Aat FSTP Focus Notes 2014 - External Student

aat
AQ2013 Level 3
PREPARE FINAL ACCOUNTS FOR SOLE

TRADERS AND PARTNERSHIPS
FOCUS NOTES
AAT FOCUS NOTES (STUDENT): PREPARE FINAL ACCOUNTS FOR SOLE TRADERS AND PARTNERSHIPS (FSTP)
Kaplan Financial Limited, 2014

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ii
K A P LA N P UB L I S H I N G
CONTENTS
CHAPTER
TITLE
PAGE
Sole trader accounts preparation
Partnerships
11
Incomplete records
33
Answers to examples
49
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KAPLAN P UBLI S H I N G
iii
iv
Sole trader accounts preparation
Learning objectives:
At the end of this chapter you will be able to:
understand the format of the accounts of a sole trader
understand how to prepare the accounts for a sole trader from a trial balance
Contents:
1
Introduction
Format of the statement of profit or loss
Format of the statement of financial position
Example 1 Sole trader accounts preparation
Summary
Further reading and questions
Introduction
Purpose of this unit:
Follows on from ACPR
Purpose to develop double-entry skills and knowledge
Prepare accounts for sole traders and partnerships
Identify relevant information and evaluate results
Provides basis of preparation for Level 4 unit FSTM
Core topics within FSTP:
Financial statements for sole traders
Partnership accounting
Incomplete records
Assessment of FSTP:
Task 1 Incomplete records and reconstruction of ledger accounts
Task 2 Missing figures and the process of preparing financial statements
Task 3 Financial statements of sole traders
Task 4 Partnership accounting
Task 5 Partnership statement of financial position
SO LE TR ADER ACCOUNTS PREPA RA TION : CHAPTER 1
Format of the statement of profit or loss

Statement of profit or loss is a summary of income and expenses for a period, usually a
year, to calculate the profit or loss made.
The trading account calculates the gross profit or loss that has been made from trading
activities the buying and selling of goods or the provision of a service.
The net profit or loss is arrived at by deducting all expenses of the business from the gross
profit.
Statement of profit or loss for the year ended 31 December 20X1
Sales revenue
Less: sales returns
Opening inventory
Purchases
Purchase returns
Carriage inwards
Closing inventory
Cost of goods sold
Gross profit
Add: Sundry income:
Discount received
Interest received
Gain on disposal of non-current asset
Expenses:
Discounts allowed
Rent
Carriage outwards
Electricity
Depreciation
Irrecoverable debt
Allowance for doubtful debt adjustment
Stationery
Telephone
Total expenses
Net profit (loss) for the year
X
X
(X)
X
(X)
X
(X)
(X)
X
X
X
X
X
X
X
X
X
X
X
X
(X)
Format of the statement of financial position

Statement of financial position is a summary or list of all assets and liabilities of the sole
trader at the end of the accounting period.
Non-current assets are those assets that will be used in the business over a number of
years; examples include land and buildings, plant and equipment and motor vehicles.
Current assets are those assets which are expected to be realised in the business in the
normal course of trading (usually a period of less than one year); examples include
inventory and prepayments.
Non-current liabilities are those liabilities which will be paid off over a period exceeding
one year from the statement of financial position date; an example of this would be longterm bank loans.
Current liabilities are the short-term payables of the business which are due to be paid
within twelve months of the statement of financial position date; examples include trade
payables and bank overdrafts (not long-term loans).
Statement of financial position as at 31 December 20X1
Cost
Accumulated
depreciation
Non-current assets:
e.g. land and buildings
X
X
Current assets:
Inventory
X
Trade receivables
X
Less allowance for receivables
(X)
X
X
Prepayments
X
Bank
X
Total current assets

X
Current liabilities:
Trade payables
(X)
VAT (Sales tax)
(X)
Accruals
(X)
Total current liabilities
(X)
Net current assets/ (liabilities)
Non-current liabilities:
Bank loan 20X5
Net assets
Financed by:
Capital
Add: Profit/(Loss) for the year
Less: Drawings
Carrying
amount
X/(X)
(X)
X
X/(X)
(X)

At the end of the financial year the following trial balance was drafted for Hardy who owns
a design business.
Trial balance for the year ended 31 December 20X9 for Hardy, trading as Design Gecko.
Description
Sales revenue
Purchases
Opening inventory
Closing inventory SFP
Closing inventory P&L
Wages
Printing and stationery
Motor expenses
Computer consumables
Sales ledger control account
Purchase ledger control account
Bank current account
Irrecoverable debts
Allowance for doubtful debts
Discounts allowed
Discounts received
Drawings
Capital
Motor vehicles at cost
MV Accumulated depreciation
Fixtures and fittings at cost
F&F Accumulated depreciation
Land
Total
Dr
Cr
365,200
266,800
23,340
25,680
25,680
46,160
13,000
3,720
760
17,330
23,004
4,560
120
588
864
1,622
20,800
200,000
24,000
12,240
28,000
16,800
170,000
645,134
645,134
Task:
Prepare the statement of profit or loss and the statement of financial position of Hardy
from the available information.
The answer to the above example can be found in Chapter 4.
Solution:
Hardy trading as Design Gecko
Sales revenue
Opening inventory
Purchases
Closing inventory
Cost of goods sold
Gross profit
Sundry income:
Discounts received
Expenses:
Wages
Motor expenses
Irrecoverable debts
Discounts allowed
Total expenses
Net profit for the year

Statement of financial position at 31 December 20X9
Cost
Accumulated
depreciation
Carrying
amount
Non-current assets:
Land
Fixtures & fittings
Motor vehicles
Current assets:
Inventory
Trade receivables
Less: allowance for doubtful debts
Prepayments
Bank

Trade payables
Accruals
Net current assets
Net assets
Capital account:
Capital account
Add: net profit for the year
Less: drawings
Summary
Statement of profit or loss

A summary of income and expenses
for the accounting period to calculate
net profit for the year.
Statement of financial position

A statement of assets and liabilities
at the year end.
Non-current assets are used within
the business over a number of years.
Current assets are expected to be
realised by the business in the normal
course of trading.
Non-current liabilities are payables or
creditors that will be paid over a
period exceeding one year from the
statement of financial position date.
Current liabilities are short-term
payables or creditors that are
expected to be paid within twelve
months of the statement of financial
position date.

