Legal Practice Course
2012 – 2013
BUSINESS LAW & PRACTICE
AN INTRODUCTION TO
BUSINESS LAW & PRACTICE
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The BLP course is the longest course that you will tackle on the LPC. We have 16
Study Units. Each Study Unit consists of preparatory work, a face to face workshop
and post workshop tasks/ review and consolidation work. There are also online
exercises for each Study Unit. In addition, there are five Large Group Sessions and
two Additional Exercises (one on Drafting and one on Business Accounts).
The reading for BLP (the BLP Pre- Course Materials) will give you general
information on the topic areas that we cover on BLP. This Introduction will give more
specific information on the format and content of the UWE BLP course. The course
leader (Cathy) will also provide further information during the first BLP Large Group
Session. There are a number of tutors who teach BLP, and we rotate workshop
groups on a regular basis so that you will experience a variety of tutors. We also
share the large group sessions. The course is quite challenging, but also full of
variety, so we hope that you will find something to interest you.
It is a good time to be studying BLP because the fairly dramatic changes as a result
of the Companies Act 2006 (CA 2006) have now bedded in (the CA 2006 was
brought into force in stages, with full implementation on the 1st October 2009). The
CA 2006 marks the first major reform in this area of law since the 1980‟s & the aims
of the 2006 Act were to modernise and simplify company law and to “think small
company first”. You may still, on occasion, be referred to the certain of the provisions
of the Companies Act 1985 on the BLP course even though it is no longer in force,
where it is important that you understand some of the more dramatic changes that
have taken place. You will of course often encounter companies that have been
incorporated under the 1985 Act in practice.
An Overview of the Course
Full- time students will study BLP (including one Study Unit on Business Accounts, SU
12) from September to March. Part- time students will study BLP (including one Study
Unit on Business Accounts, SU 12) from September to March of the first year.
The course comprises:
5 numbered Large Group Sessions
16 Study Units
2 Additional Exercises for you to do at home in your own time
Various online exercises- one for each Study Unit and Revision exercises
Sometimes you will be required to hand in a piece of work for marking (for example in
SU 3 and in SU 7). At other times you will be provided with a detailed marking guide so
that you can self- assess your own or a peer-assess a colleague‟s work. You are
always welcome to ask your tutor to have a look at any piece of work at any time,
should you so wish.
The Large Group Sessions will be recorded using our lecture capture technology and
will be available for all students (full- time and part- time) to view online. The workshop
structure is identical for both full time and part- time courses.
As you can see, the course is delivered using:
Large Group Sessions
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Study Units consisting of preparatory work, a face to face workshop and post
workshop tasks/ review and consolidation work
online exercises for each Study Unit
Two Additional Exercises
Each of these elements will be considered in more detail in the following pages.
There are certain pervasive elements that will appear during the course and, indeed,
that may crop up in the BLP assessment such as tax. In addition, you could be
assessed in Professional Conduct/ or Financial Services in the BLP assessment.
We have also included information about the BLP assessment in this introduction.
Delivery of the Course
1.
Large Group Sessions
Face to face lectures are optional and a recording of the lecture will be available
for you to view on line after the lecture has taken place. Lectures are designed
to provide an introduction/ give you an overview of the material to be covered in
greater detail in the Study Units that follow. All students may be required to do
some pre-reading before attending (or watching online) certain Large Group
Sessions. Here are some brief details of the topics to be covered in the Large
Group Sessions, which will be 50 minutes long:
Large Group Session 1
Introduction to the different types of Business Media in the UK
This large group session introduces the core subject of BLP, how it is taught and
assessed and the material to be covered in Study Units 1 and 2. We shall
consider the most important types of business media in the UK (sole traders,
partnerships, limited liability partnerships and companies). We shall also
consider the factors that might influence a client in choosing an appropriate
vehicle for his or her business.
Large Group Session 2
Introduction to Companies
This large group session is an overview lecture and introduces material to be
covered Study Unit 5. We shall look at the constitutional documents of a private
limited company (the memorandum and articles of association). We shall also
look at the model forms of articles of association contained in the Companies
Act 2006 (the "Model Articles").
Large Group session 3
Directors and Shareholders Overview lecture
This large group session will consider the distribution of power between
directors who run the day to day business of a company and its shareholders
who own it. It will also introduce the topics that you will consider in Study Units
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7-9 including directors‟ duties and statutory provisions in the CA 2006 affecting
directors.
Large Group Session 4
Company Finance and Creditor Issues – An Overview
This lecture relates to material to be covered in Study Units 11 and 13. We shall
consider the statutory framework surrounding the borrowing of money by a
company and issues affecting creditors generally.
Large Group Session 5
Review Lecture
We shall provide an overview of the BLP course in order to assist you with your
revision for the BLP and Drafting assessments. In particular, we shall review
any matters arising from your BLP and Drafting Practice Assessments (see
below).
2.
