final accounts for sole traders and partnerships4 final accounts for sole traders and partnerships...

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Final accountsfor sole tradersandpartnershipsChapter activities

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1.1 Profit for the year is calculated as:

(a) Purchases – expenses

(b) Gross profit – expenses

(c) Capital – expenses

(d) Gross profit + expenses

1.2 Which one of the following describes net assets?

(a) Non-current assets + current liabilities – current assets – non-current liabilities

(b) Current assets – current liabilities

(c) Non-current assets – non-current liabilities

(d) Non-current assets + current assets – current liabilities – non-current liabilities

Layouts for the Statement of Profit or Loss and the Statement of Financial Position are included in theAppendix of Final Accounts for Sole Trader and Partnerships Tutorial, and are also available fordownload from www.osbornebooks.co.uk.

2 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e

Preparing financial statements1

c h a p t e r a c t i v i t i e s 3

1.3 You are to fill in the missing figures for the following sole trader businesses:

Sales Opening Purchases Closing Gross Expenses Profit/loss*inventory inventory profit for year

£ £ £ £ £ £ £

Business A 75,000 7,000 50,000 8,000 ........ 16,000 ........

Business B ......... 10,000 65,000 8,000 22,000 ......... 15,000

Business C 64,000 9,500 52,000 ......... 13,500 15,500 ........

Business D 44,350 6,250 ......... 7,350 26,050 ......... 13,600

Business E 49,750 ........ 26,750 9,600 23,900 18,600 ........

Business F 75,000 11,500 47,500 ........ 26,500 ......... –5,500

* Note: loss is indicated by a minus sign


1.4 This Activity is about calculating missing balances and the accounting equation.

You are given the following information about a sole trader as at 1 April 20X7:

The value of assets and liabilities was:• Non-current assets at carrying amount £50,500• Inventory £9,450• Trade receivables £18,750• Cash at bank £2,140• Trade payables £11,380

There were no other assets or liabilities.

(a) Calculate the capital account balance as at 1 April 20X7.

£

(b) On 30 April 20X7, new office equipment is purchased on credit for use in the business. Tickthe boxes to show what effect this transaction will have on the balances. You must chooseone answer for each line.

Debit Credit No change

Non-current assets

Trade receivables

Trade payables

Bank

Capital

(c) Which of the following is a current asset? Select one answer.

(a) Owner’s capital

(b) A bank overdraft

(c) Trade payables

(d) Trade receivables


1.5 The following trial balance has been extracted by Sam Avalos at 31 March 20X8:

Dr Cr

£ £

Opening inventory 10,475

Purchases 83,691

Sales revenue 157,648

Rent and rates 10,083

Heating and lighting 3,624

Payroll expenses 35,822

Vehicle expenses 4,046

Advertising 3,984

Premises at cost 100,000

Office equipment at cost 22,000

Vehicles at cost 35,000

Sales ledger control 19,247

Bank 3,240

Cash 284

Capital 112,500

Drawings 18,913

Loan from bank 65,500

Purchases ledger control 12,286

Value Added Tax 2,475

Closing inventory – Statement of Profit or Loss 12,655

Closing inventory – Statement of Financial Position 12,655

363,064 363,064

You are to prepare the financial statements of Sam Avalos for the year ended 31 March 20X8.


1.6 The following trial balance has been extracted by Jenny Clark at 30 June 20X6:

Dr Cr

£ £

Capital 26,000


Purchases 36,147



Heating and lighting 3,071

Rent and rates 5,294

Vehicles at cost 17,390

Office equipment at cost 3,450

Sundry expenses 1,086

Vehicle expenses 3,417

Drawings 17,248

Sales ledger control 16,346

Purchases ledger control 9,273

Value Added Tax 1,212

Bank 5,954

Closing inventory – Statement of Profit or Loss 10,032

Closing inventory – Statement of Financial Position 10,032

146,804 146,804

You are to prepare the financial statements of Jenny Clark for the year ended 30 June 20X6.


1.7 An extract from the trial balance of Cheryl Croft is as follows:

Trial balance (extract) as at 31 March 20X5Dr Cr£ £



Purchases 60,320

Sales returns 1,840

Purchases returns 960

Carriage in 450

Carriage out 1,120

Discount received 120

Discount allowed 170

Other expenses 26,490

Closing inventory: Statement of Profit or Loss 12,270

You are to prepare the Statement of Profit or Loss of Cheryl Croft for the year ended 31 March20X5, using the conventional format.