Further reading
For more detailed explanation, analysis and illustration of this topic please read Chapter 1
of the Prepare Final Accounts for Sole Proprietors and Partnerships text book.
Less detailed summaries can be found in Chapter 1 of the FSTP pocket notes.
Real assessment style questions
Revision kit:
Q15 Inventory Trading
Q17 Balfour
Additional, more challenging questions

The following questions can be found at the rear of Chapter 1 of the FSTP text book.
Workbook activity 5 David Pedley
Workbook activity 6 Karen Finch
Workbook activity 7 Elmdale
If you are attending a revision course, please do not attempt the revision kit questions
until your tutor instructs you to do so.
10
Partnerships
understand the nature of a partnership
apply the principles of profit appropriation to profit made by a partnership
apply the principles of accounting for admission of a partner, including accounting for
goodwill
apply the principles of accounting for retirement of a partner, including accounting for
goodwill
Contents:
1
The nature of a partnership
The accounts of a partnership
Appropriation of profit between partners
Example 1 Appropriation of profit
Example 2 Appropriation of profit and current accounts
Appropriation of profit with change of partnership
Example 3 Appropriation of profit with admission of new partner
Example 4 Appropriation of profit with retirement of a partner
Admission of a new partner
10
Example 5 Admission of a new partner
11
Retirement of a partner
12
Example 6 Retirement of a partner goodwill and partners accounts
13
Accounts of a partnership
14
Example 7 Accounts of a partnership
15
Summary
16
11
The nature of a partnership

A partnership is two or more persons carrying on business together with a view to making
a profit and sharing that profit (or loss) on an agreed basis.
Partners in business each contribute capital to finance the business in exchange for an
agreed share or appropriation of profit (or loss).
The appropriation account summarises how the profit (or loss) for the year has been
allocated or shared between the partners.
Capital accounts reflect the amounts of capital introduced into the business by each
partner. They normally remain fixed unless there is a change in partnership, or if additional
capital is introduced by any of the partners into the business for any reason.
Current accounts reflect the share of profit (or loss) due to each partner, less any drawings
taken from the business in the year.
Drawings reflect the amounts withdrawn during the year by each partner for their own
personal use.
Principal distinctions of a partnership from a sole trader and a partnership:
Each partner will have both a capital account and a current account.
Allocation of elements of net profit (or loss) in an appropriation account

between the partners
The accounts of a partnership

The accounts of a partnership consist of:
Appropriation account
Appropriation of profit between partners

Elements of profit appropriation between partners:
12
Salary
Interest earned on capital
Interest charged on drawings
Residual profit share
P AR TNER SH IP S : C HA P T ER 2
Specimen appropriation account template horizontal format

Partners
Net profit from statement of profit or loss
account
Salary
Interest on capital
Interest charged on drawings
Residual profit
Residual profit allocation
Total
X
(X)
(X)
X
X
(X)
X
X
(X)
X
X
(X)
Total to current account

Specimen appropriation account template vertical format
Net profit from statement of profit or loss

Salary
A
B
Interest on capital
A
B
Add: Interest charged on drawings
A
B
Residual profit available for allocation
between partners
Profit share
A
B
Total
X
(X)
(X)
(X)
(X)
X
X
(X)
(X)
Note: The appropriation of profit between the partners will be identical whichever format
of appropriation account is used.
Note: The share of profit or loss for each partner is then transferred to their individual
current account.
13
Current accounts of the partners:

Current accounts
Detail
Drawings
Int on drawings
Balance c/d
Residual loss
Detail
Balance b/d
Salary
Int on capital
Residual profit
Illustration 1 Specimen appropriation account template to include admission of a

partner horizontal format (numbers for illustrative purposes only)
A and B are in partnership and their partnership agreement states that B will receive a
salary at the rate of 1,200 per annum and that they will divide any remaining profit in the
proportion 60:40. They have made a net profit of 40,000 for the year.
Total
40,000

Salary:
B
(1,200)
38,800
Residual profit
Residual profit allocation:
A (38,810 60%)
B (38,810 40%)
(23,286)
(15,514)
Nil
Summary of total profit appropriation between the partners = 40,000 as follows:
A = 23,286 and B = 16,714

Current accounts
Detail
Balance b/d
Salary
Int on capital
Residual profit
Drawings
Int on drawings
Balance c/d
14
Detail
1,200
23,286
15,514
Example 1 Appropriation of profit

Sam and Sally are in partnership and the following information has been provided to you:
1
Sam has a balance on his capital account of 32,000, and Sally has a capital account
balance of 48,000.
The net profit for the year is 54,000.
Sally will receive a salary of 10,000 for the year for taking on the responsibility of
writing up the accounting records during the year.
Interest on capital is earned at the rate of 10% per annum.
Residual profits are to be allocated between Sam (2/3) and Sally (1/3).
Tasks:
Part (a) Prepare the appropriation account of the partnership for the year.
Part (b) Prepare the appropriation account for the partnership for the year if the net
profit for the year was only 14,400.
Solution:
(a)
Net profit for
the year
Partners
Sam
Sally
Profit for the year

Salary to Sally
Interest on capital:
Sam
Sally
Residual profit
Sam
Sally
To current accounts
15
(b)
Net profit for
the year
Partners
Sam
Sally
Profit for the year

Salary to Sally
Sam
Sally
Residual profit (loss)

Sam
Sally
To current accounts
Note that the appropriation of salary and interest on capital take place as normal,
with the resulting residual profit or loss then allocated accordingly.
Example 2 Appropriation of profit and current accounts

Paula and Jane are in partnership. Paula has a balance on her capital account of 28,000.
Jane has a balance on her capital account of 12,000. The profit for the financial year is
22,000. Paula has made drawings of 12,000 and Jane 8,000. At the start of the year,
Paula had a credit balance on her current account of 8,500 and Jane had a credit balance
on her current account of 7,500.
The partners decide to share profits on the following basis:
Interest on capital 10%
Interest on drawings 5%
Salary 8,000 Paula and 12,000 Jane
Residual profits to be split 3/5 Paula and 2/5 Jane
Task:
Prepare the appropriation account of the partnership for the year, together with the
current accounts for each of the partners.
16
Solution:
Net profit for
the year
Partners
Paula
Jane
Profit for the year

