LO2.

P4. Produce final accounts for a range of examples that include sole traders, partnerships or limited
companies?

When we start a new business it becomes very important to decide that which business structure
has to be followed for this the entrepreneur has various options to choose i.e.

Sole traders

Partnership

Limited companies

SOLE TRADERS: sole traders mean the individual which runs his own business or he himself is the
owner of the business. Being a sole proprietor he is responsible for working of his business including
all debts. This means all the losses will be beard by sole trader from his own pocket.

PARTNERSHIP: partnership means a business where two or more persons join together to conduct
the business and all have common goals and objectives. Whenever anything happens in the firm all
the partners are jointly responsible for all the liabilities to take place. There is equal distribution of
profit among partners.

LIMITED COMPANIES: it is an organisation that is set up to run a business. these companies are
registered under company’s act. In this company is a separate entity. All finances of the company are
kept separately from personal finance. After all the tax is been made in company the available profit
is distributed among the shareholder as dividend. Companies have its own separate identification.

PREPARATION OF FINAL ACCOUNTS:

Preparation of final accounts is governed by different laws, acts, principles etc. final accounts should
be dealt separately for all the above stated category of organisation. Final accounts provide us the
information about the profit and correct financial position of the business.it is used by various
parties like management, owners and other interested parties. Theses final accounts are prepared
for specific period. Final accounts include preparation of the profit and loss account, trading account
and balance sheet. normally all the categories have the same criteria of formation of the final
accounts which includes all the accounts.

PREPARATION OF FINAL ACCOUNTS FOR SOLE PROPRIETORSHIP CONCERN:

While preparing the final accounts of sole traders various accounts are maintained step by step:

1.journal entry

2.ledger entry

3.trial balance

4.trading account

5. profit and loss account

6.balance sheet

After the trading account is prepared the sole traders prepare the final accounts which include profit
and loss account and balance sheet.
PREPARATION OF FINAL ACCOUNTS FOR PARTNERSHIP FIRM:

The preparation of partnership and sole traders final accounts are similar. only difference in two is
that in partnership profit is distributed among the partners. Partnership maintains a proper books of
accounts like sole traders, which includes journal entry, ledger, trial balance, trading account, profit
and loss account and balance sheet. With these in partnership few accounts are also maintained that
is; capital account and profit and loss appropriation account.

PREPARATION OF FINAL ACCOUNTS FOR LIMITED COMPANIES:

Section 210 of the companies’ act governs the preparation of final accounts of the companies. Final
accounts of company include preparation of profit and loss accounts and balance sheet.in case of
non-profit organisation income and expenditure account is also submitted in addition.

Preparation of final accounts of the all the categories are same in some or the way.

M2. Analyse profit and loss account, balance sheet and cash flow statements appropriate for the
given examples?

As we all know the all proprietors, partnership and limited companies form profit and loss account,
balance sheet and cash flow statement but the matter that contain in these three categories are
different as they are related to each concern.

PROFIT AND LOSS ACCOUNT: profit and loss account discloses the net profit of the organisation so it
is necessary to be prepared.it has two sections debit side and credit side. Debit side depicts
expenses and credit side depicts incomes. If the expenses exceed the revenues the firm will incur net
loss and if incomes exceed expenses firm will incur net profit. The sole trader prepares this account
to know the net loss of the business .in partnership firm profit and loss appropriation is also
prepared in addition to this so that the profit can distributed among the partners. Profit and loss
account shows total expenses and income incurred by the company.it is very helpful in calculation of
income tax and corporate tax.

Balance sheet: balance sheet is the one of the financial statements of the enterprise which tell us
about the net worth by giving the total assets and total liabilities the balance sheet is divided in two
sides. the left side of the balance sheet tell about assets and right side of the balance sheet tell
about the liabilities of the company. Balance sheet is based on an equation:

Asset =liabilities +equity

It helps the business to know the correct financial position of the business. Preparation of balance
sheet is the last step of the financial statements as all the true financial position of the company can
be analysed from this.
Cash flow statement: it is a statement which the tell the company about the correct flow of cash in
the organisation .it depicts about the inflow and outflow of cash in the business. Cash flow
statement helps in getting the total cash available in the business. Cash flow statement reports the
cash generated and spent during the specific period of time.it acts as a bridge between income
statement and balance sheet. Cash flow statement includes three section operating activities,
financial activities and investing activities. Operating activities generally include all the activities
which are related to the day to day operations of the business, investing activities include any loans
given or money invested by the company, financial activities includes any debts taken by the
company.