Final accounts for sole traders and partnerships

Osborne Books Tutor Zone Final accounts for sole traders and partnerships Chapter activities Osborne Books Limited, 2013

2 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 1 Preparing financial statements Layouts for the Statement of Profit or Loss and the Statement of Financial Position are included in the Appendix of Final Accounts for Sole Trader and Partnerships Tutorial, and are also available for download from www.osbornebooks.co.uk. 1.1 Profit for the year is calculated as: (a) Purchases expenses (b) Gross profit expenses (c) Capital expenses (d) Gross profit + expenses 1.2 Which one of the following describes net assets? (a) Non-current assets + current liabilities current assets non-current liabilities (b) Current assets current liabilities (c) Non-current assets non-current liabilities (d) Non-current assets + current assets current liabilities non-current liabilities

c h a p t e r a c t i v i t i e s 3 1.3 You are to fill in the missing figures for the following sole trader businesses: Sales Opening Purchases Closing Gross Expenses Profit/loss* inventory inventory profit for year Business A 75,000 7,000 50,000 8,000... 16,000... Business B... 10,000 65,000 8,000 22,000... 15,000 Business C 64,000 9,500 52,000... 13,500 15,500... Business D 44,350 6,250... 7,350 26,050... 13,600 Business E 49,750... 26,750 9,600 23,900 18,600... Business F 75,000 11,500 47,500... 26,500... 5,500 * Note: loss is indicated by a minus sign

4 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 1.4 This Activity is about calculating missing balances and the accounting equation. You are given the following information about a sole trader as at 1 April 20X7: The value of assets and liabilities was: Non-current assets at carrying amount 50,500 Inventory 9,450 Trade receivables 18,750 Cash at bank 2,140 Trade payables 11,380 There were no other assets or liabilities. (a) Calculate the capital account balance as at 1 April 20X7. (b) On 30 April 20X7, new office equipment is purchased on credit for use in the business. Tick the boxes to show what effect this transaction will have on the balances. You must choose one answer for each line. Debit Credit No change Non-current assets Trade receivables Trade payables Bank Capital (c) Which of the following is a current asset? Select one answer. (a) (b) (c) (d) Owner s capital A bank overdraft Trade payables Trade receivables

c h a p t e r a c t i v i t i e s 5 1.5 The following trial balance has been extracted by Sam Avalos at 31 March 20X8: Dr Cr Opening inventory 10,475 Purchases 83,691 Sales revenue 157,648 Rent and rates 10,083 Heating and lighting 3,624 Payroll expenses 35,822 Vehicle expenses 4,046 Advertising 3,984 Premises at cost 100,000 Office equipment at cost 22,000 Vehicles at cost 35,000 Sales ledger control 19,247 Bank 3,240 Cash 284 Capital 112,500 Drawings 18,913 Loan from bank 65,500 Purchases ledger control 12,286 Value Added Tax 2,475 Closing inventory Statement of Profit or Loss 12,655 Closing inventory Statement of Financial Position 12,655 363,064 363,064 You are to prepare the financial statements of Sam Avalos for the year ended 31 March 20X8.

6 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 1.6 The following trial balance has been extracted by Jenny Clark at 30 June 20X6: Dr Cr Capital 26,000 Sales revenue 94,333 Purchases 36,147 Opening inventory 8,175 Payroll expenses 25,148 Heating and lighting 3,071 Rent and rates 5,294 Vehicles at cost 17,390 Office equipment at cost 3,450 Sundry expenses 1,086 Vehicle expenses 3,417 Drawings 17,248 Sales ledger control 16,346 Purchases ledger control 9,273 Value Added Tax 1,212 Bank 5,954 Closing inventory Statement of Profit or Loss 10,032 Closing inventory Statement of Financial Position 10,032 146,804 146,804 You are to prepare the financial statements of Jenny Clark for the year ended 30 June 20X6.

c h a p t e r a c t i v i t i e s 7 1.7 An extract from the trial balance of Cheryl Croft is as follows: Trial balance (extract) as at 31 March 20X5 Dr Cr Opening inventory 11,090 Sales revenue 95,450 Purchases 60,320 Sales returns 1,840 Purchases returns 960 Carriage in 450 Carriage out 1,120 Discount received 120 Discount allowed 170 Other expenses 26,490 Closing inventory: Statement of Profit or Loss 12,270 You are to prepare the Statement of Profit or Loss of Cheryl Croft for the year ended 31 March 20X5, using the conventional format.