Salary to Paula
Salary to Jane
Paula
Jane
Interest charged on drawings:
Paula
Jane
Residual loss
Paula
Jane
To current accounts
Current accounts
Detail
Paula
Jane
Paula
Jane
Balance b/d
Salary
Int on capital
Drawings
Int on drawings
Share of loss
Balance c/d
Detail
Appropriation of profit with change in partnership

Appropriation of profit with admission of new partner:
Split profit or loss for the year based upon date of change of partnership
Apply old partnership agreement to earlier part of the year on pro-rata

basis
Apply new partnership agreement to later part of the year on pro-rata

basis
17
Appropriation of profit with retirement of a partner:
Split profit or loss for the year based upon date of change of partnership
Apply old partnership agreement to earlier part of the year on pro-rata

basis to old partners
Apply new partnership agreement to later part of the year on pro-rata

basis to new partners
Illustration 2 Specimen appropriation account template to include admission of a

partner horizontal format (numbers for illustrative purposes only)
A and B are in partnership and their partnership agreement states that B will receive a
salary at the rate of 1,200 per annum and that they will divide any remaining profit in the
proportion 60:40.
Nine months through the year, C joins the partnership and the new partnership agreement
states that A and B will each receive a salary at the rate of 1,500 per annum, with any
remaining profit split between A, B and C in the following proportion: 40:40:20.
Split

Salary:
A Nil & (3/12 1,500)
B (9/12 1,200) & (3/12 1,500)
C Nil & Nil
Residual profit
Residual profit allocation:
A (29,100 60%) & (9,250 40%)
B (29,100 40%) & (9,250 40%)
C Nil & (9,250 20%)
Total to current account
Total
40,000
9/12
30,000
3/12
10,000
(375)
(1,275)
38,350
(900)
29,100
X
(17,460)
(11,640)
Nil
(375)
(375)
9,250
X
(3,700)
(3,700)
(1,850)
(21,160)
(15,340)
(1,850)
Nil
Summary of total profit appropriation between the partners = 40,000 as follows:
18
A = (375 + 21,160) = 21,535
B = (1,275 + 15,340) = 16,615
C = (Nil + 1,850) = 1,850
Example 3 Appropriation of profit with admission of new partner

Cagney and Lacey started a business several years ago; they had set up a partnership
agreement as follows:
Cagney was to receive an annual salary of 2,500 and Lacey an annual salary of
1,500
Interest on capital at the rate of 10% per annum
The residual profit was to be split equally between the two partners.
At 1 May 20X1, Cagney had a capital account credit balance of 20,000 and Lacey had a
capital account credit balance of 14,000.
Starsky was admitted to the partnership on 1 February 20X2 and introduced capital of
10,000 into the business. From that date, the partners agreed the following:
Profit share: Cagney 40%: Lacey 40%: and Starsky 20%.
Partner salaries: Cagney 2,500 for the year; Lacey 1,500 for the year and Starsky
1,000 for the period 1 February to 30 April 20X2.
Interest on capital accounts: 10% per annum on the balance invested on a monthly
basis. At that date, the capital account of Cagney was 20,000, and for Lacey it was
14,000.
The net profit for the year ended 30 April 20X2 was 50,000.
Task:
Prepare the appropriation account using a vertical format of the partnership for the year
ended 30 April 20X2.
Solution:
Period split
1 May 20X1
31 Jan 20X2
9/12
1 Feb 20X2
30 April 20X2
3/12
Total
12/12
Profit for the year

Salary:
Cagney
Lacey
Starsky
Cagney
Lacey
Starsky
Profit available for appropriation

Cagney
Lacey
Starsky
19
Example 4 Appropriation of profit with retirement of a partner

Tom, Dick and Harry have been in partnership for many years; they had set up a
partnership agreement as follows:
Tom was to receive an annual salary of 2,400 and Harry and annual salary of 1,200.
Interest on capital accounts balances at the rate of 5% per annum.
The residual profit or loss is to be split between Tom, Dick and Harry in the following
proportion: 40:40: 20.
At 1 April 20X3, the credit balance on the capital account of each partner was as follows:
Tom 50,000, Dick 30,000 and Harry 20,000.
Harry retired from the partnership on 30 September 20X3. From that date, Tom and Dick
agreed the share profits and losses on the following basis:
Partner annual salaries: Tom 3,000 and Dick 1,800.
Interest on capital accounts was to remain at the rate of 5% per annum. Following
retirement of Harry, the capital account balance of the remaining partners was as
follows: Tom had a credit balance of 60,000 and Dick had a credit account balance
of 36,000.
Residual profit share: Tom 60% and Dick 40%.
The net profit for the year ended 31 March 20X4 was 60,000.
Task:
Prepare the appropriation account using a vertical format of the partnership for the year
ended 31 March 20X4.
Solution:
Period split
1 April 20X3
30 Sept 20X3
6/12
1 Oct 20X3
31 Mar 20X4
6/12
Total
12/12
Profit for the year

Salary:
Tom
Dick
Harry
Tom
Dick
Harry

Tom
Dick
Harry
20
Admission of a new partner
Goodwill:
It is the value of the business in excess of recorded net assets at date of

change in partnership.
Not normally retained as a permanent asset in the partnership accounts.
Introduced and then immediately eliminated at date of change of

partnership.
Admission of a partner step 1:
Goodwill recognised as an asset and old partnership capital accounts

credited in old profit sharing ratio
Dr: Goodwill
Cr: Old partners capital accounts in old profit-sharing ratio
New partner introduces cash and/or assets into the business.
Dr: Cash / Assets
Cr: Partner capital account
21
Goodwill eliminated as an asset and new partnership capital accounts

debited
Dr: New partners capital accounts in new profit-sharing ratio
Cr: Goodwill
In effect, goodwill has been introduced and then immediately eliminated from the
partnership accounts; the consequence is that there is an adjustment to the capital account
balances of those partners who remain in the business.
10
Example 5 Admission of a new partner

Red and Amber have been in partnership together sharing profit and loss equally. The
capital account balances for Red was 100,000 and for Amber 80,000. On 1 January 20X4,
Green was admitted to the partnership and introduced 70,000 cash into the partnership.
At that date, goodwill was valued at 120,000. From 1 January 20X4, the profits and losses
of the business where to be shared in the ratio 40:40:20
Show the accounting entries required to account for admission of the new partner. You
should also prepare a goodwill account and the partners capital accounts to reflect the
admission of Green as a partner.
Solution:
Step 1
Debit:
Goodwill
Credit:
Old partners capital accounts in old profit sharing ratio:
Red
Amber
Debit:
Bank account
Credit:
Capital account Green
Step 2
Step 3
Debit:
22
New partners capital accounts in new profit sharing ratio:

