12. Partnerships and Companies: Accounts and Regulations

Question 1

Unincorporated Business: Does Trading profit appear on the profit loss account or balance sheet or both? Where?

Answer 1

Trading profit is shown at the end of the profit and loss account – this is what the profit and loss account is designed to calculate. It is also shown on the balance sheet under ‘capital employed’.

Question 2

Unincorporated Business: where on the accounts would an unpaid bill appear?

Answer 2

On the balance sheet as an ‘accrual’

Question 3

Net asset calculation

Answer 3

Current assets - Current liabilities

Question 4

Net Assets calculation

Answer 4

(Fixed Assets + Current Assets) - (Long term liabilities + current liabilities)

Question 5

If the company sells shares to someone - how does this affect their balance sheet?

Answer 5

The net asset value increases by the amount paid for by the shares (cash)

Question 6

If a company receives a loan, how will this be shown on a balance sheet?

Answer 6

If a company receives a loan, the increase in the company’s cash (assets) will be displaced by the increase in the company’s liabilities (amount owing on the loan), causing net asset value to stay the same. If there is interest on the loan, this will cause a further decrease in net asset value.

Question 7

What does the profit and loss account show?

Answer 7

How profitable a business is through income-expenditure=net profits

Question 8

What does a ‘balance sheet’ tell you about a business

Answer 8

How much the business is worth (wrt their assets and liabilities) on the last day of the accounting period

assets - liabilities = net worth

Question 9

What does the employment of capital section of the balance sheet show?

Answer 9

Shows the value of assets less liabilities owed to third parties

Question 10

What does the ‘capital employed’ section of the balance sheet show?

Answer 10

Shows the amount owed to the proprietor of the business as capital (where the money came from)
- consists of balance on capital account (amount put into business by owner, and net profit from profit / loss account)
- If business owner has withdrawn money over the year, this is shown on the drawings account, whose balance is deducted from figures in the capital employed section

Question 11

Current Liabilities

Answer 11

liabilities which are repayable in 12 months of less from the date of the balance sheet (eg. a bank overdraft or an invoice owed to a supplier)

Question 12

Long Term liabilities

Answer 12

repayable more than 12 months from the date of the balance sheet (eg. bank loan)

Question 13

What does it mean to say that final accounts are prepared on an ‘accruals basis’

Answer 13

income and expenses are recorded in the period to which they relate instead of in the period when payment / receipt occurs

Question 14

Where do outstanding expenses show up on profit and loss account?

Answer 14

1. Don’t show up until they have been paid
2. For final accounts, unpaid bills must be included as an adjustment (here, they will show up as an expense)

Question 15

Where do oustanding bills show up on the balance sheet?

Answer 15

They won’t show up until final accounts
- added as an adjustment, additional current liability under ‘accruals’

Question 16

Where are prepayments shown on the balance sheet?

Answer 16

Added as current assets

Question 17

Where are prepayments shown in the profit and loss account?

Answer 17

Prepayment reduces value of the prepaid item in the expenses section of the profit and loss account

Question 18

Where does work which has been carried out but not billed for show up on profit and loss account?

Answer 18

Appears as additional income (profit costs) in profit and loss account for current year

Question 19

Where does work which has been carried out but not billed for show up on the balance sheet?

Answer 19

Appears as an additional current asset

Question 20

What is closing stock? Where does it show up on the balance sheet?

Answer 20

1. The stock remaining at the end of the accounting period
2. shown as an additional item on the current assets section (as business will start next year with some stock already purchased)

Question 21

Where are ‘bad debts’ shown on the profit and loss accounts / balance sheet?

Answer 21

As an expense (written off, not shown on balance sheet) instead is deducted on he balance sheet on the debtors figure

Question 22

What is a doubtful debtor? How are they factored into the P+L account and the BS?

Answer 22

1. those who ‘may not pay’,
2. Expense in PL account as ‘provision for doubtful debts’
3. subtracted from debtors figure in the balance sheet

Question 23

If an asset is depreciating how is this reflected in the PL account?

Answer 23

Assets which are depreciating are shown in profit and loss account as an expense item which reduces net profit (directors determine amount as a % of the asset’s value)

Question 24

When an asset is disposed of at an overvalue, how is this shown in the BS and PL Account?

Answer 24

1. Balance sheet: fixed assets figure reduces and cash increases
2. PL account: profit is shown by difference in book value and sale value

Question 25

When an asset is disposed of at an undervalue - how is this reflected on the profit and loss account?

Answer 25

If the asset is sold at an undervalue (relative to book value) it will be recorded in profit and loss account as a reduction of net profit

Question 26

What is the appropriation account and when is it used?

Answer 26

Partnership and LLP profit and loss accounts are prepared in the same way as the profit and loss accounts of sole traders, but there will also be an appropriation account showing how net profit is divided between the partners.

Question 27

How does the capital employed section of the balance sheet differ for partnerships and sole traders?

Answer 27

In a partnership, movements on the capital and current account balances are shown for each partner separately

Question 28

If a partner leaves / joins during an accounting period - how will this impact how accounts are prepared?

Answer 28

Two appropriation accounts must be prepared to appropriate profits between period before and after change
1. Account 1 shows allocation of profit earned before change in membership
2. Account 2 shows after chance (reflecting new PA if there is one)

Question 29

How is partnership income taxed?

Answer 29

Partnership shares are taxed as income - the same as sole traders