Financial reporting 1

Prepare financial statements for a variety of businesses from a trial balance making appropriate adjustments Explain how the information needs of different user groups vary Prepare financial statements in a form suitable for publication by a sole trader, trader, partnership and limited company

BANKING ACADEMY, HANOI BTEC HND IN BUSINESS (FINANCE) ASSIGNMENT COVER SHEET NAME OF STUDENT REGISTRATION NO UNIT TITLE ASSIGNMENT TITLE ASSIGNMENT NO NAME OF ASSESSOR SUBMISSION DEADLINE Financial Reporting Individual Assignment 1 of I, _hereby confirm that this assignment is my own work and not copied or plagiarized from any source I have referenced the sources from which information is obtained by me for this assignment _ Signature Date -FOR OFFICIAL USE Assignment Received By: Date: TABLE OF CONTENTS Contents I Coversheet………………………………………………………………… II Executive summary……………………………………………………… III Introduction…………………………………………………………… IV Main body IV.1 Sole traders………………………………………………………… IV.2 Partnerships……………………………………………………… IV.3 Corporation………………………………………………………… V Conclusion………………………………………………………………… VI Appendices……………………………………………………………… VII References……………………………………………………………… Page 12 14 15 17 18 28 II EXECUTIVE SUMMARY This report is made to show financial statements for information of many different kinds of business in a trial balance and appropriate adjustments Besides, these financial statements are also prepared from incomplete records in a form suitable for publication by a sole trader, partnership and company The other thing that is referred to in this report is the explanation to the variety in the information needs of different users group Therefore, with the purpose is to provide information about financial position, performance and change in financial position of an enterprise that is useful to a wide range of users in making economic decisions With the role of an accountant in a local firm, I have responsibilities to produce the yearend financial statement that has just been left the company at short notice Therefore, by my initiative and knowledge of recent accounting developments in drawing up the required statements for clients based on information given in the tasks, I made this report and I hope it is useful for not only the customers, managers but also all the stakeholders of the firm III INTRODUCTION Considered as one of key parts which have great contributions to the development of a country, the businesses major always get many prioritization as well as motivation policies of each country However, they also have to deal with a lot of difficulties and challenges in more and more competitive market nowadays Regarded as the language of business, financial reporting provides information about economic resources and claims to resources The intention that managers aim to get when they use this kind of reporting is that it is a good tool for them to realize effective information in order to assess amount, timing and uncertainty of future cash flows In addition, this report is also about the advantages and disadvantages of different forms of business ownership including sole traders, partnerships and corporations The main financial statements for these legal forms are the profit and loss account (or income statement) and the balance sheet which is performed on the main body of the current report and these documents are called an annual report There are many reasons why sole traders, partnerships and corporations produce financial account The first one is because managers need detail and frequent information to run their business efficiently, so regular and periodic accounts will be very important data for them to assess their own business performance The other reason is that this document is really essential for external users who are the tax authorities for sole traders and partnerships with the objective of assessing the business’s profits Similarly, banks also want regular financial statement to decide if they could lend the business or how much the business might loan which is known as the financial proof This could be understood that for corporations, it enables the shareholders to receive from the managers an annual set of accounts which have been independently checked by the auditors On the other hand, for sole traders and partnership, it allows the tax authorities to have these accounts which are often prepared by independent accountants Explaining about these matters, below are main features of sole traders, partnerships, and