Red
Amber
Green
Credit:
Goodwill
Detail
Goodwill account
Detail
Old partnership:
Red
Amber
New partnership:
Red
Amber
Green
Capital accounts
Detail
Red
Amber
Green
Red
Amber
Green
Balance b/d
Bank
Goodwill
Goodwill
Balance c/d
11
Detail
Retirement of a partner
23
Retirement of a partner:
Term used when a partner leaves the partnership for any reason.
Goodwill must be introduced and then immediately eliminated as an asset

at date of change of partnership.
Retiring partner is paid off in cash and/or assets for combined capital and
current account balance.
Retirement of a partner step 1:
Combine the retiring partners capital and current accounts into one capital
account balance.
Dr: Partner current account
Cr: Partner capital account
Goodwill recognised as an asset and old partnership capital accounts

credited in old profit sharing ratio
Dr: Goodwill
Cr: Old partners capital accounts in old profit-sharing ratio
24
Balance due to retiring partner paid off by cash and/or loan to the
partnership
Dr: Partner capital account
Cr: Cash and / or loan account
12
Goodwill eliminated as an asset and new partnership capital accounts

debited in old profit sharing ratio
Dr: New partners capital accounts in new profit-sharing ratio
Cr: Goodwill
Example 6 Retirement of a partner, goodwill and partners accounts

Kent, Essex and Devon have been in partnership for a number of years sharing profits and
losses in the ratio of 3:2:1. On 30 June 20X3 Kent is to retire from the partnership. At
30 June 20X3 the goodwill of the partnership was estimated to be 60,000 and the
partners capital and current account balances were as follows:
Capital
80,000
60,000
40,000
Kent
Essex
Devon
Current
3,600
2,100
4,400
On retirement Kent has agreed to be paid 50,000 of what is owed to him in cash and to
leave the remainder as a loan to the partnership. After Kents retirement Essex and Devon
are to share profits and losses in the ratio of 3:2.
Task:
Show the accounting entries required to account for retirement of a Kent as a partner.
You should also prepare a goodwill account and the partners capital and current
accounts to reflect the retirement of Kent as a partner.
Solution:
Step 1
Debit:
Kent current account
Credit:
Kent capital account
Debit:
Goodwill
Credit:
Step 2
Kent
Essex
Devon
25
Step 3
Debit:
Credit:
Partnership bank account
Partnership loan account
Step 4
Debit:
Credit:

Essex
Devon
Goodwill
Goodwill account
Detail
Old partnership:
Kent
Essex
Devon
Detail
New partnership:
Essex
Devon
Capital accounts
Detail
Kent
Essex
Devon
Goodwill
Cash
Loan
Balance c/d
Detail
Kent
Essex
Devon
Balance b/d
Goodwill
Current a/c
Kent
Essex
Balance b/d
Current accounts
Detail
Kent
Essex
Devon
Capital ac/c
Balance c/d
Detail
Devon
Balance b/d
Balance b/d
Note that the current accounts for Essex and Devon are not affected by the admission or
retirement of a partner.
26
13
Accounts of a partnership
Accounts of a partnership:
14
Example 7 Accounts of a partnership

Ben and Gerry have been in partnership for many years sharing profits and losses in the
ratio of 2 to 1. Gerry is allowed a salary of 4,000 per annum and interest on capital is paid
at 3% per annum based upon the opening capital balance. Given below is the trial balance
of the partnership after the net profit has been calculated at the year end of 30 September
20X4.
Net profit
40,000
40,500
26,300
Motor vehicles at cost
50,000
Motor vehicles accumulated depreciation
20,000
Fixtures and fittings
25,000
Fixtures and fittings accumulated depreciation
10,000
Closing inventory
23,500
Prepayments
2,200
Accruals
5,400
Bank
6,250
Cash
750
Loan
15,000
Current account Ben (debit balance)
1,000
Current account Gerry (credit balance)
2,500
Drawings Ben
25,000
Drawings Gerry
15,000
Capital; account Ben
45,000
Capital account Gerry
25,000
27
Task:
(a)
Prepare the partnership appropriation account for the year ending 30 September
20X4.
(b)
Prepare the partners current accounts.
(c)
Prepare the statement of financial position of the partnership as at 30 September

20X4.

Solution:
(a)
Partnership appropriation account for the year ending 30 September 20X4
Net profit
Salary Gerry
Ben
Gerry

Profit share:
Ben
Gerry
(b)
Current accounts
Detail
Ben
Gerry
Ben
Gerry
Balance b/d
Drawings
Balance c/d
Balance b/d
28
Balance b/d
Salary
Int on capital
Profit share
Balance c/d
Balance b/d
(c)
Statement of financial position as at 30 September 20X4

Cost
Accumulated
depreciation
Carrying
amount
Non-current assets:
Motor vehicles
Current assets:
Inventory
Trade receivables
Prepayments
Cash at bank
Cash in hand

Trade payables
Accruals
Net current assets

Non-current liability:
Loan
Net assets
Capital and current accounts:

Capital accounts
Current accounts
Less: drawings
Ben
Gerry
29
15
Summary
Partnership
Two or more persons carrying on
business with a view to making a
profit and sharing that profit (or loss)
on an agreed basis.
The allocation of net profit for the
year between the partners which
may include salary, interest on
capital, interest on drawings and
allocation of the residual profit or
loss.
Capital and current accounts

Capital accounts deal with amounts
introduced by each partner to
finance the business.
Current accounts deal with the share
of profit (or loss) together with any
drawings withdrawn from the
business.
Admission and retirement of a

partner
Incoming partner introduces capital.
Upon change of partners, account for
goodwill and crediting capital
accounts of old partners in old profitsharing ratio. Eliminate goodwill by
debiting capital accounts of new
partners in new profit-sharing ratio.
Total of capital and current accounts
settled with retiring partner by cash
and/or loan to partnership.
30
16