2.1 • Cost of sales for the year is £240,000.• Mark-up is 40%.What is sales revenue for the year?

(a) £240,000

(b) £96,000

(c) £144,000

(d) £336,000

2.2 • Sales for the year are £250,000.• Margin is 50%.• Opening inventory is £25,000; closing inventory is £30,000.What are purchases for the year?

(a) £120,000

(b) £125,000

(c) £130,000

(d) £375,000

Incomplete records accounting2


2.3 You are preparing accounts from incomplete records. Trade receivables at the start of the year were£20,400. During the year sales on credit total £90,300, bank receipts from trade receivables total£85,600, sales returns total £1,400, and discounts allowed total £700.

What is the trade receivables figure at the end of the year?

(a) £13,600

(b) £27,200

(c) £23,000

(d) £24,400

2.4 The following figures are extracted from the accounts of Wyvern Systems Limited for the yearended 30 June 20X8:

• sales for the year, £300,000

• opening inventory, £20,000

• closing inventory, £40,000

• purchases for the year, £260,000

You are to calculate:(a) cost of sales for the year

(b) gross profit for the year

(c) gross profit mark up

(d) gross sales margin

1 0 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e

2.5 James Hendry owns a business which sells office stationery. Most of his customers are firms in thearea, to whom he sells on credit terms. Although he does not keep a full set of accounting records,the following information is available in respect of the year ended 31 December 20X5:

Summary of assets and liabilities:1 Jan 20X5 31 Dec 20X5

£ £Shop fittings (cost £10,000) 8,000 7,000Inventory 25,600 29,800Bank balance 4,000 8,000Cash 1,000 1,600Trade receivables 29,200 20,400Trade payables 20,800 16,000Accrual: general expenses – 500

Summary of the business bank account for the year ended 31 December 20X5:£

Receipts from customers 127,800Payments to suppliers 82,600Drawings 20,000General expenses 20,600

Other informationShop fittings are being depreciated at 10% per year, using the straight-line method.

You are to:(a) calculate the amount of sales during the year(b) calculate the amount of purchases during the year(c) calculate the figure for general expenses to be shown in the Statement of Profit or

Loss for the year ended 31 December 20X5(d) prepare James Hendry's Statement of Profit or Loss for the year ended 31 December 20X5(e) prepare James Hendry's Statement of Financial Position as at 31 December 20X5

Note: VAT is to be ignored on all transactions

c h a p t e r a c t i v i t i e s 1 1

2.6 This Activity is about finding missing figures in ledger accounts where the records are incomplete.

You are working on the financial statements of a business for the year ended 31 March 20X4. Youhave the following information.

All sales and purchases are on credit terms.

Administration expenses are not included in the purchases figure in purchases day book.

There were no settlement (cash) discounts on payments made to trade payables.

Day book summaries for the year Net VAT Total£ £ £

Sales 142,000 28,400 170,400Purchases 88,000 17,600 105,600Sales returns 1,200 240 1,440Purchases returns 680 136 816

Balances as at: 31 March 20X3 31 March 20X4£ £

Trade receivables 28,360 31,790

Trade payables 13,520 not known

Further information: Net VAT Total£ £ £

Administration expenses 14,800 2,960 17,760

Bank summary Dr £ Cr £

Balance b/d 6,430 Travel expenses 6,550

Sales ledger control 165,320 Administration expenses 17,760

Balance c/d 30,930 Purchases ledger control 103,410

HMRC for VAT 8,360

Drawings 20,100


202,680 202,680


(a) Using the figures given on the previous page, prepare the sales ledger control account forthe year ended 31 March 20X4. Show clearly settlement (cash) discounts as the balancingfigure.

Sales ledger control account

(b) Using the figures given on the previous page, prepare the purchases ledger control accountfor the year ended 31 March 20X4. Show clearly the trade payables figure at the end of theyear as the balancing figure.

Purchases ledger control account

(c) Find the closing balance for VAT by preparing the VAT control account for the year ended31 March 20X4. Use the figures given on the previous page.