corporations which are summarized in the figure Features Business (i) Owners (ii) Run company (iii) Statutory Sole traders Partnership Corporation Sole traders Partners Shareholders Sole traders Partners Directors No specific act Partnership act, 1890 Companies Acts accounting legislation 2-20 (but certain (iv) Number of owners (v) Liabilities (vi) Number in UK* in 2004 Unlimited 514,820 (a) 64% under (vii) Size of £100,000 turnover in UK* (b) 1% over £1m exceptions such as accountants, solicitors) Unlimited, except for limited partners Private 1-50 Public upwards Limited 309,385 753,020 (a) 33% under (a) 33% under £100,000 £100,000 (b) 7% over £ m (b) 22% over £1 m Accounting Tax authorities for (i) Main external Tax authorities, users of accounts bank (ii) Main Trading and profit financial and loss account statements and balance sheet small, private Tax authorities, bank companies, shareholders for Trading, profit and loss and appropriation account and balance sheet public companies Profit and loss account (Income statement), balance sheet and cash flow statement (iii) Main differences in profit and loss - account from sole trader (iv) Main - Appropriation account shares out profit None Appropriation account has dividends and taxation Companies, when in differences in net group, may have assets from sole good will They are trader also likely to have other intangible assets such as patents or brands In current liabilities , there are proposed dividends ( for non-listed companies only) and taxation payable Capital and current (v) Main differences in owners’ capital from sole trader - accounts and record Capital essentially partners’ share of divided into share capital invested and capital and reserves profit From Office for National Statistics, Size Analysis of United Kingdom Businesses, 2004 Figure 1: Compared features between sole traders, partnerships and corporation ( from Michael Jones, Accounting, p.149, the second edition (2006) by John Wiley and Sons Ltd, the Atrium, Southern Gate, Chichester, West Sessex PO 198SQ, England) The features of each kind of legal from above made the advantages and disadvantages for the business The first one might be referred to is sole trader which is defined to be single individual carrying on a business on their own and the examples for this form could be grocery shops, local restaurants, beauty salon, boutiques, barbers and so on With their own specialization, sole traders not require formal procedures to start so they are usually not only small –scale operation and represent the lowest amount of market capitalization but also popular for example, about 70 percent of all businesses in the United States focuses on this business ownership ( Megginson (1997), p.40) Moreover, the owners are subject to a much lighter regulatory and paperwork burden than other business forms Besides, they handle total control of their firm’s activities, so they earn all of the profit as well as cover the losses Another advantage of sole traders is that such businesses are so close to customers so they can respond quickly to the market change and meet their customers’ needs If the good news is that sole traders keep all the profit, the bad news is that they have unlimited liability for business debts According to that, the creditors can look beyond business asset to the sole trader’s personal assets for payment That means the creditors can run after his possessions like house, car, land, if the capital is insufficient to pay for the debts It is recognized that there is no distinction between the owner’s business assets and personal assets The income of the business is also added to the owner’s personal income and taxed by the government at the appropriate personal tax rate Besides, the owners also have to face financial problems including difficulties in raising finance, expansion is only possible by ploughing back profit and borrowed capital for expansion is often limited by lack of collateral Figure below is the summary of sole traders’ characteristics as well as the comparison of the characteristics of business forms Characteristics Ownership Legal requirements Sole traders Single individual Few, entity easily Partnerships Multiple owners Few, entity easily Corporations Unlimited ownership Numerous legal and regulation Legal distinction formed None formed None requirements Legal separation between owner and between owners and business Liability business Limited Unlimited Unlimited but shared among Ability to raise capital Transferability