparation of statement of profit and loss
Profit and Loss statement for the year ended 31 December 2020
Particulars Details (£) Amount (£)
Revenue 557500
less: COGS
Opening stock 50000
Add: receipt of stock during year 420000
Less: Closing stock 42000 428000
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Gross Profit 129500
Operating Expenses
Net wages paid 33300-200 33100
Shop expenses 6200
Net telephone expenses 600-100 500
Interest Paid 8000
Travel expenses 550
Net Discount 900-450 450
sales of Non-current asset 250
depreciation on premises 15000-5000 10000
depreciation on shop 14400-6400 8000
Irrecoverable debts 500
Allowance of bad and doubtful debts 250
adjustment for allowance of doubtful debt 50 800
Total operating expenses 67850
OP 61650
Less: VAT 3250
NP 58400
3.3 preparation of balance sheet to show the financial position
Balance sheet for the year ended 31 December 2020
Particulars Details (£) Amount (£)
Assets
Current assets:
stock 428000
Opening stock 50000
add: purchases of stock 420000
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less: closing stock 42000
sales 10000 9200
Less: Irrecoverable debt 500
Add: Allowance for bad and doubtful debt 250
Add: adjusted bad and doubtful debt 50
Bank balance 2650
Total Current assets 439850
Fixed assets
premises 250000
accumulated depreciation 15000
depreciation charge 5000 240000
Shop fitting at cost 40000
less: accumulated depreciation 14400
less: depreciation charge 6400 32000
Total fixed assets 272000
Total Assets 711850
Liabilities
Current liabilities
purchase of ledger control 11250
VAT 3250
Loan 130000
Total current liabilities 144500
Non-Current liabilities 407950
Total Liabilities 552450
equity 125000
less: drawings 24000 101000
Net profit 58400
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