A summary of the Business Accounts and Tax portion of the Business Law and Practice Module at Nottingham Law School. It details how to prepare a profit and loss statement, appropriation account, movement in current accounts and balance sheet. It also provides a detailed explanation of how to analys...
LPC BUSINESS LAW & PRACTICE ACCOUNTS AND TAX SUMMARY
BUSINESS ACCOUNTS SUMMARY
Business accounts should always be prepared in the following order:
1. PROFIT & LOSS STATEMENT
For a sole trade: Income – Expenditures = Net Profit/Loss
• Heading: Profit and Loss Account for ABC company FOR THE YEAR ENDED 31 December 20-
• Consists of nominal accounts
Income Accounts Expense Accounts
Costs Insurance premiums Light and heat
Rent Received Business rates Rents and rates
Rental income Interest paid Interest payable
Interest received Wages Establishment costs
Car expenses Advertising expense
Computer maintenance Motor expenses
For a corporation:
Income – Expenses = Profit Pre-tax & dividends
Less: Tax on ordinary activities (19%)
Dividends
= Retained Profits
2. APPROPRIATION ACCOUNT – used when there is a partnership
• Heading: Appropriation Account of ABC Partnership FOR THE YEAR ENDED 30 September 20-
• Profit to be shared between partners = [Net Profit] – [Interest on capital + Salaries]
• Format: 1) Net Profit, 2) Interest on Capital, 3) Salaries and 4) Share of Profits
• Divide shares of profit between partners according to their allocated ratio
o Add up ratios, divide total profit by sum of ratios and multiply according to ratio
• Add Net Profit/Loss from P & L Statement
3. MOVEMENT IN CURRENT ACCOUNTS – is actually an addendum to the balance sheet
Movement in Current Accounts of ABC Partnership FOR THE YEAR ENDED 30 September 20-
Opening Balance of Current Account
Add: Interest on Capital
Add: Salaries
Add: Shares of Profit
Less: Drawings
= Closing Balance of Current Accounts
4. BALANCE SHEET (Assets – Liabilities = Owner’s Equity)
• Heading: Balance Sheet for ABC company AS AT 31 December 20-
• Consists of person and real accounts (i.e. fixed and current assets, current liabilities, equity)
1
, Fixed Assets Current Assets Current Liabilities Equities
Furniture & fittings Stock on hand Bank overdraft Share capital
Cars Petty cash/cask at creditors
bank
PPE VAT owed Long-term
liabilities
Investments debtors Debenture stock
Freehold premises Lon-term loan
*For a corporation’s accounts: must add tax & dividends from the P&L to Current Liabilities
CAPITAL SECTION
For a Sole trader: For Company:
Represented By: Capital and Reserves
Capital Share capital (Ordinary shares + Preference share)
Add: Net Profit (get from P&L Statement) Add: Share premium account (capital gain)
Less: Drawings Add: Retained earnings (P&L from current + past years)
For a partnership:
Capital Employed
Capital Accounts
A XXXXX
B XXXXX XXXXX
Current Accounts – these are the closing balances from the Movement in Accounts statement
A XXXXX
B XXXXX XXXXX XXXXX
*For a partnership: Assets – Liabilities = Capital Employed
ANALYSING BUSINESS PERFORMANCE
Gearing ratio = Long-term liabilities / Share capital + reserves
• Ratio between long term debt and shareholder funds
• Higher gearing ratio - means risker investment for investors
• 100% gearing ratio – means share capital could just about pay off debts
**An acceptable level of gearing depends on the level of risk in the industry/market sector
Current ratio = Current Assets /Current Liabilities)
• Determines if a company can pay off its debts within 1 year (i.e. is the business liquid?)
• if ratio > 1 = company has enough assets to pay off their current liabilities (i.e. company is liquid)
• if ratio < 1 = company doesn’t have enough assets to pay off current liabilities
Quick ratio = [Current Asset – Stock] / Current Liabilities
• more conservation measure of risk
*A company with a quick ratio of less than 1 cannot currently pay back their current liabilities
Net profit margin = [Net profit before tax / Sales or turnover] x 100
• shows how much profit a company makes for every £1 they sell
Gross profit margin = Gross profit / turnover
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