of Very limited Nontransferable ownership (except by sale of Taxes entire) Paid by owner partners Limited Nontransferable Nearly unlimited Easily transferable Paid by partners Corporation pays income tax and stockholders pay Owner expertise in Essential Essential taxes on dividends Unnecessary business Figure 2: Comparison of Characteristics of Business Forms (From, Corporate finance, p.04) According to the definition in Section of the Uniform Partnership Act, partnership is an association of two or more people to carry on as co-owners a business for profit Therefore, partnerships may be seen as sole traders with multiple owners Many sole traders take on partners to help them finance and run their business Each partner can own a different percentage of the firm and from that firm control is determined by the size of partners’ ownership stakes However, for the most part, partnerships share many of the same advantages and disadvantages as the sole traders Because of great effect of the business on the relationship between partners, the operations of the firm must through the agreement among partners and then businesses’ profits are split among the partners, usually by the percentage of firm ownership At this kind, received profits are added to each partner’s personal income and taxed at personal income tax rates Two obvious advantages of a partnership over a sole trader are the pooling of financial capital of the partners and the sharing of the business risk among them, from that banks are more willing to lend to partnerships than to sole traders and partners are liable for repaying the debts Nevertheless, these advantages may not be as important as the pooling of the partners’ service-oriented expertise and skill, especially in large partnerships Based on the disadvantages of sole traders, partnerships have their similar ones Firstly, partnerships also have unlimited liability for business debts and as to death, it will extinguish the partnership because the operation and existence of partnership is based on trust Secondly, partnership has limited life of the business because dissolution could occur if a partner die, becomes incapacitated, goes bankrupt or withdraws The other disadvantage of this form is its difficulties of transferring ownership because a transfer requires that a new partnership be formed From the table and above, it is easy to see the clarity in advantages and disadvantages of partnership In order to raise enough capital for continual growth, a partnership will often change into a corporation As far as the real situation of corporation is concerned, corporation is the most important form in terms of size of business organization in the United States There is less than 20 percent of all businesses in the United States but approximately 90 percent of the country’s business revenue ( Meggison (1997) ) The corporation is a legal entity, and has rights, duties and privileges similar to those of an individual such as the ability to own property, sign binding contracts, and pay taxes Corporations’ owners are stockholders (shareholders) but the business debts and liabilities are those of the company, not those of their owners In the other words, this is an advantage of corporation that is limited liability This could be understood that they are not personally liable for the obligations of the corporations because the corporation is a separate and distinct personality from its stockholders and the company is considered as another person Following that, the stockholders are not obliged to use their own personal property as payment for the company’s debts instead it is the liability of the company The second advantage of corporation is that corporation owners don’t need to be an expert in the industry or management of the business, unlike the owners of sole traders or partnership where business expertise is really essential and important to success Each person who has sufficient money can invest to own the stock and this makes benefits for both the business and the owners From that, the business can seek capital from many investors, not only in domestic markets but worldwide One of the most important advantages of corporation form is that it is easy to transfer ownership Transferability of shares allows corporations to have unlimited life because each share of the ownership symbolizes one or more formal document called stock certificate The stockholder can sell or transfer their shares through companies that act as middlemen in the trading of stock