Financial Statements for Sole Traders, Partnerships and Limited Companies
What the domain tests
You must prepare and interpret financial statements for three ownership forms and adjust the figures for accruals, inventory, depreciation, bad debts and tax. The exam tests classification between capital and revenue and between expense and appropriation.
Core rules
- Sole trader: income statement and statement of financial position. Capital account is increased by profit and capital introduced, reduced by drawings and losses.
- Partnership: add an appropriation account. Partners' salary, interest on capital and interest on drawings are appropriations, not expenses. Residual profit or loss is shared in the profit-sharing ratio. Use current accounts for appropriations and drawings; capital accounts for fixed capital.
- Company: statement of profit or loss and other comprehensive income, statement of financial position, statement of changes in equity and notes. Income tax and dividends are not expenses in profit or loss; dividends are distributions.
- Adjust for closing inventory, accruals, prepayments, depreciation, irrecoverable debts and allowances.
Worked example
Partnership profit before appropriation is 120,000. A is entitled to salary 30,000 and interest on capital 4,000; B to interest on capital 3,000. Residual is 83,000, shared 3:2. A gets 49,800 residual; B gets 33,200. A total = 30,000 + 4,000 + 49,800 = 83,800. B total = 3,000 + 33,200 = 36,200. Check: 83,800 + 36,200 = 120,000.
Traps
Drawings are not expenses. Partners' salaries are not wages expense. Company dividends are not finance costs. Do not omit tax in a company statement. Closing inventory affects cost of sales and current assets.