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Introduction

Final accounts are formulated by all the business entities whether it is sole trader, corporate organisation or partnership firm as it can guide to analyse actual position and situation of the company. It is very important for all the enterprises to follow set guidelines of regulatory authorities of the country so that financial statements can be formulated in a set format. There are various types of accounts that are created by firms (Whiteley, 2017). These are trading, profit and loss, P & L appropriation, partner's capital and current account, balance sheet etc. In sole traders all the profits are acquired by the owner and in firms these are distributed to the partners in a predetermined ratio. In this project report various topics are discussed such as needs and process of preparation of final accounts, formulation of accounting records with the help of incomplete information and preparation of final accounts for sole traders. Legislative and accounting requirements for partnership, formulation of P & L appropriation account and statement of financial position are also covered in this assignment.

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TASK 1

1.1 Reasons for closing off accounts and producing a trial balance

In all the business entities various ledger accounts such as income, expenses, sales, purchase, assets, liabilities are closed every year and then trial balance is generated. There are various reasons for closing off all of them are as follows:

  • All of them are closed because balance of temporary account is transferred to permanent as they are generated for a specific financial period.
  • Another reasons behind closing off is to determine that firm is generating profits or losses for a specific time period (Storey and et.al., 2016).
  • Trial balance is produced to analyse that all the transactions are recorded accurately or not.
  • While formulating trial balance all the mathematical errors are detected that are made during the preparation of ledger and journals.
  • Accountants may analyse the mistakes that are made by them previously in ledger accounts with the help of this statement.

1.2 Process and limitations of preparing a set of final accounts

Trial balance is a statement in which closing balance of all ledger accounts is recorded. Process and limitation of formulating it are as follows:

Process of generating final accounts

  • Firstly all the figures of trial balance and other information are analysed by the accountants..
  • Then items according to their nature are recorded in trading and Profit & loss account are recorded. If there is any adjustments related to the transactions then these are considered to calculate adjusted amount. In case of partnership firm profits are distributed to partners and then their current and capital account are generated.
  • Assess and liabilities are recorded in balance sheet and any type of provisions, depreciation are deducted from them
  • At last profits or losses are calculated and transferred to the balance sheet. It is also analysed that both the column have same balance or not. If it does not match then it means mistakes are made during the formulation process of final accounts (Russell-Jones, 2014).

Limitations of Trial balance:

  • Trial balance is not able to analyse all types of errors such as a transaction in which wrong amount is recorded in both the related accounts. It may create issues while formulation of final accounts as accurate amount cannot be recorded in the profit or loss account.
  • In trial balance only errors can be determined it is not possible to assess their reasons from this statement it will result in inappropriate final accounts as they are generated on the basis of information which is recorded in it.
  • The mistakes that are made by not following the right accounting principles. When these are not considered then final accounts are not considered accurate (Trial balance and its limitations,2014).

1.3 Methods of constructing accounts from incomplete records

In business entities different types of methods are used to construct accounts from incomplete records available to the accountants. All of them are described below:

Control accounts: Such type of accounts are created in general ledger in order to analyse detailed information of subsidiary ledger. The actual and appropriate balance of incomes, expenses, assets and liabilities are recorded in them that can be transferred to financial statements. These are mainly formulated to record data of account receivables and payables as large number of transactions are recorded in them.

Markup and margin method: Accountants use this method to gather missing information with the help of margin percentage. When amount of sales and this proportion is available then cost of goods sold can be analysed.

The accounting equation: This method is used by the accounts when there is value of capital is missing. All the external liabilities can be subtracted from total assets then actual amount of capital can be analysed. For this purpose an accounting equation is followed which is:

Total assets= external liabilities+ internal liabilities (Capital and reserves)

1.4 Reasons for imbalances resulting from incorrect double entries

Incorrect double entries cause imbalances in trial balance which is because of organisation may have not followed the appropriate accounting principles or other reasons.

All these causes are as follows:

  • Main reasons behind the imbalance is that amount of one transaction is recorded in single account and not sowed in other related account. For example, rent of 5000 is paid in cash but by mistake it is recorded in bank account. It may result in imbalance of bank account.
  • If a transaction is wrongly posted in other account which is not related then it will create imbalance in two accounts. For example, furniture is purchased and its amount is posted in land account.
  • When an entry is made more than one then it will also create variances in trial balance. For example, if cash received from debtors is recorded twice in cash and debtor account then it will result in imbalance of the statement.

