Final Accounts Preparation

Question 1

The Partnership Act of 1890 defines a partnership as….

Answer 1

The relation which subsists between partners carrying on a business in common with a view of profit

Question 2

A partnership is usually made up of how many members?

Answer 2

Between 2 - 20 members with the exceptions being larger professional business such as solicitors or accountant which are usually formed as a limited liability partnership (LLP)

Question 3

The accounting requirements of a partnership are either…

Answer 3

To follow the rules set out in the Partnership Act of 1890
Or - and more likely - for the partners to agree amongst themselves, by means of a partnership agreement

Question 4

What type of financial statements does a partnership prepare?

Answer 4

The same as a sole trader so
Statement of Profit or Loss
Statement of Financial Position
With the addition of a Partnership Appropriation Account which immediately follows after the statement of profit or loss

Question 5

What is the purpose of a Partnership Appropriation Account?

Answer 5

The purpose is to show how the profit or loss from the statement of profit or loss is shared amongst the partners.

Question 6

A partnership agreement will usually cover the following 4 main points….

Answer 6

1. Division of profits and losses between partners (which may be expressed as a ratio, fraction or percentage)
2. Partner’s salaries/commission
3. Whether interest is allowed on partner’s capital and at what rate
4. If interest is to charged on partner’s drawings and at what rate

Question 7

What are the two factors that a Partnership’s SoFP would be understated?

Answer 7

Faithful Representation
Goodwill

Question 8

Why would faithful representation of a partnership accounts cause the SoFP to be understated?

Answer 8

If there is doubt over the value of an asset, they will usually be stated at the lower figure, but without bias

Question 9

What is the definition of Goodwill?

Answer 9

The difference between the value of a business as a whole, and the net value of its separate assets and liabilities.

Goodwill has a value as an intangible non-current asset to the owners/owners of the going concern business.

Question 10

Why would goodwill cause a partnership’s SoFP to be understated?

Answer 10

a going concern business will often have a value of goodwill due the various factors e.g trading relationships build up with long standing customers, the reputation of the business, location of the business or the skills of its employees. Without these factors the business would be find it difficult to continue to trade.

Question 11

Why would a partnership need to look at the valuation of goodwill?

Answer 11

If the partnership is being sold, the goodwill will need to be valued most commonly by looking at the average profit of the business over a given number of years then multiplied by a an agreed figure. If there is an admission of a new partner or retirement of a partner.

Question 12

What is premium for goodwill?

Answer 12

An amount charged to a new partner who joins an existing partnership.

Question 13

What are the steps (in terms of goodwill) for the admission of a new partner?

Answer 13

1. Agree a valuation for goodwill
2. Old partners: Goodwill Created (DEBIT goodwill account with the amount of goodwill/CREDIT partners’ capital account (in the old profit sharing ratio) with the amount of goodwill)
3. Old partners + new partner : goodwill written off (DEBIT partners’ capital accounts (in the new profit sharing ratio) / CREDIT goodwill account
   This is too charge the new partner with a premium for goodwill

Question 14

Why do we charge new partners a premium for goodwill?

Answer 14

This is because the new partner will start to share in the profits of the business immediately and will benefit from the goodwill already established by the existing partners.
The premium for goodwill is an additional amount paid by the new partner to compensate to the old partners for the part of profit taken up by them.

Question 15

What are the steps (in terms of goodwill) for the retirement of a partner?

Answer 15

1. Agree a valuation for goodwill
2. Old partners : goodwill created (DEBIT goodwill account / CREDIT partner’s capital accounts (in the old profit sharing ratio)
3. Remaining Partner’s : goodwill written off (DEBIT Partners’ capital accounts (in the new profit sharing ratio) / CREDIT goodwill account)

Question 16

What happens (financially) when a partner retires from the business?

Answer 16

The amount of goodwill (which is due to the partner that was built up whilst they worked for the business) plus the balances in the retiring partners capital and current accounts is the paid to the partner from the business bank account (usually if there are insufficient fund to do so the retiring partner will keep some money in the business as a ‘loan’ which is then paid off over a period of time)

Question 17

Why would there be a need to change the profit sharing ratios within a going concern partnership?

Answer 17

It might be necessary to change the ratios due to a number of factors which include a higher capital contribution in relation to the other partners or a partner takes a more active role within the business, the profit sharing ratios would then need to be adjusted accordingly (the same will also be true for the reverse i.e less capital contribution or a partner taking a step back in the day to day running of the business.)

Question 18

What is the Cost of Sales calculation

Answer 18

Opening inventory
PLUS purchases
LESS purchases returns
LESS closing inventory
EQUAL cost of sales

Question 19

What are the debit and credit entries on the SoPL for the cost of sales (if the cost of sales hadn’t already been calculated)

Answer 19

DEBIT
Opening Inventory
DEBIT
Purchases
CREDIT
Purchases Returns
CREDIT
Closing Inventory

Question 20

If the Cost of Sales had already been calculated at the year end would it be showing as a debit or credit entry?

Answer 20

Debit

Question 21

Is the closing inventory figure shown as a CREDIT or DEBIT balance on the SoFP

Answer 21

DEBIT - because it is shown as an asset on the SoFP

Question 22

What is the definition of unlimited liability

Answer 22

Unlimited liability means that should a business become insolvent, the personal assets of the owner(s) may be used to pay the debts of the business

Question 23

What is the definition of incorporated?

Answer 23

A business that has now formed into a legal corporation

Question 24

What is the definition of a corporation?

Answer 24

A corporation is a legal entity that is separate and distinct from its owners

Question 25

What is the governing document for charities?

Answer 25

Charities are govern by a trust deed, which sets out the name of the charity, its objects and powers and deals with the appointments of trustees, how meetings are to be run and the required financial statements

Question 26

What are the main rules governing charities?

Answer 26

Charities Act 2011
The Charities Commission
The statement of Recommended Practice Accounting and Reporting for Charities (FRS 102)

Question 27

What is the role of a designated member within a LLP?

Answer 27

A designated member of an LLP is responsible for ensuring that the legal and accounting requirements are carried out e.g keeping accounting records, arranging for the accounts to be audited (if required) and submitting the LLP’s Confirmation Statement and Annual Accounts to Companies House, etc…

Question 28

What is the definition of Materiality

Answer 28

That some items are of such low value that it is not worthwhile recording them separately in the accounts and may by grouped together in a sundry expenses account.

Question 29

What is the definition of Relevance

Answer 29

Fundamental qualitative accounting characteristic that requires financial information to be useful to users of financial statements

Question 30

What is the definition of Faithful Representation

Answer 30

Fundamental qualitative accounting characteristic that requires information to correspond to the effect of transactions or events

Question 31

Definition of Material Misstatement

Answer 31

Information contained in the financial statements is untrue - whether accidentally or intentionally
‘Material’ means that the amount of the misstatement must be significant in relation to the size of the business.

Question 32

Definition of Business Entity

Answer 32

The financial statements records & report on the activities of one particular business

Question 33

What are the 4 supporting qualitative characteristics?

Answer 33

Comparability - users can compare the information with that of previous years/similar businesses
Verifiability - Users are assured of information
Timeliness - Users receive information in time to make necessary decisions
Understandability - Information is presented clearly and concisely so all can interpret that data.

Question 34

What is the formula to calculate the purchases for the year?

Answer 34

Payments made in the year MINUS trade payable at the beginning of the year PLUS trade payable at the end of the year

Question 35

What is the formula to calculate sales for the year (incomplete records)

Answer 35

Receipts for the year LESS trade receivables at the beginning of the year PLUS trade receivables at the end of the year