Further reading
of the Prepare Final Accounts for Sole Traders and Partnerships text book.
Less detailed summaries can be found in Chapters 2 and 3 of the FSTP pocket notes.
Revision kit:
Q19 Wyn, Francis and Bill capital and goodwill
Q20 Phil, Geoff and Jack capital and goodwill
Q22 Rachel, Ed and Matty profit appropriation
Q28 Derek, Jin and Ahmed profit appropriation
Q32 R & R Trading partnership statement of financial position
Q33 Osmond Partnership partnership statement of financial position

Workbook activity 9 Curran and Edgar
Workbook activity 11 Liam, Sam and Fred
Workbook activity 12 Wilson and Bridget
31
32
Incomplete records
calculate opening and/or closing capital using incomplete information
calculate the opening and/or closing cash/bank account balances
prepare sales and purchase ledger control accounts, using these to correctly calculate sales,
purchases and bank figures
calculate account balances using mark-ups and margins
Contents:
1
Incomplete records techniques
The net assets approach
Example 1 Net assets approach June
The cash and bank approach
Example 2 Cash and bank approach April
Mark-ups and margins
Example 3 Mark-ups and margins Tarquin
Sales ledger and purchase ledger control accounts
Example 4 Control account reconciliations May
10
Example 5 Incomplete records mini case study
11
Summary
12
33
Incomplete records techniques

The net assets approach (i.e. accounting equation) is used to construct a statement of
financial position. From this, the accounting equation can be used to derive the profit (or
loss) for the year or drawings as a balancing figure. Note that, if all other information is
provided, the one missing figure can always be derived, for example the opening or closing
capital figure.
The cash and bank account approach is used to construct records of cash and bank
transactions as a basis for identifying and classifying those transactions into items of
income or expense, or that they relate to changes in items included in the statement of
financial position.
Mark-ups and margins are used to apply information about known relationships between
cost, profit and selling price to determine gross profit.
Sales ledger and purchase ledger control accounts may be constructed to identify any one
missing figure from the control account. Note that you may need to set up and use several
standard workings for the control accounts to find the link to complete the missing
information.
34
The net assets approach
I NCO MPLE TE RECORD S : CHAPTER 3
Example 1 Net assets approach June

The statement of financial position for June, a sole trader, at 31 May 20X3 showed that she
had net assets totalling 28,500. During the year to 31 May 20X4 June did not keep a full
set of accounting records but she can supply you with the following list of assets and
liabilities at 31 May 20X4:
13,300
6,200
10,400
500
2,100
150
10,200
1,800
750
12,500
3,500
SLCA
PLCA
Motor vehicle at carrying amount
Accruals
Bank account balance overdrawn
Cash in till
Fixtures and fittings at carrying amount
Computer at carrying amount
Prepayments
Inventory
Bank loan
June can also tell you that she withdrew 15,200 of cash for her own use during the year
and that she did not introduce any new capital into the business.
Task:
How much profit did June make for the year ended 31 May 20X4?
Solution:
Assets:
Inventory
Receivables
Prepayments
Cash in till
Liabilities
Bank overdraft
Payables
Accruals
Bank loan
Net assets at 31 May 20X4
35
Increase in net assets
=
=
==
==
==
Capital introduced + profit drawings
The cash and bank approach

Cash balance is the value of notes and coins in the till or petty cash box at a specific date,
normally the year-end date.
Bank balance is the balance on the bank current or cheque account of the business at a
specific date, normally the year-end date.
Use of cash and bank information:
Summarise transactions to quantify and identify missing amounts
May need to reconcile transfers between cash and bank accounts
e.g. amounts banked may be after deducting a fixed monthly amounts for
proprietors drawings.- the total of these two amounts would be receipts
from customers
e.g. any shortfall or difference in the cash account reconciliation may be

due to drawings
Example 2 Cash and bank approach April

Given below is the summarised cash book for April, a sole trader, for the year ended 30
September 20X6.
Cash book summary
63,425
Cash from customers
Payments to suppliers
Payments for expenses
Drawings
28,650
5,800
15,450
The owner can also provide you with details of the assets and liabilities at the start and at
the end of the year as follows:
Receivables
Payables
Accruals
Inventory
36
1 October 20X5
10,500
6,200
350
8,200
30 September 20X6
11,200
7,500
675
9,500
Tasks:
(a)
What is the sales revenue figure for the year?
(b)
What is the purchases figure for the year?
(c)
What is the gross profit for the year?
(d)
What is the net profit for the year?

Solution:
(a)
SLCA
Detail
Balance b/d
Sales revenue (bal fig)
Balance c/d
Detail
Cash received
Balance c/d
Balance b/d
(b)
PLCA
Detail
Cash payments
Balance c/d
Detail
Balance b/d
Purchases (bal fig)
Balance b/d
(c)
Detail
Sales revenue
Opening inventory
Purchases
Less: closing inventory
Cost of goods sold
Gross profit
37
(d)
Detail
Gross profit
Less: expenses
Net profit
The adjustments to the expenses are for opening and closing accruals
Example 3 Mark-ups and margins Tarquin

You have been provided with information by Tarquin, a sole trader who prices some goods
based by adding a profit mark-up to cost of purchase, whilst other goods are priced to
achieve a required sales margin based upon selling price as follows:
Task:
Product A had a purchase cost of 50. What is the selling price and gross profit per unit if
Tarquin adds a mark-up of 30%?
Product B had a purchase cost of 90. What is the selling price and gross profit margin if
Tarquin adds a mark-up of 40%?
Tarquin sells product C for 80. What was the purchase cost and gross profit per unit if
the selling price includes a margin of 25%?
Tarquin sells product D for 75. What was the purchase cost and gross profit per unit if
the selling price includes a margin of 20%?
38
Solution:
Product A
Percentage
Product B
Percentage
Product C
Percentage
Product D
Percentage
Sales ledger and purchase ledger control accounts

Control account reconciliations:
Use when there is some, but incomplete, information
Able derive missing or balancing figures
May include use of mark-up or sales margin information
May need to distinguish between cash and bank transactions
39

Bank payments
Purchase returns
Discounts received
Contra with SLCA
Closing balance
Opening balance
Sales
40
X
X
X
X
X
Opening balance
Purchases
X
Bank receipts
X
Discount allowed
X
Sales returns
X
Bad debts written off
X
Contra with PLCA
Closing balance
X
X
X
X
X
X
X
Example 4 Control account reconciliations