8 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 2 Incomplete records accounting Layouts for the Statement of Profit or Loss and the Statement of Financial Position are included in the Appendix of Final Accounts for Sole Trader and Partnerships Tutorial, and are also available for download from www.osbornebooks.co.uk. 2.1 Cost of sales for the year is 240,000. Mark-up is 40%. What is sales revenue for the year? (a) 240,000 (b) 96,000 (c) 144,000 (d) 336,000 2.2 Sales for the year are 250,000. Margin is 50%. Opening inventory is 25,000; closing inventory is 30,000. What are purchases for the year? (a) 120,000 (b) 125,000 (c) 130,000 (d) 375,000

c h a p t e r a c t i v i t i e s 9 2.3 You are preparing accounts from incomplete records. Trade receivables at the start of the year were 20,400. During the year sales on credit total 90,300, bank receipts from trade receivables total 85,600, sales returns total 1,400, and discounts allowed total 700. What is the trade receivables figure at the end of the year? (a) 13,600 (b) 27,200 (c) 23,000 (d) 24,400 2.4 The following figures are extracted from the accounts of Wyvern Systems Limited for the year ended 30 June 20X8: sales for the year, 300,000 opening inventory, 20,000 closing inventory, 40,000 purchases for the year, 260,000 You are to calculate: (a) (b) (c) (d) cost of sales for the year gross profit for the year gross profit mark up gross sales margin

1 0 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 2.5 James Hendry owns a business which sells office stationery. Most of his customers are firms in the area, to whom he sells on credit terms. Although he does not keep a full set of accounting records, the following information is available in respect of the year ended 31 December 20X5: Summary of assets and liabilities: 1 Jan 20X5 31 Dec 20X5 Shop fittings (cost 10,000) 8,000 7,000 Inventory 25,600 29,800 Bank balance 4,000 8,000 Cash 1,000 1,600 Trade receivables 29,200 20,400 Trade payables 20,800 16,000 Accrual: general expenses 500 Summary of the business bank account for the year ended 31 December 20X5: Receipts from customers 127,800 Payments to suppliers 82,600 Drawings 20,000 General expenses 20,600 Other information Shop fittings are being depreciated at 10% per year, using the straight-line method. You are to: (a) calculate the amount of sales during the year (b) calculate the amount of purchases during the year (c) calculate the figure for general expenses to be shown in the Statement of Profit or Loss for the year ended 31 December 20X5 (d) prepare James Hendry's Statement of Profit or Loss for the year ended 31 December 20X5 (e) prepare James Hendry's Statement of Financial Position as at 31 December 20X5 Note: VAT is to be ignored on all transactions

c h a p t e r a c t i v i t i e s 1 1 2.6 This Activity is about finding missing figures in ledger accounts where the records are incomplete. You are working on the financial statements of a business for the year ended 31 March 20X4. You have the following information. Day book summaries for the year Net VAT Total Sales 142,000 28,400 170,400 Purchases 88,000 17,600 105,600 Sales returns 1,200 240 1,440 Purchases returns 680 136 816 All sales and purchases are on credit terms. Balances as at: 31 March 20X3 31 March 20X4 Trade receivables 28,360 31,790 Trade payables 13,520 not known Further information: Net VAT Total Administration expenses 14,800 2,960 17,760 Administration expenses are not included in the purchases figure in purchases day book. Bank summary Dr Cr Balance b/d 6,430 Travel expenses 6,550 Sales ledger control 165,320 Administration expenses 17,760 Balance c/d 30,930 Purchases ledger control 103,410 HMRC for VAT 8,360 Drawings 20,100 Payroll expenses 46,500 202,680 202,680 There were no settlement (cash) discounts on payments made to trade payables.