Note: The business is not charged VAT on its travel expenses.

VAT control account

Balance b/d 3,460



3.1 A Statement of Profit or Loss shows a loss for the year of £5,800. It is discovered that no allowancehas been made for payroll expenses accrued of £550 and rent prepaid of £250 at the year end.What is the adjusted loss for the year?

(a) £6,600

(b) £5,000

(c) £6,100

(d) £5,500

3.2 Identify whether the following items will be stated in the year end Statement of Profit or Loss asincome or expense by selecting the relevant column of the table below.

Item Income Expense

Loss on disposal of non-current asset

Increase in allowance for doubtful debts

Irrecoverable debts

Discounts received

Depreciation charges

Carriage out

Sole trader financial statements3


3.3 A Statement of Profit or Loss shows a profit for the year of £15,240. The owner of the businesswishes to decrease the allowance for doubtful debts by £600 and to write off irrecoverable debts of£200. What is the adjusted profit for the year?

(a) £15,640

(b) £14,840

(c) £16,040

(d) £14,440


3.4 You have the following trial balance for a sole trader known as Computer Traders. All the necessaryyear end adjustments have been made.

(a) Prepare a Statement of Profit or Loss (on the next page) for the business for the year ended31 March 20X4.

Tysoe TradingTrial balance as at 31 March 20X4

Dr Cr£ £

Accruals 550Bank 3,290Capital 60,000Closing inventory 17,320 17,320Depreciation charges 3,000Discounts allowed 740Drawings 25,450General expenses 30,850Office equipment at cost 35,600Office equipment: accumulated depreciation 12,300Opening inventory 15,680Payroll expenses 45,960Prepayments 1,040Purchases 95,210Purchases ledger control 17,360Rent and rates 12,590Sales revenue 214,830Sales ledger control 41,470Value Added Tax 5,840

328,200 328,200


Computer TradersStatement of Profit or Loss for the year ended 31 March 20X4

£ £

Sales revenue

Cost of salesGross profitLess expenses:

Total expenses

Profit for the year

(b) Indicate where prepayments of expenses should be shown in the Statement of FinancialPosition. Select one from:

(a) As a non-current asset

(b) As a current asset

(c) As a current liability

(d) As an addition to capital

(c) State the meaning of a debit balance for disposal of a non-current asset in a trial balance.Select one from:

(a) The business has made a gain on disposal

(b) The business has made a loss on disposal

(c) The asset has been over depreciated

(d) The asset has been part-exchanged on disposal


3.5 The following adjusted trial balance has been taken from the books of Julie McCabe, who sellsshoes, as at 31 March 20X3:

Dr Cr£ £

Allowance for doubtful debts 200Allowance for doubtful debts: adjustment 75Purchases ledger control 12,380Sales ledger control 1,050Value Added Tax 1,490Bank 4,870Capital 30,000Sales revenue 164,275Purchases 75,490Opening inventory 22,650Shop wages 43,120Accrual of shop wages 420Heat and light 3,420Rent 12,680Prepayment of rent 750Shop fittings at cost 22,000Shop fittings: depreciation charges 5,250Shop fittings: accumulated depreciation 10,500Disposal of non-current asset 200Irrecoverable debts 120Drawings 27,740Closing inventory 25,980 25,980

245,320 245,320

You are to prepare the financial statements of Julie McCabe for the year ended 31 March20X3, using the conventional format.


4.1 Profits of a two-person partnership are £24,600 before the following are taken into account:

• interest on partners’ capital accounts, £2,200

• salary of one partner, £12,500

• interest on partners’ drawings £500

If the remaining profits are shared equally, how much will each partner receive?

(a) £12,300

(b) £7,400

(c) £5,200

(d) £6,900


Partnership financial statements4


4.2 You have the following information about a partnership business:

• The financial year ends on 31 March

• The partners are Joe, Kit and Liz

• Partners’ annual salaries:Joe £12,600Kit £20,900Liz £5,350

• Partners’ capital account balances as at 31 March 20X7:Joe £40,000Kit £30,000Liz £20,000

Interest on capital is allowed at 3% per annum on the capital account balance at the end of thefinancial year.