All the above described reasons results in variance in the total of closing balance of trial balance and also create issues in the preparation of final accounts (Bull, 2014).

1.5 Reasons for incomplete records arising from insufficient data and inconsistencies

When accountants of firm does not have sufficient data to formulate trial balance and final accounts then it results in incomplete records (Reasons for incomplete records, 2018). There are various reasons behind this, that are described below in detail:

  • Unintentional failure to record: Organisation's final accounts become incomplete when employees or accountants forgot to record transactions. It is done unintentionally hence it is not possible to punish them but it creates issues for business because of incomplete records. Another cause of this problem is that sometimes staff members forget to implement appropriate policies and procedures.
  • Intentional manipulation: When accountants or other workers of the business entities trying to make a fraud or steal form the organisation then they make intentional manipulation in records. Sometimes such type of mistakes also made by owners in order to pay less tax on wealth.
  • Data loss: This type of issue take place when the businesses does not have appropriate or sufficient information for the formulation of final accounts. It take place due to changes in software as companies are moving toward paperless work and using new and innovative media to record data. This problem can be resolved by keeping backups of accounting content on regular basis.
  • Employee turnover: When employees are terminated or they leave organisation willingly they inadvertently take records with them. It create issues such as incomplete records for business entities. It also may result in any legal action against the firm because there is no proper information of transactions that are made by it in a specific time period.

All the above described points defines that business enterprises may may have incomplete records due to insufficient data and inconsistency.

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TASK 2

2.1 Calculation of closing and opening capital using incomplete information

Capital account: It is one of the primary components of partnership firm in which changes in ownership of net assets are recorded. It also depicts contribution of owners in capital and retained earning of firm. It is a general ledger account in which amounts paid by the investors are recorded as their contribution in the operational activities. Calculations of closing and opening balances are as follows:

(1). Calculation of closing capital

Capital Account

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

In the above account closing balance of capital is calculated which is 3000.

(2). Calculation of opening capital

Capital Account

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

From the above account opening balance of capital is calculated which is 4640.

2.2 Calculation of opening and closing cash/ bank account balance

Cash book: It is a book in which cash related transactions are recorded. There are various types of cash books are generated that are single, double, three column and petty book. In single column only cash receipts and payments are taped. All the banks and cash related incomes and expenses are recorded in the double column (Chappell and Dunn, 2015)

There are three separate columns that are cash, bank and discount are created in triple column cash book. In petty books small and such transactions are recorded that are done on regular basis.

A double column cash book is generated for the client.

Cash book

Date

Particulars

Cash (£)

Bank (£)

Date

Particulars

Cash (£)

Bank (£)

01/Sep./19

To capital a/c

 

10940

06/Sep./19

By Rent a/c

135

 

02/Sep./19

To M. Boon a/c

 

315

07/Sep./19

By cash a/c

 

50

04/Sep./19

To sales a/c

802

 

23/Sep./19

By S. Wills a/c

 

277

07/Sep./19

To bank a/c

50

 

29/Sep./18

By Drawings a/c

 

120

15/Sep./19

To sales a/c

 

490

30/Sep./19

By Wages a/c

518

 

29/Sep./19

To drawings a/c

120

 

30/Sep./19

By Balance c/d

319

11298

 

 

972

11745

 

 

972

11745

01/Oct./19

To balance c/d

319

11298

 

 

 

 

From the above cash book it has been analysed that closing cash and bank balances are 319 and 11298 respectively.

2.3 Preparation of sales and purchase ledger control accounts

Sales ledger control account: It is mainly used to monitor the amounts that are outstanding by customers of a business entity. It is also called trade debtors control account in which credit sales, bad debts written off, discount allowed, return inward, etc. transactions are recorded. It is apart of balance sheet that helps to analyse the closing balance of debtors.

Sales Ledger Control Account

Date

Particulars

Amount

Date

Particulars

Amount

01/01/20

Balance B/d

23220

31/Dec./20

Discount allowed

3160

31/Dec./20

Credit sales

162540

31/Dec./20

Sales return

8150

 

 

 

31/Dec./20

bad debt written off

4770

 

 

 

31/Dec./20

Received form debtors

146610

 

 

 

31/Dec./20

Balance c/d (b.f.)

23070

 

 

185760

 

 

185760

From the above table it has been analysed that closing balance which is going to be carried in balance sheet is 23070. £370 are subtracted from total receipts from debtors because these were written off by organisation in previous year.