and this trading takes place at a lot of marketplaces known as stock exchanges However, the key point is that when the shares are sold, the sale doesn’t influence on the company’s assets and liabilities On the other hand, the corporate structure also has limitations The first limit is that forming a corporation is much more difficult than a sole trader or partnership because they not only have to identify the purpose of business, organizational structure, expected life, business location, capital but also methods to call upon the investment of people to make real shareholders and so on Moreover, because of too many shareholders of some corporations, they are subject to more regulation than are partnership and sole trader, while regulation serves to protect shareholders, it can be costly to them as well The complexity of forming a corporation leads to hiring lawyers and accountant to ensure that the operation of the company is in a good condition and under the control In addition, because of separate legal entity of corporation, its income is taxed by the government, even at the local authorities At the same time, the income that is distributed to the stockholders is taxable to them Hence, there is double taxation of a corporation’s earnings In short, sole traders, partnerships and corporation are good types of business organization, each types has its own advantages and disadvantages With all the explanation above, hopefully it is useful and provides the readers necessary knowledge about this field 10 Loan Draco Trade Creditors Accrued expenses Net Current assets Net assets Long- term liabilities Net assets Capital As at February,20X0 Net profit for the year Less: Drawing (7) 12,000 14,200 3,400 29,600 122,050 130,060 (12,000) (8) (10) 129,500 69,960 69,400 130,060 PARTNERSHIP STATEMENT OF CHANGES IN PARTNER’S CAPITAL For the month ended 31 March 20X3 Changes in BAN GAY’s capital £ Beginning Capital Less: Provision for doubtful debts 59,625 555 59,070 (1) Changes in BAN TRAI’s capital £ Beginning Capital Less: Provision for doubtful accounts receivable 405 Under depreciation of furniture and fixtures 900 £ 33,500 (2) 1,305 (3) 32,195 12 PARTNERSHIP BALANCE SHEET For the month ended 31 March 20X3 £ Fixed assets Furniture and fixtures Office equipment Current assets Inventories Accounts receivable Cash Prepaid expense Curent liabilities Accounts payable £ 38,100 14,250 52,350 (4) (5) 49,500 31,040 12,750 9,375 102,665 (6) (7) (8) (9) (63,750) (10) Net current assets Long-term liabilities 38,915 Net assets 91,265 Capital Capital as at 31 March 20X3 91,265 CORPORATION GRIEG COMPANY TRADING, PROFIT AND LOSS ACCOUNT For the month ended January 31, X1 $ Sales Cost of sale Depreciation Expenses $ 11,000 7,000 120 7,120 Net Profit 3,880 13 GRIEG COMPANY BALANCE SHEET As at 31 January, X1 $ Fixed assets Equipment Less: Accumulated Depreciation $ 1,200 120 1,080 1,080 Current assets Merchandise inventory Debtors 2,000 1,000 Cash 11,300 14,300 Current Liabilities Creditor 1,000 1,000 Net current assets 13,300 14,380 Long-term liabilities Loan Net assets Capital Capital as at January, X1 Profit for the month (500) 13,880 10,000 3880 13,880 14 V CONCLUSION This report not only provides knowledge about sole traders, partnerships, corporations but also practical statistics of these business forms including Cygnus (sole trader), BAN GAY and BAN TRAI (partnership) and Grieg company (corporation) As far as theory about these legal business forms is concerned, this report refers to advantages and disadvantages of them so that people who are interested in this field can consider this document as a reference to make a good decision in starting a business Besides profit and loss accounts and balance sheets which are illustrated in the main body are also accurate evidence for identifying important features and necessary skills for managers to set up as well as run the business Trading, profit and loss account and balance sheets of three kinds of business structure, it shows the importance of these tools in the operating control of each enterprise For that reason, each business should make their own regular trading, profit and loss account and balance sheet in detail in order that stakeholders including internal and external users could 15 base on that to have grasp knowledge about the real situations of the company, they can give suitable and clever decisions and actions with the business Considered as a key factor of an enterprise, profit and loss accounts and balances are real