• Interest charged on partners’ drawings:Joe £120Kit £310Liz £90

• The partners share the remaining profit of £22,000 as follows:Joe 40%Kit 35%Liz 25%

• Partners’ drawings for the year:Joe £16,350Kit £26,490Liz £12,600

Prepare the current accounts for the partners for the year ended 31 March 20X7. Show clearly thebalances carried down. You must enter zeros where appropriate. Do not use brackets, minus signsor dashes.

Current accounts

Joe £ Kit £ Liz £ Joe £ Kit £ Liz £Balance b/d 200 0 0 Balance b/d 0 600 1,000


4.3 This Activity is about preparing a partnership Statement of Financial Position.

You are preparing the Statement of Financial Position for the JK Partnership as at 31 March 20X5.The partners are Jon and Kim.

All the necessary year end adjustments have been made, except for the transfer of profit to thecurrent accounts of the partners.

Before sharing profits the balances of the partners’ current accounts are:

• Jon £750 debit

• Kim £400 credit

Each partner is entitled to £6,500 profit share.

(a) Calculate the balance of each partner’s current account after sharing profits. Indicatewhether these balances are DEBIT or CREDIT.

Current account: Jon £ DEBIT / CREDIT

Current account: Kim £ DEBIT / CREDIT

Note: these balances will need to be transferred into the Statement of Financial Position ofthe partnership which follows.

You have the following trial balance. All the necessary year end adjustments have beenmade.


(b) Prepare a Statement of Financial Position for the partnership as at 31 March 20X5. Youneed to use the partners’ current account balances that you have just calculated. Do notuse brackets, minus signs or dashes.

JK PartnershipTrial balance as at 31 March 20X5

Dr £ Cr £Accruals 590Administration expenses 23,850Allowance for doubtful debts 760Allowance for doubtful debts: adjustment 150Bank 4,680Capital account – Jon 30,000Capital account – Kim 20,000Cash 570Closing inventory 12,630 12,630Current account – Jon 750Current account – Kim 400Depreciation charges 3,000Disposal of non-current asset 220Machinery at cost 40,000Machinery: accumulated depreciation 12,500Opening inventory 11,220Payroll expenses 43,260Purchases 73,840Purchases ledger control 14,750Sales revenue 155,910Sales ledger control 36,230Value Added Tax 2,860Total 250,400 250,400


JK PartnershipStatement of Financial Position as at 31 March 20X5

Cost Accumulated Carrying amountdepreciation

Non-current assets £ £ £

Current assets

Current liabilities

Net current assets

Net assets

Financed by: Jon Kim Total


4.4 Clark and Pearce are in partnership selling business computer systems. The following trial balancehas been taken from their accounts for the year ended 30 June 20X4:

Dr Cr£ £

Sales revenue 225,000Cost of sales 120,000Payroll expenses 30,400Electricity 2,420Telephone 3,110Rent and rates 10,000Discount allowed 140Office expenses 10,610*Closing inventory – Statement of Financial Position 41,570Sales ledger control 20,000Purchases ledger control 6,950Value Added Tax 5,240Irrecoverable debts 1,200Allowance for doubtful debts 780Office equipment at cost 52,000Office equipment: accumulated depreciation 20,800Clark: Capital account 60,000

Current account 430Drawings 20,600

Pearce: Capital account 30,000Current account 300Drawings 15,700

Bank 21,750349,500 349,500

* Only the closing inventory is included in the trial balance because cost of sales has beencalculated already.

Notes at 30 June 20X4:• depreciate the office equipment at 20 per cent, using the straight-line method• Pearce is to receive a partnership salary of £12,000• allow interest on partners’ capital accounts at 5 per cent per year• remaining profits and losses are shared as follows: Clark two-thirds, Pearce one-third

Task 1Show the partners’ capital and current accounts for the year ended 30 June 20X4. (Note: in orderto complete these you will need to calculate the profit share from the Statement of Profit or Loss inTask 2.)

Task 2Prepare the partnership financial statements for the year ended 30 June 20X4 in the conventionalformat.


5.2 Rachel and Sonia are in partnership sharing profits equally. Each has a capital account with abalance of £40,000. Trish joins as a new partner. The profit share will be Rachel 60%, Sonia 30%and Trish 10%. An adjustment is made for goodwill on the admission of Trish to the value of£30,000, but no goodwill is to be left in the accounts. What will be the balance of Rachel’s capitalaccount after the creation and write off of goodwill?

