Final Accounts Preparation for Sole Traders and Partnerships

This report delves into the preparation of final accounts for both sole traders and partnerships, emphasizing their crucial role in assessing a business's financial health. It explores the processes of creating final statements, including trial balances, profit and loss accounts, and statements of financial position. The report covers methods for handling incomplete data, calculating capital, and managing cash books, sales, and purchase ledgers. It also examines the key components of partnership agreements and accounts, including profit allocation and the creation of capital and current accounts. Furthermore, the report highlights the reasons for imbalances in double-entry bookkeeping and the impact of insufficient data, providing a comprehensive overview of financial accounting practices for these business structures.

Prepare final accounts
for sole traders and
partnerships

Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Reason for producing Trail balance and closing of accounts................................................1
1.2 Process and restriction of preparing final accounts...............................................................2
1.3 The method of preparing accounts from incomplete data.....................................................2
1.4 Reason for imbalances resulting from double entries............................................................3
1.5 Insufficient data resulting in incomplete record....................................................................4
TASK 2............................................................................................................................................4
2.1 Calculation of opening and closing capital............................................................................4
2.2 calculation of opening and closing of cash book...................................................................5
2.3 Preparation of sales and purchase ledger control account.....................................................6
2.4 Mark ups and margins...........................................................................................................6
TASK 3............................................................................................................................................7
3.1 Components of a set of final accounts...................................................................................7
3.2 Statement of profit and loss...................................................................................................7
3.3 Statement of financial position..............................................................................................9
TASK 4..........................................................................................................................................10
4.1 Key components of partnership agreement.........................................................................10
4.2 Key components of partnership accounts............................................................................10
TASK 5..........................................................................................................................................11
5.1 Profit and loss account and profit and loss appropriation account......................................11
5.2 Determination of profit and loss to partners........................................................................12
5.3 Capital and current account and..........................................................................................13
TASK 6..........................................................................................................................................13
6.1 Closing balance of each partner from its capital and current account.................................13
6.2 Statement of financial position............................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
In business world, internal manager of companies prepare final statement or account that
help to determine the exact position of business during a financial year. These final statements
also supports in examining the overall performance and financial health. With the help of
accurate information business decision are made and operation are operated effectively. In
partnership companies and sole proprietorship the final statement are prepared on the same basis
but profit is distributed differently (Aboagye-Otchere and Agbeibor
Davies-Netzley, 2013). In sole proprietor firm the profit is acquired by the main proprietor, but
in partnership firm the profit is divided according to a fixed rate. To prepare final account there
are different method that are used by both types of firm.
The main aim of this report is to show the importance and need of final account in
partnership and sole proprietor firm. Report shows the preparation of final account from the
complete or incomplete information in companies. The report also shows the profit and loss
account and financial statements to determine the position of business for both types of firm.
TASK 1
1.1 Reason for producing Trail balance and closing of accounts.
There is a need for closing account within companies that will be helpful for them to
create new account in new financial year with zero proportion. The companies need to close off
their accounts just in case to withdraw and transfer amount from one account to another basically
from temporary to permanent. They want to do so as there account is prepared for a specific
accounting year that helps them to determine the financial position. The main focus of internal
account manager in partnership and sole proprietor firm to close off those accounts that could
became a liability in future period such as, profit, expenses and dividend.
There is a very much need to prepare trail balance by an accountant in companies as these
accounts helps them to identify any transaction or mathematical error within ledgers and journal
entries. The main reason of preparing trail balance is to check that debit and credit balance are
equal for an accounting year. In case if there is any mis matched within amount than manager are
able to figure out error in ledger or journal (Elsig, 2017). At that time prepare an account to
overcome that difference called “Suspense” account. With the help of trail balance accountant of
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company would be able to figure out the arithmetic accuracy of the transaction happen in an
accounting period.
1.2 Process and restriction of preparing final accounts.
An accountant of partnership and sole proprietor firm must consider following point
while preparing final account or trail balance for an accounting year. These are explained below:
 Closely look the journal entries, ledger, cash book, bank account as well as subsidiary
account the help them to post transaction accordingly.
 Then three column statements is prepared with the names particular, debit amount and
credit account.
 The balance for the following ledger is been posted in this debit and credit column of trail
balance. For example, if sales ledger account shows the debit balance, then it has to be
posted on credit side of trail balance.
 Manager then review these created trail balance to figure out the difference, if there are
error in statements that suspense account is opened to do the adjustment.
 In case if some items are found outside the trail balance that these item are adjusted at
two places.
 Manager must keep in mind that all account related to purchase, purchase return, sales
and sales return are recorded at trading account.
There are certain limitation while preparing final account and trail balance within
company that are explained below:
 Trail balance is only able to determine the error but not the reason for that particular
reason.
 It the accounting standards are not followed properly than there is a chance that
accountant is not able to detect error.
 The main limitation of trail balance is that it is not able to determine the wrong
transaction posted in any ledger.
