final accounts-sole traders

8/4/2019 Final Accounts-Sole Traders

1/35

Financial Accounts


2/35

Financial Statements

To help communicate financial data, the followingaccounts are prepared:

Trading Account Profit & Loss Account

Balance Sheet

These accounts provide information relating to anorganisations activities during a trading period usually one year.


3/35

Trading Account


4/35

Trading Account

Compares the value of sales to the customer with the value of the sales atcost price.

Difference between the Sales Value (turnover) and the Cost of Sales is theGross Profit

Items that might appear include: Sales (turnover) Purchases Returns inwards / outwards Stock at start of trading period Stock at end of trading period

This account details any item that relates to the sales or the cost incurredwhen making those sales

Trading Account Simple Format & Templates Trading Account Questions
http://joans%20p%26l%20acc.xls/http://trading%20accountjwfeb2009.doc/http://joans%20p%26l%20acc.xls/http://joans%20p%26l%20acc.xls/http://trading%20accountjwfeb2009.doc/http://joans%20p%26l%20acc.xls/http://joans%20p%26l%20acc.xls/


5/35

Profit & Loss Account


6/35


Used by business as a statement for both internaland external reporting.

This calculates the final profit (net profit) or lossthat an organisation has made over a financial timeperiod.

The Profit & Loss Account is a continuation of the

Trading Account it starts with the Gross Profit

Lists any items of additional revenue raised and anyexpenses incurred not directly linked to trading.


7/35


Items that might appear include:

Additional revenue (income)

Discounts received Commission received Rent received Investment income

Expenses not Linked to Trading

Wages Rent Insurance Advertising Depreciation Stationery

Any other general expense

Where does a P&L account start? Profit & Loss Account (sole trader) Profit & Loss Account Questions
http://2.%20profit%20%26%20loss%20account.xls/http://joans%20p%26l%20acc.xls/http://trading%20accountjwfeb2009.doc/http://joans%20p%26l%20acc.xls/http://joans%20p%26l%20acc.xls/http://trading%20accountjwfeb2009.doc/http://joans%20p%26l%20acc.xls/http://2.%20profit%20%26%20loss%20account.xls/


8/35


Under the Companies Act 1985, a limited company

must produce their year-end accounts in accordance

with a legal format.

Trading Profit & Loss Account (Ltd)
http://2.%20trading%20profit%20%26%20loss%20account%20%28ltd%29.xls/http://2.%20trading%20profit%20%26%20loss%20account%20%28ltd%29.xls/


9/35


The type of profit and loss account that isproduced will depend on the type of business

e.g. Sole trader, partnership, private limitedcompany or public limited company

Trading & Profit & LossAccount Terminology


10/35

Questions

Distinguish between the following financial terms

1. Opening stock and closing stock

2. Gross profit and net profit

3. Purchase returns and sales returns

4. Purchases and sales

(4)


11/35

Solution


12/35

Balance Sheet


13/35

Balance Sheet

A balance sheet shows the financial worth andfinancial position of a business at a particular point intime (usually the last day of the financial year).

It is out of date by the time it is published.


14/35

Balance Sheet

Shows 3 different things:

Assets (things that the business owns)

Fixed (buildings etc Listed in order of permanence) Current (can easily be turned into cash e.g. stock)

Liabilities (what it owes to others e.g. creditors, bank)

Current liabilities (creditors due within one year)

Long term liabilities (creditors due over 1 year)

Capital(money invested in business by owners to set it up)


15/35

Balance Sheet

Accounting equation:

CAPITAL = ASSETS - LIABILITIES


16/35

Balance Sheet

The Balance Sheet is presented in 2 parts:

Top half assets and liabilities

Bottom half capital

The top half of the balance sheet must equal thetotal of the bottom half of the balance sheet.

Balance Sheet - Sole Trader & Partnership

Balance Sheet - Limited CompanyBalance Sheet

Terminology
http://2.%20balance%20sheet%20example%20%28sole%20trader%20%26%20partner%29.xls/http://2.%20balance%20sheet%20example%20%28ltd%29.xls/http://2.%20balance%20sheet%20example%20%28ltd%29.xls/http://2.%20balance%20sheet%20example%20%28ltd%29.xls/http://2.%20balance%20sheet%20example%20%28ltd%29.xls/http://2.%20balance%20sheet%20example%20%28ltd%29.xls/http://2.%20balance%20sheet%20example%20%28sole%20trader%20%26%20partner%29.xls/http://2.%20balance%20sheet%20example%20%28sole%20trader%20%26%20partner%29.xls/http://2.%20balance%20sheet%20example%20%28sole%20trader%20%26%20partner%29.xls/http://2.%20balance%20sheet%20example%20%28sole%20trader%20%26%20partner%29.xls/


17/35

Questions

Distinguish between the following financialterms

1. Fixed Assets and Current Assets

2. Long-term liability and Current Liability

3.

Capital and drawings

(3)


18/35

Solutions


19/35

Question

Describe the purpose of an organisation preparing a profit andloss account and a balance sheet.

(2 marks)

Describe the contents of the following financial statements(identify at least two items that would be shown in each):

a Trading Account a Profit and Loss Account a Balance Sheet

(9 marks)


20/35

Solution Q1

An organisation would produce a profit andloss account because its shows the incomeand costs of the business over a financial

period. This enables a business to work out ifit has run at a profit or loss.