(a) £43,000

(b) £55,000

(c) £37,000

(d) £22,000

5.1 Anne, Beth and Carol are in partnership sharing profits equally. Anne is to retire and it is agreedthat goodwill is worth £24,000. After Anne’s retirement, Beth and Carol will continue to run thepartnership and will share profits equally. What will be the goodwill adjustments to Carol’s capitalaccount?

(a) Debit £8,000; credit £12,000

(b) Debit £12,000; credit £8,000

(c) Debit £8,000; credit £8,000

(d) Debit £12,000; credit £12,000

Changes in partnership 5


5.3 You have the following information about a partnership:

The partners are Dan and Eve.

• Fay was admitted to the partnership on 1 April 20X5 when she paid £30,000 into the bankaccount as her capital.

• Profit share, effective until 31 March 20X5:– Dan 40%– Eve 60%

• Profit share, effective from 1 April 20X5:– Dan 30%– Eve 50%– Fay 20%

• Goodwill was valued at £20,000 on 31 March 20X5.

• Goodwill is to be introduced into the partners’ capital accounts on 31 March and theneliminated on 1 April.

(a) Prepare the goodwill account of the partnership, showing clearly the transactions on theadmission of Fay, the new partner.

Goodwill account

(b) Prepare the capital account for Fay, the new partner, showing clearly the balance carrieddown as at 1 April 20X5.

Capital account – Fay

Balance b/d 0


(c) Identify whether the following statements about the partnership of Dan, Eve and Fay aretrue or false by putting a tick in the relevant column of the table below.

Statement True False

Fay has paid a premium to join the existing partnership ofDan and Eve

The balances of Dan and Eve’s capital accounts will increase because goodwill has been charged to Fay

Dan and Eve have each paid money to Fay when she joined the partnership

After the admission of Fay, the bank account of the partnership will have £30,000 extra minus the amount paid by Fay for goodwill


5.4 Henry, Ian and Jenny are in partnership sharing profits equally. Ian retired on 31 December 20X4.

The Statement of Financial Position drawn up immediately before Ian’s retirement was as follows:

£ £Non-current assets 120,000Current assets 55,000Bank 15,000

190,000Current liabilities 50,000

140,000

Capital accounts:Henry 42,000Ian 43,000Jenny 50,000

135,000Current accounts:

Henry 4,000Ian (2,000)Jenny 3,000

5,000140,000

Upon Ian’s retirement from the partnership:

• goodwill was agreed to be worth £36,000

• his current account balance was to be transferred to his capital account

• he was to be paid £10,000 of his capital and share of the goodwill from the bank, and thebalance was to be left as a loan to the partnership

• Henry and Jenny were to continue in partnership sharing profits and losses equally

• No goodwill is to remain in the accounts

Task 1Prepare the partners’ capital accounts, showing the retirement of Ian.

Task 2Show the Statement of Financial Position immediately after Ian’s retirement from the partnership.


5.5 You have the following information about a partnership business:

• The financial year ends on 31 March.

• The partners at the beginning of the year were Gil, Hal and Ian.

• Gil retired from the partnership on 1 January 20X7.

• There is no interest on partners’ capital.

• Partners’ annual salaries:

– Gil £18,000

– Hal £16,000

– Ian £12,000

• Partners’ interest on drawings:

– Gil £360 per full year

– Hal £200 per full year

– Ian £160 per full year

• Profit share, effective until 31 December 20X6:

– Gil 50%

– Hal 30%

– Ian 20%

• Profit share, effective from 1 January 20X7:

– Hal 60%

– Ian 40%

Profit for the year ended 31 March 20X7 was £75,000. The profits accrued evenly during the year.

Prepare the appropriation account (on the next page) for the partnership for the year ended 31March 20X7.


Partnership Appropriation account for the year ended 31 March 20X7

1 Apr 20X6 – 1 Jan 20X7 –31 Dec 20X6 31 Mar 20X7 Total

£ £ £

Profit

Salaries:

Gil

Hal

Ian

Interest on drawings:

Gil

Hal

Ian

Profit available for distribution

Profit share

Gil

Hal

Ian

Total profit distributed

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