week 10

Question 1

what are incomplete records

Answer 1

a general term for when small businesses have kept few accounting records, often not in double entry
may also arise if records have been destroyed eg in floods, fires etc

Question 2

what are examples of incomplete records

Answer 2

cash book
cash receipts
bills
bank statements
last years SOFP

Question 3

how do you find profit from incomplete records

Answer 3

construct opening and closing statements of financial position

Question 4

what is the equation for the opening balance

Answer 4

At-1 - Lt-1 = Et-1

Question 5

what is the equation for the closing balance

Answer 5

At - Lt = Et

Question 6

how do you calculate profit

Answer 6

Et = Et-1 + profit + capital introduced - drawings
profit = revenue - expenses

Question 7

what is single entry

Answer 7

transactions only in a book of prime entry and not in a ledger

Question 8

what is incomplete single entry

Answer 8

often where there are no accounting records but there are other records such as bank statements, cheque books and invoices from which records can be reconstructed

Question 9

how do you complete incomplete records

Answer 9

prepare opening accounts to work out
prepare a cash book/account
calculate purchases looking at cash and credit payments
calculate sales by looking at cash and credit receipts
look at bills which have been paid in advance or not paid at year end for accruals and prepayments
use asset values to calculate depreciation
look at recievables to calculate bad debts
check if any drawings/dividends have been paid and any more capital/loans introduced
prepare financial statements

Question 10

how do you calculate closing balance equity capital

Answer 10

OB equity capital + new equity capital + profits - drawings

Question 11

what do partnership agreements usually consist of

Answer 11

capital - amount each partner pays in as a share of capital
interest on capital - the agreed rate of interest, an appropriation of profit
partners salaries - these are different to employee wages, an appropriation of profit
profit sharing ratio - allocation of profits/losses after deducting salaries and interest
drawings and interest on drawings - appropriation of profit

Question 12

how do you account for sole traders

Answer 12

ownership interest - capital + capital introduced + profits - drawings - losses
taxation - not included
format - no formal headings or content in income statement
profit - belongs to owner

Question 13

how do you account for partnerships

Answer 13

ownership interest - ownership interest of each partner is shown
taxation - not included
format - no formal heading or content in income statement
profit - appropriation account to showing how the profit is allocated between partners

Question 14

how do you account for companies

Answer 14

ownership interest - share capital, share premium, retained profits, other reserves = equity
taxation - included, corporation tax paid by company
format - specified by companies act with specific headings
profit - distributed as dividends

Question 15

what are the motivations for partnerships

Answer 15

growing business - sole traders cant provide financial resources, expertise and time
benefit from economies of scale
easier to set up than a company, more flexible
pay income tax and keep more info private than companies

Question 16

how do you account for partnerships

Answer 16

differences are - appropriation of profit between partners and the capital and current accounts
capital account - shows all capital transactions since company was set up
current account - records appropriation of profit, how profit has been allocated to partners
debits for drawings and interest on drawings
credit for interest on loans, interest on capital, salaries and shares of profit

Question 17

what is the appropriation of profit

Answer 17

once the business is set up it runs, record transactions as you would for a sole trader
split profit based on capital contributed, salaries and split of additional amounts

Question 18

how is profit sharing agreed

Answer 18

each partner receives a share of the profit as:
a salary - related to time each devotes to the business
interest - on capital invested
remaining residual profit - divided between partners according to an agreement, usually pay interest on drawings

Question 19

how do you calculate appropriation of profit

Answer 19

start with net profit from P/L account
deduct salaries of each partner
deduct interest on capital based on capital invested
gives profits available for sharing out according to the split given in the partnership account
split remaining profits in proportion specified
loss should be shared in the same proportion