You have been provided with the following information by May, a sole trader:
Inventory
SLCA
PLCA
Bank
1 July 20X7
23,850
16,175
10,860
825
30 June 20X8
25,765
18,325
11,325
700 (overdraft)
During the year cash payments were made for purchases of 67,450 and for expenses of
6,300. May tells you that all sales are made at a mark-up on cost of 20%. However she is
not able to tell you how much she took out of the business as drawings.
Task:
What were Mays drawings for the year ended 30 June 20X8?
Solution:
Drawings =
per bank account reconstruction

Cash payments
Balance c/d
Balance b/d
Purchases (bal fig)
Trading account
Detail
Sales revenue
Opening inventory
Purchases
%
120
Cost of goods sold
100
Gross profit
20
41
Balance b/d
Sales revenue
Cash received (bal fig)

Balance c/d
Balance b/d
Cash from sales (SLCA)
Balance c/d
10
Bank account
Payments for purchases

Expenses paid
Drawings (bal fig)
Example 5 Incomplete records mini case study

Jane Smith is considering buying a small wholesale business. The vendor of the business has
provided some financial information for his business, which is set out below.
(i)
Assets and liabilities as at 31 October 20X3

Freehold premises at cost
Less: depreciation to date
Fixtures and fittings at cost

Less: depreciation to date
Inventory
SLCA
Prepaid general expenses
Cash
PLCA
Bank overdraft
42
150,000
30,200
119,800
30,500
18,250
12,250
37,420
48,370
850
805
87,445
40,160
16,400
56,560
(ii)
A summary of the business bank account for the year ended 31 October 20X4:
Cash banked
Receipts from customers
305,625
757,850
Opening balance
Payments to suppliers
General expenses
Salaries
Drawings
Closing balance
1,063,475
(iii)
16,400
832,160
9,315
100,250
42,000
63,350
1,063,475
Other information:
The profit margin achieved on all sales was 25%.
The value of the closing inventory held on 30 April 20X1 is unknown
Depreciation is calculated as follows:
Premises 2% per annum on cost
Fixtures and fittings 25% per annum on cost
All cash is banked at the end of each day, apart from a cash float. During the
year, the cash float decreased from 805 to 750.
On 31 October 20X4 the outstanding balances were:

PLCA
SLCA
Accrual for general expenses
67,200
61,390
250
Tasks:
Jane Smith has asked you to calculate some key figures as follows:
(a)
Calculate the total value of the credit sales for the year ended 31 October 20X4.
(b)
Calculate the total sales for the year ended 31 October 20X4.
(c)
Calculate the total value of the purchases for the year ended 31 October 20X4.
(d)
Calculate the value of the closing inventory held on 31 October 20X4.
(e)
Calculate the net profit made for the year ended 31 October 20X4.
(f)
Show the carrying amount of the non-current assets held on 31 October 20X4.
43
Solution:
(a)
SLCA
Bal b/d
Credit sales (bal fig)
Cash receipts
Balance c/d
(b)
Cash
Balance b/d
Cash sales (bal fig)
Total sales
Credit
Cash
Cash banked
Balance c/d
(c)
PLCA
Cash payments
Balance c/d
44
Balance b/d
Purchases (bal fig)
(d)
Sales revenue
Less: cost of goods sold
Opening inventory
Purchases (part c)
%
100
Closing inventory (bal fig)
Cost of goods sold
75
Gross profit
25
(e)
Gross profit (part d)

Less: expenses
General expenses
Salaries
Depreciation
premises
fixtures and fittings
Net profit
(f)
Premises
Total
Fixtures and
fittings
Cost
Accumulated depreciation
Carrying amount
45
11
Summary
Incomplete records
This term is used when there is
incomplete information available to
prepare accounting information.
There are several approaches that
may be adopted to create or identify
the missing information.
Net assets approach

This requires the compilation of
either a trial balance or statement of
financial position to identify the
missing value as a balancing figure.
Cash and bank approach

This requires completion of control or
total accounts to identify a balancing
or missing value.
It is important to distinguish between
cash transactions and those passing
through the bank account.

Mark-up on cost adds an extra
amount to cost to get selling price.
Margins include the profit within
selling price.
Purchase ledger and sales ledger

control accounts
This requires compilation of control
accounts to identify a balancing or
missing value.
Normally, there will be detailed,
although incomplete information
available that should enable a full set
of accounts to be prepared.
46
12

Further reading
of the Prepare Final Accounts for Sole Traders and Partnerships text book.
Less detailed summaries can be found in Chapter 4 of the FSTP pocket notes.
Revision kit:
Q1 A Catering Business
Q9 Chiron
Q10 Parker

Workbook activity 7 Brew-By-Us
Workbook activity 8 Diane Kelly
47
48
Answers to examples
Chapter 1
Sales revenue
Opening inventory
Purchases
Closing inventory
23,340
266,800
(25,680)
Cost of goods sold
(264,460)
100,740
Gross profit
Sundry income:
Discounts received
Expenses:
Wages
Motor expenses
Irrecoverable debts
Discounts allowed
Total expenses
365,200
1,622
102,362
46,160
13,000
3,720
760
120
864
(64,624)
37,738
49

Statement of financial position at 31 December 20X9
Cost
Non-current assets:
Land
Fixtures & fittings
Motor vehicles
Current assets:
Inventory
Less: allowance for doubtful debts
Prepayments
Bank
170,000
28,000
24,000
222,000
16,800
12,240
29,040
Carrying
value
170,000
11,200
11,760
192,960
25,680
17,330
(588)
16,742
4,560
46,982

Accruals
Accumulated
Depreciation
23,004

Net current assets
Net assets
Capital account:
Capital account
Add: net profit for the year
Less: drawings
50
(23,004)
23,978
216,938
200,000
37,738
(20,800)
216,938
AN SWERS TO E XAM PLES : CHAPTER 4
Chapter 2
Example 1
(a)
Net profit for
the year
Profit for the year
Salary to Sally
Sam (10% 32,000)
Sally (10% 48,000)
Residual profit
Sam (2/3)
Sally (1/3)
To current accounts
54,000
(10,000)
(3,200)
(4,800)
36,000
(24,000)
(12,000)
Nil
Partners
Sam
Sally
10,000
3,200
4,800
24,000
12,000
26,800
27,200
(b)
Net profit for
the year
Profit for the year
Salary to Sally
Sam (10% 32,000)
Sally (10% 48,000)
Residual profit (loss)
Sam (2/3)
Sally (1/3)
To current accounts
14,400
(10,000)
(3,200)
(4,800)
(3,600)
(2,400)
(1,200)
Nil
Partners
Sam
Sally
10,000
3,200
4,800
(2,400)
800
(1,200)
13,600
Note that the appropriation of salary and interest on capital take place as normal, with the
resulting residual profit or loss then allocated accordingly.
51
Example 2
Net profit for
the year
22,000
(8,000)
(12,000)
Profit for the year

