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Unit 6: Financial Statements – Partnerships: Limited Liability Companies
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O Level Principles of Accounts (7110)
Recommended Prior Knowledge
It is important that students are able to prepare financial statements for sole traders, together with appropriate adjustments before beginning this unit.
Context
This unit covers the impact of a partnership relationship on the financial statements of a business and the impact of incorporation on businesses.
Outline
The unit serves to highlight the similarities in financial statements between different types of business as well as the differences.
AO
Learning outcomes
Suggested Teaching activities
Learning resources
4.1
Candidates should be able to:
Compare the advantages and disadvantages of sole trader and
partnership businesses in terms of ownership, control and sources
of finance.
http://www.tutor2u.net/revision_notes_accou
nting.asp
•
explain the advantages and
disadvantages of forming a
partnership
It can be useful to take the same information about fixed and
current assets and current liabilities as in the last example for a sole
trader and simply show the capital accounts as being different. This
treatment of the different type of business as a development of
financial statements rather than something completely new will help
students concentrate on the new information.
Past question papers available from CIE,
e.g.
Specimen Paper 1 Q19
It is important that students understand that a partnership is a
business in which two or more individuals have invested capital and
it is the business profit as a whole that is calculated. They SHOULD
NOT prepare separate columnar accounts splitting sales, purchase,
expenses and so on between partners. Sharing of profits or losses
takes place after profit for the year is calculated.
Candidates should be able to:
•
outline the importance and
contents of a partnership
Explain what is meant by a partnership agreement and what it
contains. Explain the typical matters which will be defined in a
partnership agreement covering matters such as the sharing of
profits.
http://www.bized.ac.uk/stafsup/options/acco
unting/work07.htm
1
AO
Learning outcomes
Suggested Teaching activities
Learning resources
A key difference between partnerships and
sole traders is the use of appropriation accounts. This is the part of
the financial statements in which profits or losses are shared
between partners.
http://accounting10.tripod.com/content.htm
agreement
•
explain the purpose of an
Appropriation Account
•
prepare partnership Income
Statements, Appropriation
Accounts and Balance Sheets
•
explain the uses and differences
between capital and current
accounts
Explain the reasons for and against using current accounts in a
partnership and the implications of both on the bookkeeping.
•
draw up partners’ current and
capital accounts, both in ledger
form, as part of a Balance Sheet
presentation
Illustrate and provide practice for students in preparing current and
capital accounts.
•
show the treatment of interest on
capital, partners’ salaries, interest
on partners’ loans and on
drawings
It is helpful for students to increase the number of transactions in
the appropriation account steadily. Initially, begin with the sharing of
profits. Then add partners’ salaries, the interest on capital and
drawings, gradually increasing the complexity.
Past question papers available from CIE,
e.g.
Jun 2003 Paper 1 Q31
Jun 2005 Paper 1 Q32
Nov 2002 Paper 2 Q3
Ensure students thoroughly understand the place of drawings and
that they do not appear in the appropriation account.
4.2
Candidates should be able to:
•
make simple entries for the
formation of a partnership via
capital contribution by each
partner in cash and/or non-cash
assets and amalgamation of two
sole traders, including the
calculation and recording of
Illustrate how sharing profit may not be equal because the capital
injection may not be equal, or the commitment of one partner to a
business may be less in terms of management than another and
this is reflected in profit share.
Students should be shown the calculation of goodwill as the surplus
of purchase price over net assets. They should be able to account
for goodwill and the net assets.
Past question papers available from CIE,
e.g.
Nov 2003 Paper 1 Q21, 26
2
AO
Learning outcomes
Suggested Teaching activities
Learning resources
Explain and work through examples of goodwill and how it is
included in accounts. Journal entries and ledgers should be fully
covered to prevent students reversing the entries. This is a common
error in examination answers.
http://www.bized.ac.uk/stafsup/options/acco
unting/work08.htm
Complete the study of partnerships by working through a full set of
partnership financial statements.
Students can be confused about when to use columnar
current/capital accounts. A consistent approach of using separate
full ledger accounts outside the balance sheet, bringing the closing
balance to the balance sheet is less confusing for students.
Past question papers available from CIE,
e.g.
There are parallels with partnerships in the
case of the company appropriation account. In the case of a
company the main transactions seen in the appropriation account
are proposed and paid dividends and transfers to and from
reserves.
Past question papers available from CIE,
e.g.
The structure of capital in a company can be complex including not
only shares but also capital and revenue reserves. Illustrate and
explain the use of the common types of reserve and the common
types of capital. Multiple choice questions are useful to help
students think through the variations.
http://www.bized.ac.uk/dataserv/extel/notes/
seq-ex.htm
Goodwill
•
make the other adjustments as
detailed under 4.1
Nov 2003 Paper 1 Q21, 26
Jun 2004 Paper 2 Q5
Jun 2006 Paper 2 Q5
Questions will not be set on the
dissolution of partnership.
4.5
Candidates should be able to:
•
•
•
prepare a simple limited company
appropriation account
explain the capital structure of a
limited company (comprising
preference shares capital, ordinary
share capital and retained profits)
and how it appears in the Balance
Sheet
recognise the distinctions between
called-up, issued and paid-up
share capital and between share
capital – ordinary and preference
– and loan capital e.g. debentures
Candidates will not be required to
prepare a company's Income
Statement or a complete Balance
Sheet, to make entries to record the
Time should be spent outlining the features and differences
between an ordinary share, a preference share and a debenture.
Debentures are often regarded as part of ‘loan capital’ although
loans rank as a creditor and not capital at all. It is important to
emphasise this important distinction and its implications to students.
Nov 2003 Paper 1 Q35
Jun 2003 Paper 2 Q3
Nov 2005 Paper 2 Q3
Specimen Paper 1 Q36
Specimen Paper 2 Q5
http://www.bized.ac.uk/dataserv/extel/notes/l
tl-th.htm
http://www.bized.ac.uk/dataserv/extel/notes/l
tl-ex.htm
It is important to clarify for students the extent of this syllabus so
that they spend their course and homework time on matters of
3
AO
Learning outcomes
Suggested Teaching activities
issue of capital, or to know the
accounting requirements of the
Companies Acts.
direct relevance.
Learning resources
Candidates need to be aware of
cumulative and non-cumulative
preference shares. They are not
required to have an awareness of
deferred, founders, participating,
redeemable or ‘A’ shares, rights
issues, bonus issues, share premium
or capital redemption reserve.
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