week 10 Flashcards
what are incomplete records
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
what are examples of incomplete records
cash book
cash receipts
bills
bank statements
last years SOFP
how do you find profit from incomplete records
construct opening and closing statements of financial position
what is the equation for the opening balance
At-1 - Lt-1 = Et-1
what is the equation for the closing balance
At - Lt = Et
how do you calculate profit
Et = Et-1 + profit + capital introduced - drawings
profit = revenue - expenses
what is single entry
transactions only in a book of prime entry and not in a ledger
what is incomplete single entry
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
how do you complete incomplete records
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
how do you calculate closing balance equity capital
OB equity capital + new equity capital + profits - drawings
what do partnership agreements usually consist of
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
how do you account for sole traders
ownership interest - capital + capital introduced + profits - drawings - losses
taxation - not included
format - no formal headings or content in income statement
profit - belongs to owner
how do you account for partnerships
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
how do you account for companies
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
what are the motivations for partnerships
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
how do you account for partnerships
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
what is the appropriation of profit
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
how is profit sharing agreed
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
how do you calculate appropriation of profit
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