Salary to Paula
Salary to Jane
Paula (10% 28,000)
Jane (10% 12,000)
Interest on drawings:
Paula (5% 12,000)
Jane (5% 8,000)
(2,800)
(1,200)
600
400
(1,000)
600
400
Nil
Residual loss
Paula (3/5)
Jane (2/5)
To current accounts
Partners
Paula
Jane
8,000
12,000
2,800
1,200
(600)
(400)
(600)
9,600
(400)
12,400
Note the effect of interest on drawings upon the appropriation account. They represent a charge
against each partner, with the effect that the profit available for allocation between the partners
has been increased.
Current accounts
Detail
Drawings
Int on drawings
Share of loss
Bal c/d
52
Paula
12,000
600
600
6,100
19,300
Jane
8,000
400
400
11,900
20,700
Detail
Balance b/d
Salary
Int on capital
Paula
8,500
8,000
2,800
Jane
7,500
12,000
1,200
19,300
20,700
Example 3
Period split
Profit for the year
Salary:
Cagney
Lacey
Starsky
Cagney
Lacey
Starsky
Cagney
Lacey
Starsky
1 May 20X1
31 Jan 20X2
9/12
37,500
1 Feb 20X2
30 April 20X2
3/12
12,500
12/12
50,000
(1,875)
(1,125)
(625)
(375)
(1,000)
(2,500)
(1,500)
(1,000)
(1,500)
(1,050)
(500)
(350)
(250)
9,400
(3,760)
(3,760)
(1,880)
Nil
(2,000)
(1,400)
(250)
41,350
(19,735)
(19,735)
(1,880)
Nil
1 April 20X3
30 Sept 20X3
6/12
30,000
1 Oct 20X3
31 Mar 20X4
6/12
30,000
Total
12/12
60,000
(1,200)
(600)
(1,500)
(900)
(2,700)
(900)
(600)
(1,250)
(750)
(500)
25,700
(10,280)
(10,280)
(5,140)
Nil
(1,500)
(900)
25,200
(15,120)
(10,080)
Nil
(2,750)
(1,650)
(500)
50,900
(25,400)
(20,360)
(5,140)
Nil
31,950
(15,975)
(15,975)
Nil
Total
Example 4
Period split
Profit for the year
Salary:
Tom
Dick
Harry
Tom
Dick
Harry
Tom
Dick
Harry
53
Example 5
Step 1
Debit:
Goodwill
120,000
Credit:

Red
60,000
Amber
60,000
Debit:
Bank account
70,000
Credit:
Capital account Green
70,000
Step 2
Step 3
Debit:
Credit:

Red
48,000
Amber
48,000
Green
24,000
Goodwill
120,000
Goodwill account
Detail
Detail
Old partnership:
New partnership:
Red
60,000
Red
48,000
Amber
60,000
Amber
48,000
Green
24,000
54
120,000
120,000
Capital accounts
Detail
Red
Amber
Green
Detail
Balance b/d
Goodwill new
partners
48,000
48,000
112,000
92,000
Amber
Green
100,000
80,000
24,000 Cash
introduced
Goodwill old
partners
Bal c/d
Red
70,000
60,000
60,000
46,000
160,000
140,000
70,000
160,000
140,000
70,000
Example 6
Step 1
Debit:
Kent current account
3,600
Credit:
3,600
Step 2
Debit:
Goodwill
Credit:
60,000
Kent
30,000
Essex
20,000
Devon
10,000
Step 3
Debit:
113,600
Credit:
Partnership bank account
50,000
Partnership loan account
63,600
Step 4
Debit:
Credit:

Essex
36,000
Devon
24,000
Goodwill
60,000
55
Goodwill account
Detail
Detail
Old partnership:
New partnership:
Kent
30,000
Essex
36,000
Essex
20,000
Devon
24,000
Devon
10,000
60,000
60,000
Capital accounts
Kent
Goodwill
Cash
Loan
Balance c/d
Essex Devon
36,000 24,000
50,000
63,600
113,600
44,000
80,000
Kent
Balance b/d 80,000

Goodwill
30,000
Current account 3,600
Essex
60,000
20,000
Devon
40,000
10,000
113,600
80,000
44,000
50,000
26,000
Kent
3,600
Essex
2,100
Devon
4,400
3,600
2,100
2,100
4,400
4,400
26,000
50,000
Balance b/d
Current accounts
Capital account
Balance c/d
Kent
3,600
3,600
Essex
Devon
Balance b/d
2,100 4,400

2,100 4,400

Balance b/d
56
Example 7
(a)
Partnership appropriation account for the year ending 30 September 20X4
Net profit
Salary
Interest on capital
Ben (45,000 3%)
Gerry (25,000 3%)
40,000
(4,000)
1,350
750
(2,100)
33,900
Profit share:
Ben (33,900 2/3)
Gerry (33,900 1/3)
22,600
11,300
(33,900)
(b)
Current accounts
Balance b/d
Drawings
Balance c/d
Ben
Gerry
1,000
25,000 15,000
3,550
Balance b/d

26,000 18,550

2,050
Ben
Balance b/d
Salary
Interest on capital
Profit share
Balance c/d
Balance b/d
1,350
22,600
2,050
26,000
Gerry
2,500
4,000
750
11,300
18,550
3,550
57
(c)
Statement of financial position as at 30 September 20X4

Cost
Non-current assets:
Motor vehicles
50,000
25,000
75,000
Current assets:
Inventory
Receivables
Prepayments
Cash at bank
Cash in hand
Payables
Accruals
Accumulated
depreciation
Carrying
value
20,000
10,000
30,000
30,000
15,000
45,000
23,500
40,500
2,200
6,250
750
73,200
(26,300)
(5,400)
(31,700)
Non-current liability:
Loan
(15,000)
71,500
Capital accounts
Ben
Gerry
Current accounts
Ben
Gerry
41,500
86,500
45,000
25,000
70,000
(2,050)
3,550
1,500
71,500
58
Chapter 3
Example 1
Assets:
Inventory
Receivables
Prepayments
Cash in till
Liabilities:
Bank overdraft
Payables
Accruals
Bank loan
2,100
6,200
500
3,500
Net assets at 31 May 20X4
Increase in net assets