recommendations that are given to the readers and people with their concerns with the intention that the business is in a good condition and under an excellent management Besides, these documents should also be made clear, regular and smart so that stakeholders can see from it then evaluate the situation of the business With all the knowledge, explanation and analysis are used in the report, it might be helpful tools for building and developing a business VI APPENDICES Sole traders (1) Payment for purchases: Closing balance: Trade creditor 81,400 Opening balance: 12,100 14,200 Purchases: X 95,600 95,600 Purchases 95,600 Less 12,100 83,500 Cost of sales Opening stock Purchases Closing stock 146,400 83,500 128,700 101,200 16 (2) Calculation of sales: Sales = 101,200 x = 202,400 (3) Rent expense = 6000/12 x + 9000/12 x = 7,750 Rent in advance as at Jan 31, 20X1 = 9000/12 x = 1,500 (4) Calculation of sundry expense Sundry expense 18,600 Opening balance : 2,100 3,300 Sundry expense : 19,800 21,900 21,900 Payment for sundry expense : Closing balance (5) Calculation of Depreciation expense: Opening balance Less items sold Add item purchased Cost as at Jun 31, 20X1 Depreciation on old assets Depreciation on new assets Cost 14,800 (800) 14,000 1,800 15,800 14,000 x 10% 1,800 x 10% x 6/12 Account depreciation assets Jan 31, 20X1 Cost assets: Depreciation: Net book value: Sales Proceeds: Profit on sale: Accumulated depreciation 6,900 (600) 6,300 1,400 90 7,790 800 600 200 300 100 (6) Interest expense: = 24,000 x 10% x 11/12+ 12, 00 x 10% x 1/12 = 2,300 (7) Calculation of Accrued expenses: = 3,300 + (200 + 2,300 – 2,400) = 3,400 (8) Calculation of opening capital: Assets 17 Shop equipment Stocks Trade debtors Rent in advance Cash at bank Cash in hand 7,900 146,400 14,400 800 170,500 Liabilities Loan_ Draco Trade creditors Accrued Bank overdraft 24,000 12,100 2,300 2,600 41,000 129,500 Capital as at February, 20X0 (9) Calculation of cash received from sales: Trade debtors Opening balance Sale 14,400 202,400 216, 800 Cash received Closing balance X 15,700 216,800 Cash received = 216,800 – 15,700 = 201,100 (10) Calculation of drawings: Cash in hand Opening balance Cash received Closing balance 800 201,100 201,900 Drawings Cash banked X 131,600 201,900 Drawings = 201,900 – 131,600 = 69,400 Partnerships • (1), (2): Because BAN GAY and BAN TRAI agreed to provide 3% for doubtful accounts receivable => Provision for doubtful accounts receivable of BAN GAY = 18,500 x 3% = 555 Provision for doubtful accounts receivable of BAN TRAI = 13,500 x 3% = 405 • (3): Because they also agreed that Ban Trai’s furniture and fixtures are under depreciated by £900 => Under depreciation of furniture and fixtures of BAN TRAI= 900 18 • (4): Furniture and fixtures equals Furniture and fixtures of BAN GAY plus furniture and fixtures of BAN TRAI plus under depreciation of furniture and fixtures of BAN TRAI  Furniture and fixtures Furniture and fixtures of BAN GAY 30,000 Furniture and fixtures of BAN TRAI 9,000 Under depreciation of furniture and fixtures of BAN TRAI 900 38,100 • (5): Office equipment equals Office equipment of BAN GAY and Office equipment of BAN TRAI => Office equipment Office equipment of BAN GAY 11,500 Office equipment of BAN TRAI 2,750 14,250 • (6): Inventories equals Inventories of BAN GAY and Inventories of BAN TRAI => Inventories Inventories of BAN GAY 30,000 Inventories of BAN TRAI 19,500 49,500 • (7): Accounts Receivable equals Accounts Receivable of BAN GAY plus Accounts Receivable of BAN TRAI less Provision for doubtful accounts receivable of BAN GAY less Provision for doubtful accounts receivable of BAN TRAI  Accounts Receivable Accounts Receivable of BAN GAY 18,500 Accounts Receivable of BAN TRAI 13,500 Less Provision for doubtful accounts receivable of BAN GAY 405 Provision for doubtful accounts receivable of BAN TRAI 555 31,040 • (8): Cash equals Cash of BAN GAY plus Cash of BAN TRAI  Cash Cash of BAN GAY 9,000 Cash of BAN TRAI 3,750 12,750 • (9): Prepaid Expense equals Prepaid Expense of BAN GAY plus Prepaid Expense of BAN TRAI  Prepaid Expense Prepaid Expense of BAN GAY 6,375 Prepaid Expense of BAN TRAI 3,000 9,375 • (10): Accounts Payable equals Accounts Payable of BAN GAY and Accounts Payable of BAN TRAI 19  Accounts Payable Accounts Payable of BAN GAY Accounts Payable of BAN TRAI 45,750 18,000 63,750 20 3, Corporation JOUNAL: Cash 10,000 Capital 10,000 Investing common shareholders Equipment 1,200 Cash 1,200 Acquirement the equipment for cash Merchandise inventory 9,000 