They would prepare a balance sheet because

it lists the assets and liabilities of thebusiness, how it is financed and the value ofthe business at that particular time.


21/35

Solution Q2

A trading account shows the sales and cost of sales resulting inthe calculation of the gross profit; purchases, opening andclosing stocks, sales, sales returns.

A profit and loss account shows the net profit or loss after all

the expenses have been deducted from the gross profit, and anyitems of income added on to the gross profit; rent, wages,electricity, commission received.

A balance sheet shows the value of an organisation as at aparticular date; fixed assets e.g. equipment, vehicles; currentassets e.g. stock, debtors, cash; current liabilities e.g. creditors;

financed by e.g. capital.

(1 mark for each description, 2 marks for ID)


22/35

Interpreting Final Accounts

All public and private companies are requiredto provide financial statements at end of eachtrading period.

Inland Revenue use information to calculatethe tax payable.


23/35


Sole Traders / Partnerships / Private Companies

Not legally obliged to make final accounts public.

May need to provide them when attempting toborrow from banks etc.

Public Limited Companies

Legally obliged to publish final accounts


24/35

Question

Outline the main elements in the finalaccounts of a business and how each ofthese elements is calculated

(6 marks)


25/35

Solution

The trading account shows the gross profit

This is achieved by deducting the cost of goods soldfrom sales revenue

The profit and loss account shows how much netprofit the business has made

This is achieved by deducting expenses from thegross profit

The balance sheet shows the financial worth of the

organisation. It is calculated by deducting the assets from the

liabilities


26/35


The following may use the information in publishedaccounts:

Rival companies

Investors Lenders Trade Union Representatives

Interpreting the data and making comparisons withprevious years or other organisations gives an indicationof the future success and financial security of anorganisation.


27/35


Interpretation of Trading Profit & Loss Accounts

Was this years trading result good or bad, compared with last yearor with a rival company?

Has the Gross Profit improved this year, compared with last year?

Are we making efficient use of our stock?

Does our Net Profit figure compare favourably with those of otherorganisations in the same industry?

Interpretation of Balance Sheets

Do we have enough working capital to avoid cash flow problems?

Are we making enough use of available trade credit?

Is our level of debtors comparable with that of our industrycompetitors?


28/35

Trading Profit & Loss AccountTerminology

Trading account

Provides a summary of the businesss trading activityduring the financial year.

Sales

Monies that the business has received from sellinggoods and/or services

Turnover/net sales

The value of the businesss sales less the value of any

returns.Cost of sales

Costs associated directly with the production/purchase ofgoods or services

Balance Sheet


29/35


Opening stock

The value of the stock of goods at the start of thefinancial period

Purchases

The cost of goods that the business has bought forresale to its customers.

Carriage Inwards

The cost of transporting or delivering goods purchased

by the business for resalePurchase Returns

The value of goods purchased but returned to thesupplier e.g. wrong colour, faulty

Balance Sheet


30/35


Closing stock

The value of unsold stock at the end of the financialperiod

Gross profit/loss

The profit (or loss) recorded as the difference betweenthe businesss sales and purchases

Expenses

Any expenses incurred by the business in the course of

its normal operationNet profit/loss

The profit (or loss) recorded after all business expenseshave been deducted

Balance Sheet


31/35


Corporation tax

A tax on business profits payable to the Government

Dividend

Proportion of the business profit paid toshareholders and dependent on the number ofshares that they own.

Unappropriated profit

Profit retained in the business i.e. not distributed to

owners or shareholders.

Balance Sheet


32/35

Balance Sheet Terminology Limited company

Fixed asset

Something the business owns and depends on to operate on adaily basis. Usually has a degree of permanence e.g. property,equipment, furniture, vehicles

Current asset Assets that are likely to be changed into cash in the short term.

They frequently change in value e.g. stocks, debtors, cash

Current liability

Something that the business owes money for in the short term.

They must usually be paid within a period of 12 months or oneyear e.g. creditors, bank overdraft, dividends and taxation

Long term liability

Debts of the business that are due to be repaid for more than 12months e.g. debentures, mortgages

Interpretation


33/35

Balance Sheet Terminology Limited company

Net current assets (Working Capital)

The amount by which total value of current assets exceedsthe total value of current liabilities. Value of current assetsshould be greater than value of current liabilities. If not,organisation may be facing serious cash flow problems.

Net assets (Capital employed) Net fixed assets + net current assets. Shows the net value

of the firm once short-term debts have been repaid.Issued share capital

Money put into organisation by the owners or shareholders.In return for their investment they receive dividendpayments.

Interpretation


34/35

Balance Sheet Terminology Sole trader or partnership

Owners capital at start

Value of the owners investment at the start of the

accounting period and any retained profits accrued inprevious trading periods.

Profit

The value of net profit taken from the Profit & Loss

Account.

Owners capital at the end

Value of the owners capital at the end of this financial

period.

Interpretation


35/35

Balance Sheet Terminology Sole trader or partnership

Capital

The money invested by the owner(s) of the business to set

it up. The money is owed back to the owner(s) by thebusiness.

Reserves

Profits retained by the organisation after the payments of

dividends to shareholders and after provision has beenmade fore all other current liabilities.

Drawings

The value of resources that are withdrawn from theorganisation by the owner(s) for their private use. Can be

taken in form of cash, goods or services.

Interpretation

final accounts-sole traders

Documents