1 2 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e (a) Using the figures given on the previous page, prepare the sales ledger control account for the year ended 31 March 20X4. Show clearly settlement (cash) discounts as the balancing figure. Sales ledger control account (b) Using the figures given on the previous page, prepare the purchases ledger control account for the year ended 31 March 20X4. Show clearly the trade payables figure at the end of the year as the balancing figure. Purchases ledger control account (c) Find the closing balance for VAT by preparing the VAT control account for the year ended 31 March 20X4. Use the figures given on the previous page. Note: The business is not charged VAT on its travel expenses. VAT control account Balance b/d 3,460

c h a p t e r a c t i v i t i e s 1 3 3 Sole trader financial statements Layouts for the Statement of Profit or Loss and the Statement of Financial Position are included in the Appendix of Final Accounts for Sole Trader and Partnerships Tutorial, and are also available for download from www.osbornebooks.co.uk. 3.1 A Statement of Profit or Loss shows a loss for the year of 5,800. It is discovered that no allowance has been made for payroll expenses accrued of 550 and rent prepaid of 250 at the year end. What is the adjusted loss for the year? (a) 6,600 (b) 5,000 (c) 6,100 (d) 5,500 3.2 Identify whether the following items will be stated in the year end Statement of Profit or Loss as income or expense by selecting the relevant column of the table below. Item Income Expense Loss on disposal of non-current asset Increase in allowance for doubtful debts Irrecoverable debts Discounts received Depreciation charges Carriage out

1 4 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 3.3 A Statement of Profit or Loss shows a profit for the year of 15,240. The owner of the business wishes to decrease the allowance for doubtful debts by 600 and to write off irrecoverable debts of 200. What is the adjusted profit for the year? (a) 15,640 (b) 14,840 (c) 16,040 (d) 14,440

c h a p t e r a c t i v i t i e s 1 5 3.4 You have the following trial balance for a sole trader known as Computer Traders. All the necessary year end adjustments have been made. (a) Prepare a Statement of Profit or Loss (on the next page) for the business for the year ended 31 March 20X4. Tysoe Trading Trial balance as at 31 March 20X4 Dr Cr Accruals 550 Bank 3,290 Capital 60,000 Closing inventory 17,320 17,320 Depreciation charges 3,000 Discounts allowed 740 Drawings 25,450 General expenses 30,850 Office equipment at cost 35,600 Office equipment: accumulated depreciation 12,300 Opening inventory 15,680 Payroll expenses 45,960 Prepayments 1,040 Purchases 95,210 Purchases ledger control 17,360 Rent and rates 12,590 Sales revenue 214,830 Sales ledger control 41,470 Value Added Tax 5,840 328,200 328,200

1 6 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e Computer Traders Statement of Profit or Loss for the year ended 31 March 20X4 Sales revenue Cost of sales Gross profit Less expenses: Total expenses Profit for the year (b) Indicate where prepayments of expenses should be shown in the Statement of Financial Position. Select one from: (a) (b) (c) (d) As a non-current asset As a current asset As a current liability As an addition to capital (c) State the meaning of a debit balance for disposal of a non-current asset in a trial balance. Select one from: (a) (b) (c) (d) The business has made a gain on disposal The business has made a loss on disposal The asset has been over depreciated The asset has been part-exchanged on disposal

c h a p t e r a c t i v i t i e s 1 7 3.5 The following adjusted trial balance has been taken from the books of Julie McCabe, who sells shoes, as at 31 March 20X3: Dr Cr Allowance for doubtful debts 200 Allowance for doubtful debts: adjustment 75 Purchases ledger control 12,380 Sales ledger control 1,050 Value Added Tax 1,490 Bank 4,870 Capital 30,000 Sales revenue 164,275 Purchases 75,490 Opening inventory 22,650 Shop wages 43,120 Accrual of shop wages 420 Heat and light 3,420 Rent 12,680 Prepayment of rent 750 Shop fittings at cost 22,000 Shop fittings: depreciation charges 5,250 Shop fittings: accumulated depreciation 10,500 Disposal of non-current asset 200 Irrecoverable debts 120 Drawings 27,740 Closing inventory 25,980 25,980 245,320 245,320 You are to prepare the financial statements of Julie McCabe for the year ended 31 March 20X3, using the conventional format.

1 8 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 4 Partnership financial statements Layouts for the Statement of Profit or Loss and the Statement of Financial Position are included in the Appendix of Final Accounts for Sole Trader and Partnerships Tutorial, and are also available for download from www.osbornebooks.co.uk. 4.1 Profits of a two-person partnership are 24,600 before the following are taken into account: interest on partners capital accounts, 2,200 salary of one partner, 12,500 interest on partners drawings 500 If the remaining profits are shared equally, how much will each partner receive? (a) 12,300 (b) 7,400 (c) 5,200 (d) 6,900