1.3 The method of preparing accounts from incomplete data.
Many time an accountant are not able to record the transaction according to the
accounting principle or double entry book keeping system (Miller, 2018 ). So they apply
different method to prepare account for these incomplete information some of these are
explained below:
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Accounting equation:
In case if a company accountant has detail information about assets and liabilities, they
can apply the method of accounting equation to complete record. The formula for this is equation
is liabilities deducted from Assets that is equal to capital (Trotman and Carson, 2018).
Control Account:
In case if manager are not able to maintain balance in account then they can use the
control account process to complete account. Control method is related to completing of account
with the help of available information and the assumption of debit and credit side. With the help
of this method the manager keeps the general ledger free from particular information, yet they
have the correct amount for their final account.
Mark-up method:
According to this method margin percentage is used by the companies’ accountant in
order to find the missing information. This helps them to find the figure of sales that will be
helpful in determining the actual cost of goods sold and complete the missing information.
1.4 Reason for imbalances resulting from double entries.
In companies many times accountant are not able to record transaction according to
accounting principle. There is lot of difference in amount that create an imbalance in final
account from the data collected from journal entries. The main reasons that create imbalance in
accounts are described below:
 In case if balance are recorded in only single account then there is imbalance in account.
Such as, sales cash balance is recorded in only cash book but not in sales book there
would be imbalances.
 Sometime a single amount is posted or recorded twice, that result to increase one side to
trail balance account.
In many cases the transaction are recorded in different books that create a mismatched of amount
in final books. For instance, amount of rent is being posted in sales account with totally different
account that create imbalance in final account (Reid, 2018).
1.5 Insufficient data resulting in incomplete record.
It is observed that if data is not collected well or there is insufficient data then it may lead
to incomplete record. Accountant of partnership and sole proprietor ship companies lack to
maintain proper data to create final account that may lead to formation of incomplete account.
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There can be different reason that may lead to incomplete record. Some of these are described
below:
Record failure: The situation arises when employees are not able to record or completely
forgot to evidence any transaction in their books.
Data loss: In many companies this is consider to be one of the most negative factor that
let to creation of improper account. As in today's world most of the companies have shifted their
work of accounting from paper to digital. This led to loss of data as much time software got
corrupted or data may get crash in many situations (Staubus, 2013). This led to loss of data that
result in creating of improper account.
Employees Turnover: In companies many time there is a situation that when employees
leave company they took important information related to company with them. It may lead to
problem in company as they do not have the accurate data to complete account.
Intentional manipulate of data: Sometime, accountant makes mistake while recording
transaction in companies account. The have the main intention to save tax and show more
expenses. This practice of accountant could lead to problem in company.
TASK 2
2.1 Calculation of opening and closing capital.
Capital Account: These accounts are basically prepared by accountant of companies in
order to record and report the capital transaction. This account comprises the total amount of
capital introduced by the owner in company and the total drawing they have taken from account.
The formula of calculating capital employed is deducting liabilities from assets.
1. Closing capital
Particulars Amount Particulars Amount
To drawings 600 By balance b/d 1000
To balance c/d (b.f.) 3000 By net profits 2600
3600 3600
2. Opening capital
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Particulars Amount Particulars Amount
To drawings 800 To balance b/d (b.f.) 4640
To balance c/d 4200 By net profits 360
5000 5000
2.2 calculation of opening and closing of cash book.
Cash Book: This Book is helpful in recording all relevant information about cash and
bank transaction. The accountant basically prepares three kinds of cash books such as single
column, double and three column cash book (Whitehead, 2014). In single column cash book
there is one column to record cash transaction, double column book means that bank and cash
transaction are recorded individually. And in three column cash book there are three section
cash, bank and discount column. There is a cash book that shows the opening and closing
balances from 1st October to 30sep is as follows:
Cash book
Date Particulars Cash Bank Date Particulars Cash Bank
01/09/19 To capital 10940 06/09/19 By Rent 135
02/09/19 To M. Boon 315 07/09/19 By cash 50
04/09/19 To sales 802 23/09/19 By S. Wills 277
07/09/19 To bank 50 29/09/18 By Drawings 120
15/09/19 To sales 490 30/09/19 By Wages 518
29/09/19 To drawings 120 30/09/19 By Balance c/d 319 11298
972 11745 972 11745
01/09/19 To balance c/d 319 11298
2.3 Preparation of sales and purchase ledger control account
Sales ledger control account
Particulars Amount Particulars Amount
Balance B/d 23220 Cash sales 1490
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Credit sales 162540 Discount allowed 3160
Sales return 8150
bad debt written off 4770
Received form
debtors 146610
Balance c/d (b.f.) 21580
185760 185760
Purchase ledger control account
Particulars Amount Particulars Amount
Discount received 1310 Balance b/d 16400
Return outward 2330 Credit purchase 114800
Paid to creditors 109040
balance c/d 18520
131200 131200
2.4 Mark ups and margins
Mark ups pricing method: Mark-up pricing is new method in selling in which a seller
trades the good to earn revenue. It mentions to a pricing technique in which the stable
amount or the percentage of price of a commodity is added to produce’s good value to get
the selling price of the goods.