36,800 28,500
8,300
8,300 + 15,200
23,500
=
=
==
==
==
10,200
10,400
1,800
12,500
13,300
750
150
49,100
(12,300)
36,800
Capital introduced + profit drawings

0 + profit 15,200
Profit 15,200
Profit for the year
Profit for the year
Example 2
(a)
SLCA
Detail
Balance b/d
Sales revenue (bal fig)
Balance b/d
10,500
64,125
74,625
11,200
Detail
Cash received
Balance c/d
63,425
11,200
74,625
59
(b)
PLCA
Detail
Cash payments
Balance c/d
28,650
7,500
74,625
Detail
Balance b/d
Purchases (bal fig)
Balance b/d
6,200
29,950
36,150
7,500
(c)
Detail
Sales revenue
Opening inventory
Purchases
64,125
8,200
29,950
38,150
(9,500)
Cost of goods sold

Gross profit
(28,650)
35,475
(d)
Detail
Gross profit
Less: expenses (5,800 350 + 675)
Net profit
35,475
(6,125)
29,350
The adjustments to the expenses are for opening and closing accruals.
60
Example 3
Product A
Cost
Mark-up
Selling price
Product B
Cost
Mark-up
Selling price
Product C
Percentage
100
50
30
15
50 30%
130
65
50 130%
Percentage
100
90
40
36
90 40%
140
126
90 140%
Percentage
Cost
75
60
80 75%
Mark-up
25
20
80 25%
100
80
Selling price
Product D
Percentage
Cost
80
60
75 80%
Mark-up
20
15
75 20%
100
75
Selling price
Example 4
Drawings = 4,825
Cash payments
Balance c/d
67,450
11,325
78,775
Balance b/d
Purchases (bal fig)
10,860
67,915
78,775
61
Trading account
Detail
Sales revenue
Opening inventory
Purchases
79,200
%
120
(66,000)
13,200
100
23,850
67,915
91,765
(25,765)
Cost of goods sold

Gross profit
20

Balance b/d
Sales revenue
16,175
79,200
95,375
Cash received (bal fig)

Balance c/d
77,050
18,325
95,375
Bank account
Balance b/d
Cash from sales (SLCA)
Balance c/d
825
77,050
700
78,575
Payments for purchases

Expenses paid
Drawings (bal fig)
67,450
6,300
4,825
78,575
Example 5
(a)
SLCA
Opening balance
Credit sales (bal fig)
62
48,370 Cash receipts

770,870 Closing balance
819,240
757,850
61,390
819,240
(b)
Cash
Opening balance
Cash sales (bal fig)
805 Cash banked

305,570 Closing balance
306,375
Total sales
Credit
Cash
305,625
750
306,375
770,870
305,570
1,076,440
(c)
PLCA
Cash payments
Closing balance
832,160 Opening balance

67,200 Purchases (bal fig)
899,360
40,160
859,200
899,360
(d)
Sakes revenue (770,870 + 305,570)

Less: cost of goods sold
Opening inventory
Purchases (part c)
Closing inventory (bal fig)

Cost of goods sold
Gross profit
1,076,440
%
100
807,330
269,110
75
37,420
859,200
896,620
(89,290)
25
63
(e)
Gross profit (part d)

Less: expenses
General expenses
(9,315 + 850 + 250)
Salaries
Depreciation
premises
(2% 150,000)
fixtures and fittings
(25% 30,500)
269,110
10,415
100,250
3,000
7,625
121,290
147,820
Net profit
(f)
Premises
Cost
Accumulated depreciation
(30,200 + 3,000)
(18,250 + 7,625)
Carrying amount
64
150,000
Fixtures and
fittings
30,500
Total
180,500
25,875
4,625
59,075
121,425
33,200
116,800

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PREPARE FINAL ACCOUNTS FOR SOLE

Kaplan Financial Limited, 2014

Sole trader accounts preparation

Sole trader accounts preparation

understand the format of the accounts of a sole trader

Format of the statement of profit or loss

Format of the statement of financial position

Example 1 Sole trader accounts preparation

Further reading and questions

Purpose of this unit:

Follows on from ACPR

Purpose to develop double-entry skills and knowledge

Prepare accounts for sole traders and partnerships

Identify relevant information and evaluate results

Provides basis of preparation for Level 4 unit FSTM

Core topics within FSTP:

Financial statements for sole traders

Task 1 Incomplete records and reconstruction of ledger accounts

Task 2 Missing figures and the process of preparing financial statements

Task 3 Financial statements of sole traders

Task 4 Partnership accounting

Task 5 Partnership statement of financial position

SO LE TR ADER ACCOUNTS PREPA RA TION : CHAPTER 1

Format of the statement of profit or loss

Format of the statement of financial position

Total current assets

SO LE TR ADER ACCOUNTS PREPA RA TION : CHAPTER 1

Example 1 Sole trader accounts preparation

Cost of goods sold

Net profit for the year

SO LE TR ADER ACCOUNTS PREPA RA TION : CHAPTER 1

Hardy trading as Design Gecko

Total current assets

Total current liabilities

Net current assets

Statement of profit or loss

Statement of financial position

SO LE TR ADER ACCOUNTS PREPA RA TION : CHAPTER 1

Further reading and questions

Q15 Inventory Trading

Additional, more challenging questions

Workbook activity 5 David Pedley

Workbook activity 6 Karen Finch

Workbook activity 7 Elmdale

understand the nature of a partnership

apply the principles of profit appropriation to profit made by a partnership

The nature of a partnership

The accounts of a partnership

Appropriation of profit between partners

Example 1 Appropriation of profit

Example 2 Appropriation of profit and current accounts

Appropriation of profit with change of partnership

Example 3 Appropriation of profit with admission of new partner

Example 4 Appropriation of profit with retirement of a partner

Admission of a new partner

Example 5 Admission of a new partner

Example 6 Retirement of a partner goodwill and partners accounts

Example 7 Accounts of a partnership

Further reading and questions

The nature of a partnership

Principal distinctions of a partnership from a sole trader and a partnership:

Allocation of elements of net profit (or loss) in an appropriation account