c h a p t e r a c t i v i t i e s 1 9 4.2 You have the following information about a partnership business: The financial year ends on 31 March The partners are Joe, Kit and Liz Partners annual salaries: Joe 12,600 Kit 20,900 Liz 5,350 Partners capital account balances as at 31 March 20X7: Joe 40,000 Kit 30,000 Liz 20,000 Interest on capital is allowed at 3% per annum on the capital account balance at the end of the financial year. Interest charged on partners drawings: Joe 120 Kit 310 Liz 90 The partners share the remaining profit of 22,000 as follows: Joe 40% Kit 35% Liz 25% Partners drawings for the year: Joe 16,350 Kit 26,490 Liz 12,600 Prepare the current accounts for the partners for the year ended 31 March 20X7. Show clearly the balances carried down. You must enter zeros where appropriate. Do not use brackets, minus signs or dashes. Current accounts Joe Kit Liz Joe Kit Liz Balance b/d 200 0 0 Balance b/d 0 600 1,000

2 0 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 4.3 This Activity is about preparing a partnership Statement of Financial Position. You are preparing the Statement of Financial Position for the JK Partnership as at 31 March 20X5. The partners are Jon and Kim. All the necessary year end adjustments have been made, except for the transfer of profit to the current accounts of the partners. Before sharing profits the balances of the partners current accounts are: Jon 750 debit Kim 400 credit Each partner is entitled to 6,500 profit share. (a) Calculate the balance of each partner s current account after sharing profits. Indicate whether these balances are DEBIT or CREDIT. Current account: Jon DEBIT / CREDIT Current account: Kim DEBIT / CREDIT Note: these balances will need to be transferred into the Statement of Financial Position of the partnership which follows. You have the following trial balance. All the necessary year end adjustments have been made.

c h a p t e r a c t i v i t i e s 2 1 (b) Prepare a Statement of Financial Position for the partnership as at 31 March 20X5. You need to use the partners current account balances that you have just calculated. Do not use brackets, minus signs or dashes. JK Partnership Trial balance as at 31 March 20X5 Dr Cr Accruals 590 Administration expenses 23,850 Allowance for doubtful debts 760 Allowance for doubtful debts: adjustment 150 Bank 4,680 Capital account Jon 30,000 Capital account Kim 20,000 Cash 570 Closing inventory 12,630 12,630 Current account Jon 750 Current account Kim 400 Depreciation charges 3,000 Disposal of non-current asset 220 Machinery at cost 40,000 Machinery: accumulated depreciation 12,500 Opening inventory 11,220 Payroll expenses 43,260 Purchases 73,840 Purchases ledger control 14,750 Sales revenue 155,910 Sales ledger control 36,230 Value Added Tax 2,860 Total 250,400 250,400

2 2 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e JK Partnership Statement of Financial Position as at 31 March 20X5 Cost Accumulated Carrying amount depreciation Non-current assets Current assets Current liabilities Net current assets Net assets Financed by: Jon Kim Total

c h a p t e r a c t i v i t i e s 2 3 4.4 Clark and Pearce are in partnership selling business computer systems. The following trial balance has been taken from their accounts for the year ended 30 June 20X4: Dr Cr Sales revenue 225,000 Cost of sales 120,000 Payroll expenses 30,400 Electricity 2,420 Telephone 3,110 Rent and rates 10,000 Discount allowed 140 Office expenses 10,610 *Closing inventory Statement of Financial Position 41,570 Sales ledger control 20,000 Purchases ledger control 6,950 Value Added Tax 5,240 Irrecoverable debts 1,200 Allowance for doubtful debts 780 Office equipment at cost 52,000 Office equipment: accumulated depreciation 20,800 Clark: Capital account 60,000 Current account 430 Drawings 20,600 Pearce: Capital account 30,000 Current account 300 Drawings 15,700 Bank 21,750 349,500 349,500 * Only the closing inventory is included in the trial balance because cost of sales has been calculated already. Notes at 30 June 20X4: depreciate the office equipment at 20 per cent, using the straight-line method Pearce is to receive a partnership salary of 12,000 allow interest on partners capital accounts at 5 per cent per year remaining profits and losses are shared as follows: Clark two-thirds, Pearce one-third Task 1 Show the partners capital and current accounts for the year ended 30 June 20X4. (Note: in order to complete these you will need to calculate the profit share from the Statement of Profit or Loss in Task 2.) Task 2 Prepare the partnership financial statements for the year ended 30 June 20X4 in the conventional format.

