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

-Assignment Received By: Date:

TABLE OF CONTENTS

Contents Page

I Coversheet……… 1

II Executive summary……… 5

III Introduction……… 6

IV Main body IV.1 Sole traders……… 12

IV.2 Partnerships……… 14

IV.3 Corporation……… 15

V Conclusion……… 17

VI Appendices……… 18

VII References……… 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, withthe 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

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 reportand 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 1

(iv) Number of

owners 1

2-20 (but certain exceptions such as accountants, solicitors)

Private 1-50 Public 2 upwards

(v) Liabilities Unlimited Unlimited, except for

limited partners Limited(vi) Number in

(a) 33% under

£100,000(b) 22% over £1 m

Accounting

(i) Main external

users of accounts

Tax authorities, bank Tax authorities, bank

Tax authorities for small, private companies, shareholders for public companies

Trading, profit and lossand appropriation account and balance sheet

Profit and loss account (Income statement), balance sheet and cash flow statement.(iii) Main

(iv) Main

differences in net

assets from sole

trader

- None Companies, when in

group, may have good will They are also likely to have other intangible assetssuch as patents or brands In current liabilities , there are

proposed dividends ( for non-listed companies only) and taxation payable(v) Main

Capital essentially divided into share capital and reserves

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 do not require formal procedures to start so they are usually not only small –scale operation and represent the lowest amount of marketcapitalization but also popular for example, about 70 percent of all businesses in the UnitedStates 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 canrun 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 2 below is the summary of sole traders’ characteristics as well as the comparison of the characteristics of business forms.

Characteristics Sole traders Partnerships Corporations

Ownership Single individual Multiple owners Unlimited ownershipLegal requirements

between owner and

business

None None Legal separation

between owners and business

Liability Unlimited Unlimited but

shared among partners

Nontransferable Easily transferable

Taxes Paid by owner Paid by partners Corporation pays

income tax and stockholders pay taxes on dividendsOwner expertise in

business

Essential Essential Unnecessary

Figure 2: Comparison of Characteristics of Business Forms

( From, Corporate finance, p.04)

According to the definition in Section 6 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

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 1 and 2 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’sbusiness 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 notpersonally 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, whileregulation 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

IV MAIN BODY

1 SOLE TRADERS

CYGNUS TRADING, PROFIT AND LOSS ACCOUNT

For the year ended Jan 31, 20X1

Reference toworkingSALES

(3)(4)(5)(5)(6)

7,75019,8001,4901002,300

202,400101,200101,200

31,400Net profit 69,960

CYGNUS BALANCE SHEET

For the year ended Jan 31, 20X1

.Reference

to working

Loan Draco 12,000

Trade Creditors 14,200

Accrued expenses (7) 3,400

29,600Net Current assets 122,050

STATEMENT OF CHANGES IN PARTNER’S CAPITAL

For the month ended 31 March 20X3 Changes in BAN GAY’s capital

£Beginning Capital 59,625

Less: Provision for doubtful debts 555 (1)

59,070

Changes in BAN TRAI’s capital

£ £Beginning Capital 33,500

Less: Provision for doubtful accounts receivable 405 (2) Under depreciation of furniture and fixtures 900

1,305 (3)

32,195

PARTNERSHIP BALANCE SHEET

For the month ended 31 March 20X3

TRADING, PROFIT AND LOSS ACCOUNT

For the month ended January 31, X1

Sales 11,000Cost of sale 7,000

Depreciation

Expenses 120

7,120

Net Profit

3,880

1,080

1,080

Current assets

Merchandise inventory

2,000

Debtors 1,000

11,300

14,300

Current Liabilities

Creditor

1,000

1,000

Net current assets

13,300

14,380

Long-term liabilities

(500)

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 thebusiness

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

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 stakeholderscan 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