Creditor 9,000 Purchasing merchandise inventory on credit Cash 500 Notes Payable 500 Borrowing cash from a bank Cash 6,000 Receivable 5,000 Revenue 11,000 Merchandising inventory Cash 4,000 Accounts receivable 4,000 Collection of account receivable Accounts payable 8,000 Cash 8,000 Payment of account payable Depreciation expense 120 Accumulated Depreciation 120 Recognizing depreciation expense 21 Grieg Company Date 20X0 Jan Cash General Journal Description PR Credit 10,000 Common Stock Equipment Cash Merchandise inventory Account payable Cash Bank loan Cash Account receivable Sales Cost of sales Merchandise inventory Cash Account receivable Account payable Cash Depreciation Depreciation expense Debit 10,000 1,200 1,200 9,000 9,000 500 500 6,000 5,000 11,000 7,000 7,000 4,000 4,000 8,000 8,000 120 120 General Ledger Cash Date Descriptions Debit Investment of common shareholders Payment of equipment Borrowed from a bank Cash from sold machine in inventory 10,000 Account No Credit Balance 20x1 Jan 1,200 500 6,000 10,000 8,800 9,300 15,300 22 Collection of accounts receivable Payment of account payable 4,000 8,000 19,300 11,300 General Ledger Equipment Date Descriptions Debit Account No Credit Balance 20X1 Jan 1,200 1,200 Descriptions Debit Credit Account No Balance Sold merchandise inventory on credit Collection of account receivable 5,000 4,000 5,000 1,000 General Ledger Account receivable Date 20X1 Jan General Ledger Purchased merchandise inventory Date Descriptions 20X1 Jan Debit Credit Account No Balance Purchased merchandise inventory on credit Carried merchandise in inventory 9,000 7,000 9,000 2,000 General Ledger Common Stock Date 20X1 Jan Descriptions Debit Credit Account No Balance Investment from common shareholders 10,000 10,000 General Ledger 23 Account payable Date 20X1 Jan Descriptions Debit Credit Account No Balance Purchased merchandise inventory on credit Payment of account payable 9,000 9,000 1,000 8,000 General Ledger Sales Date Descriptions Debit Account No Credit Balance 20X1 Jan Sold merchandise inventory General Ledger Cost of sales Date 20X1 Jan Descriptions 11,000 Debit 11,000 Account No Credit Balance Cost of merchandise in inventory was carried 7,000 7,000 General Ledger Depreciation Date Descriptions Debit Account No Credit Balance 20X1 Jan 120 120 General Ledger Depreciation expense Date Descriptions Debit Credit Account No Balance 20X1 Jan Recognized depreciation expense 120 120 General Ledger Bank loan Date Descriptions Debit Credit Account No Balance 24 20X1 Jan Borrowed from bank 500 500 Grieg Company Trial Balance January 31, 20X1 Cash Equipment Account receivable Purchased merchandise inventory Common Stock Account payable Bank loan Sales Cost of sales Depreciation Depreciation expense 11,300 1,200 1,000 2,000 10,000 1,000 500 11,000 7,000 120 22,620 120 22,620 VII REFERENCES 25 1, Brand ford D Jordan, Randolph W Westerfield and Stephen A Ross (2007), Fundamentals of Corporate finance, 8th ed, McGraw- Hill Education 2, Edward J Van Derbeck (2003), Cost Accounting, 14th ed, South-Western 3, Franklin Allen, Stewart C Myers and Richard A Brealey (2004), Principles of Corporate finance, 9th ed, McGraw-Hill education 4, J.R Dyson (2004), Accounting for non-accounting students, 6th ed, Pearson Education 5, George H Bodnar and William S Hopwood(2007), Accounting information systems, 7th ed, Pearson Education 6, Mitch Ellison and neil Seitz (2004), Capital budgeting and long-term financing decisions, 4th ed, Saith Western 7, Hector B Perera and timothy S Doupnik (2005), International accounting, McGrawHill Irwin 8, Jan R Williams, Mark S better, Robert F Meigs and Susan F Haka (2008), Financial and managerial accounting, 12th ed, McGraw-Hill Irwin 9, Michael Jones (2002), Accounting, 2nd ed, John Wiley & Son Ltd 10, Hervé Stolowy and Michel J lebas (2004), Financial Accounting & Reporting, 2nd ed, South Western 26 ... stock 14 6,400 83,500 12 8,700 10 1,200 16 (2) Calculation of sales: Sales = 10 1,200 x = 202,400 (3) Rent expense = 6000 /12 x + 9000 /12 x = 7,750 Rent in advance as at Jan 31, 20X1 = 9000 /12 x = 1, 500... as at Jun 31, 20X1 Depreciation on old assets Depreciation on new assets Cost 14 ,800 (800) 14 ,000 1, 800 15 ,800 14 ,000 x 10 % 1, 800 x 10 % x 6 /12 Account depreciation assets Jan 31, 20X1 Cost assets:... Depreciation $ 1, 200 12 0 1, 080 1, 080 Current assets Merchandise inventory Debtors 2,000 1, 000 Cash 11 ,300 14 ,300 Current Liabilities Creditor 1, 000 1, 000 Net current assets 13 ,300 14 ,380 Long-term