2 4 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 5 Changes in partnership 5.1 Anne, Beth and Carol are in partnership sharing profits equally. Anne is to retire and it is agreed that goodwill is worth 24,000. After Anne s retirement, Beth and Carol will continue to run the partnership and will share profits equally. What will be the goodwill adjustments to Carol s capital account? (a) Debit 8,000; credit 12,000 (b) Debit 12,000; credit 8,000 (c) Debit 8,000; credit 8,000 (d) Debit 12,000; credit 12,000 5.2 Rachel and Sonia are in partnership sharing profits equally. Each has a capital account with a balance of 40,000. Trish joins as a new partner. The profit share will be Rachel 60%, Sonia 30% and Trish 10%. An adjustment is made for goodwill on the admission of Trish to the value of 30,000, but no goodwill is to be left in the accounts. What will be the balance of Rachel s capital account after the creation and write off of goodwill? (a) 43,000 (b) 55,000 (c) 37,000 (d) 22,000

c h a p t e r a c t i v i t i e s 2 5 5.3 You have the following information about a partnership: The partners are Dan and Eve. Fay was admitted to the partnership on 1 April 20X5 when she paid 30,000 into the bank account as her capital. Profit share, effective until 31 March 20X5: Dan 40% Eve 60% Profit share, effective from 1 April 20X5: Dan 30% Eve 50% Fay 20% Goodwill was valued at 20,000 on 31 March 20X5. Goodwill is to be introduced into the partners capital accounts on 31 March and then eliminated on 1 April. (a) Prepare the goodwill account of the partnership, showing clearly the transactions on the admission of Fay, the new partner. Goodwill account (b) Prepare the capital account for Fay, the new partner, showing clearly the balance carried down as at 1 April 20X5. Capital account Fay Balance b/d 0

2 6 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e (c) Identify whether the following statements about the partnership of Dan, Eve and Fay are true or false by putting a tick in the relevant column of the table below. Statement True False Fay has paid a premium to join the existing partnership of Dan and Eve The balances of Dan and Eve s capital accounts will increase because goodwill has been charged to Fay Dan and Eve have each paid money to Fay when she joined the partnership After the admission of Fay, the bank account of the partnership will have 30,000 extra minus the amount paid by Fay for goodwill

c h a p t e r a c t i v i t i e s 2 7 5.4 Henry, Ian and Jenny are in partnership sharing profits equally. Ian retired on 31 December 20X4. The Statement of Financial Position drawn up immediately before Ian s retirement was as follows: Non-current assets 120,000 Current assets 55,000 Bank 15,000 190,000 Current liabilities 50,000 140,000 Capital accounts: Henry 42,000 Ian 43,000 Jenny 50,000 Current accounts: Henry 4,000 Ian (2,000) Jenny 3,000 135,000 5,000 140,000 Upon Ian s retirement from the partnership: goodwill was agreed to be worth 36,000 his current account balance was to be transferred to his capital account he was to be paid 10,000 of his capital and share of the goodwill from the bank, and the balance was to be left as a loan to the partnership Henry and Jenny were to continue in partnership sharing profits and losses equally No goodwill is to remain in the accounts Task 1 Prepare the partners capital accounts, showing the retirement of Ian. Task 2 Show the Statement of Financial Position immediately after Ian s retirement from the partnership.

2 8 f i n a l a c c o u n t s f o r s o l e t r a d e r s a n d p a r t n e r s h i p s t u t o r z o n e 5.5 You have the following information about a partnership business: The financial year ends on 31 March. The partners at the beginning of the year were Gil, Hal and Ian. Gil retired from the partnership on 1 January 20X7. There is no interest on partners capital. Partners annual salaries: Gil 18,000 Hal 16,000 Ian 12,000 Partners interest on drawings: Gil 360 per full year Hal 200 per full year Ian 160 per full year Profit share, effective until 31 December 20X6: Gil 50% Hal 30% Ian 20% Profit share, effective from 1 January 20X7: Hal 60% Ian 40% Profit for the year ended 31 March 20X7 was 75,000. The profits accrued evenly during the year. Prepare the appropriation account (on the next page) for the partnership for the year ended 31 March 20X7.

c h a p t e r a c t i v i t i e s 2 9 Partnership Appropriation account for the year ended 31 March 20X7 Profit Salaries: Gil Hal Ian Interest on drawings: Gil Hal Ian 1 Apr 20X6 1 Jan 20X7 31 Dec 20X6 31 Mar 20X7 Total Profit available for distribution Profit share Gil Hal Ian Total profit distributed