Purchase ledger control account: This account helps to analyse total trade creditors at the end of an accounting year. The closing balance of this account is transferred to balance sheet.  Credit purchase, discount received, return outward, payment too creditors are recorded in this account (Doering, Neumann and Paul, 2015).

Purchase Ledger Control Account

Date

Particulars

Amount

Date

Particulars

Amount

31/Dec./20

Discount received

1310

01/Jan./20

Balance b/d

16400

31/Dec./20

Return outward

2330

31/Dec./20

Credit purchase

114800

31/Dec./20

Paid to creditors

109040

 

 

 

31/Dec./20

Balance c/d (b.f.)

18520

 

 

 

 

 

131200

 

 

131200

From the above account it has been analysed that closing balance of creditors of is 18250 which is going to be recorded in balance sheet.

2.4 Calculation of account balances using mark ups and margins

Mark ups: It is mainly used in cost accounting in order to calculate the amount of cost of goods sold with the help of sales and mark up percentage. It is also very beneficial to determine the selling price of products in relation to the cost of actually produced products. It is a ratio between a sales and cost of items that are sold by an organisation (Reid, 2018). Formula of mark up is as follows:

Selling price – Cost/ cost*100

For example, if total amount of sales is 5000 and cost is 3000 then markup can be used to determine the proportion of cost in sales.

=5000-3000/3000*100

=66.67%

Margins: In accounting margins refers to the amount which is received after deducting cost of goods sold from sales. If its percentage is high then it means that firm attain a good profits on the selling (Goede, 2015).

For example, if total sales is 8000 and cost is 6500 then margins will be 1500 for the organisation.

TASK 3

3.1 Description of components of a set of final accounts for a sole trader

In each type of business entity whether it is sole trader or partnership firm there are five different types of components. All of them are recorded in different statements such as trading, profit and loss account and balance sheet. All of them are as follows:

  • Revenues: These are the increment in economic benefits of an organisation for an accounting period. These are recorded in income statement of the firms (Radtke, Wiesbron and Wiesebron, 2016).
  • Expenses: All the business entities have to bear two different types of expenses these are operating and administrative. Some of them are recorded in trading and rest are recorded in profit and loss account. Salaries, wages, legal charges, interest paid, commission, postage are considered as expenses (Hoenig and Morris, 2014).
  • Equities: Total investment of the owner is consider as equities that includes capital and retained earnings. It is total difference between assets and external liabilities of the firm. These are also known as internal funds.
  • Liabilities: All the external funds including debentures, loans etc. are considered as liabilities. It is vital for sole traders to maintain it, in order to appropriately execute the business.
  • Assets: All of them are recorded in balance sheet and mainly used by sole traders to smoothly run the business. There are two different types of assets these are fixed and intangible. Land, furniture etc. are fixed and goodwill, trademarks etc. are intangible assets.

Conclusion

The above assignment concludes that, there are different types of statements that are part of final accounts. These are profit and loss account, P & L appropriation, balance sheet etc. All of them are generated by sole traders and partnership firms in order to analyse actual performance and position. Such accounts are formulated to determine that organisation is making profits or bearing losses. In partnership firms profits are distributed to the partners on a pre-decided ratio. In case of sole trader profits and losses are faced by owner.

References

  • Bull, R. J., 2014. Accounting in business. Butterworth-Heinemann.
  • Chappell, D. and Dunn, M. H., 2015. The architect in practice. John Wiley & Sons.
  • Doering, P., Neumann, S. and Paul, S., 2015. A primer on social trading networks–institutional aspects and empirical evidence.
  • Goede, G. W., 2015. Wirtschaftsenglisch-Lexikon: Englisch-deutsch, deutsch-englisch. Walter de Gruyter GmbH & Co KG.
  • Hoenig, T. M. and Morris, C. S., 2014. Restructuring the banking system to improve safety and soundness. In The Social Value of the Financial Sector: Too Big to Fail or Just Too Big? (pp. 401-425).
  • Horngren, C. and Harrison, W., 2015. ACCOUNTING: BSB110. Pearson Higher Education AU.
  • Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
  • Paterson, R., 2016. Off balance sheet finance. Springer.
  • Radtke, K. W., Wiesbron, M. and Wiesebron, M., 2016. Competing for Integration: Japan, Europe, Latin America and Their Strategic Partners: Japan, Europe, Latin America and Their Strategic Partners. Routledge.
  • Reid, W., 2018. The meaning of company accounts. Routledge.
  • Russell-Jones, N., 2014. Business Planning Pocketbook. Management Pocketbooks.

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