Margin Method:
This method, used by accountant to determine the actual net profit and analyse that profit
margin according to the appropriate base.
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TASK 3
3.1 Components of a set of final accounts
There are various types of division of final account which need to be prepared in order to
analyse the profit and loss of the company. Different types of division of final accounts are
trading account, profit and loss account and balance sheet per forma. In addition to this there are
different types of sub components which are included in the final account are explained below:
Assets: These refer to the value which can be converted into cash. In addition to this it is
referred to as the resources which are available to the sole traders. Such assets can be utilized by
the sole trader in case when he is suffering from loss (Sidebotham, 2014). Example of assets is
machinery, land, cash, inventories, building goodwill etc.
Liabilities: These are recorder on the left side of the balance sheet and mainly debts are
recorder under liability side of balance sheet. In order to achieve successful business growth in
the future it is very essential for the manager to manage assets and liability effectively and
efficiently. Example of liability like interest payable, loans creditors etc.
Revenues: It refers to as the sales or the turnover which the business earns by selling out
its products and services in the marketplace. In addition to this it can be said that it refer to as
income which the company has from its normal business activities. These are mainly recorder in
the formal of profit and loss account of the company.
Equity: In companies balance sheet the amount of that shows the capital introduced by
the owner or shareholder within company. It also includes retained earnings or losses also that
are basically denoted by stockholder equity. The amount is basically determined by deducting
liabilities from assets and the amount is shown on the liabilities side of balance sheet.
Expenses: This refers to the amount spent by companies on any of the relevant business
activity in order to run their daily activities. The main purpose of an organisation is to earn huge
profit so they spent amount of their business operations. Expenses may be in the form of actual
cash like salaries, rent, bill payment etc.
3.2 Statement of profit and loss
Trading A/C
particulars amt. particulars amt.
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to opening stock 50000 by closing stock 42000
to purchases 431250 BY sales 567050
to gross profit c/d 43800
total 525050 525050
Purchase A/C
particulars amt. particulars amt.
To discount received 900 by bal b/d 11250
bal c/d 430350 by credit purchases 420000
total 431250 431250
Sales A/C
particulars amt. particulars amt.
To bal b/d 10000 by discount allowed 450
to credit sales 557500 by bal c/d 567050
total 567500 567500
Profit And Loss Account
Dr. Cr.
particulars amt. particulars amt.
shop expenses 6200 by gross profit b/d 43800
shop wages 33300 by income from asset d. 250
less: prepaid 200 33100 By net loss c/d 19850
telephone expenses
600
Add: accrual 100 700
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travel exp 550
Interest paid 8000
Dep:pre:5000
+fitings 6400 11400
bad debts: 500
add: bad debt allow
200 700
Tax exp. 3250
total 63900 63900
3.3 Statement of financial position
Balance sheet
Liabilities amt. Assets amt.
Premises 250000
Capital : 125000 less: dep. 5000+15000 230000
less: drawings 24000 shop fittings 40000
Less: net loss 19850 81150 less: dep. 6400+14400 19200
bank loan 130000 Bank 2650 2650
O/S telephone exp 100 prepaid exp 200
creditors 430350 closing stock 42000
211250 debtors 557500
suspense a/c 1300
total 852850 852850
TASK 4
4.1 Key components of partnership agreement
In business world it is very important to have an agreement that is valid and legal
between partners of a firm. With the help of this type of agreement they are bound to have
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an equal share in company and distribute profit according to the valid document. There are
some points that need to be kept in mind such as:
Ownership and Percentage: In agreement there must be especially clear about the
relationship of every member. The ownership and percentage of share may vary because of
the amount of investment a partner involved in his business.
Distribution of profit: The profit must be allocated among partner on the basis of the
agreement or share they have invested in business.
Making decision: Every partner has an equal right to be get participated in decision
making process and gives their opinion to make an effective decision.
Termination of partner: There are number of reason to resolve the partnership firm such
as, death of existing partner, issue in ways of doing business, personal problem etc.
4.2 Key components of partnership accounts.
Statement of profit or loss: This statement is prepared at the end of an accounting year
in order to determine the gross profit or loss and net profit or loss or an accounting period of
time.
Partnership appropriation account: This account is basically prepared by the partner in
order to determine the actual capital introduced by them in company business. It is an
intermediary account that is creates between the profit and loss account and partnership account.
Goodwill: It is defines in accounting as an intangible asset that rises when a purchaser
obtains a prevailing business.
Partners’ current accounts: In this kind of account the transaction related to drawing,
interest on capital and salary is recorded and the balance fluctuates every financial year.
Partners’ capital accounts: This account is also known as partner equity accounts that use to
record transaction that how much account is being capitalised by partner in the firm etc (
Partners' Capital Accounts, 2017).
Statement of financial position: Balance sheet is another name of statement of financial
position. As it helps to determine the total assets and liabilities hold by company at the end of
financial year.
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