Study Units
Each Study Unit consists of a block of learning of approximately 11 hours
consisting of preparatory work for the workshop, the workshop itself and post
workshop tasks and review and consolidation work. There is an online multiple
choice tests for you to do for each Study Unit (sometimes two). Your tutors will
monitor your performance in these tests.
Before the Workshop
At the Workshop
The workshops will be of two and a half hours duration plus a 15-minute break.
They are designed to be interactive sessions where you put into practice the law
and procedure to which you have been introduced in your preparatory work and
through your directed reading. There is a substantial amount of preparatory
work for each workshop (approximately 6-7 hours) and you must make
sufficient time to thoroughly prepare for your workshop.
There will be a mixture of group and individual work. The workshops will also
provide an opportunity for you to practice the skills of legal writing and drafting in
particular (the latter is assessed in the context of BLP – see below). Some
workshops will also require you to conduct an interview or a negotiation and to
use your research skills. Please note that we do not hand out model answers
as a matter of course; these will be provided very sparingly.
It is essential that you are fully prepared for the workshops. Full time students
will receive hard copies of their instruction sheets in batches well before the
relevant workshop takes place. After the initial study session, instruction sheets
for part time students will be included in the study packs provided at the study
session before the relevant workshops take place (we call these „Student
Instructions‟). This should give all students plenty of time to complete the
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directed reading, complete the preparatory work and attend the relevant
lectures, where appropriate. Workshop instruction sheets will also be available
on-line.
After the workshop
It is also very important that you complete any post workshop tasks (some
of which will involve „new‟ work and any review and consolidation work which is
designed to strengthen and cement the knowledge that you have gained in the
workshop.
Materials to bring to the Workshops
The instruction sheets will tell you what you need to bring to the workshops. For
most workshops you will need your:
BLP Manual
Companies Legislation Handbook
Law Society's Professional Conduct handbook
You will also require a calculator for the tax and accounts workshops.
2.2
The Content of the Study Units
Here is a brief outline of the subject matter of each of the Study Units. All
workshops within the relevant Study Unit will be of two and a half hours duration
unless otherwise stated:
Introductory matters and sole traders
Study Unit 1 - Choice of Business Media
Partnerships
Study Unit 2 – Partnership (including LLPs)
Bankruptcy, sole traders and partnerships
Study Unit 3 – Bankruptcy, sole traders and partners. In this Study Unit you
will be required to produce a letter to a client explaining the relevant law to
be handed in within a specified period, this will be marked by your tutor.
Taxation
Study Unit 4 – Income tax for sole traders and the self-employed and capital
gains tax for sole traders and the self-employed.
Companies
Study Unit 5 – Constitution (memorandum and articles of association)
Study Unit 6 – Share issue and transfer and pre-emption rights
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Study Unit 7– Company stakeholders (1) – Directors. In this Study Unit you
will be required to draft certain company documents to be handed in
within a specified period, this will be marked by your tutor.
Study unit 8 – Company Stakeholders (2) – Shareholders
Study Unit 9 – Company Decision Making – A case study on the removal of
directors
Study Unit 10 – Company Stakeholders (3) – Minority Shareholders.
Study Unit 11 – Raising company finance.
Study Unit 12 – Business Accounts
Study Unit 13 – Company Stakeholders (4)- Creditors (and Company Searches)
Study Unit 14 – Share capital, distributions and corporation tax (including the
taxation of directors and employees)
Study Unit 15 –Corporate insolvency
Study Unit 16 – Structured Revision
3.
Online Exercises
You will also be required to attempt a number of on-line exercises for each
Study Unit and assessments at strategic points during the course. In most
cases, instantaneous electronic feedback will be provided to enable you to
assess your own performance. Your tutors will also monitor test results to
see whether any particular topics are causing difficulties. It is important
that you attempt these exercises by the times stated in your instructions
for the relevant Study Unit so that your tutors can check your performance
prior to the workshop.
4.
Additional Exercises
There are two Additional exercises comprising of about four hours work on the
BLP course for you to complete in your own time. These are best completed
proximate to the relevant Study Unit as directed in your Student Instructions.
There is one Additional Exercise associated with the Study Unit on Drafting and
one on Business Accounts (Study Unit 12). Answer Guides will be available
online on Blackboard.
5.
Legal Skills
5.1
Introduction
In the context of the BLP course, you will come across both written and oral
skills that you will need to use daily in a lawyer's office.
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The written skills will be developed in the workshops through the drafting of:
file notes and memoranda
letters to clients
agreements, minutes, notices of meetings, resolutions etc.
In addition, the course will expose you to the oral skills involved in role-play,
interviewing and negotiation.
4.2
Drafting
The core skill of Drafting is assessed within the context of BLP. You will have a
separate assessment in Drafting which will take place close to your BLP
assessment. You will have a combined Study Unit on Writing and Drafting early
in the course and this will be followed by a separate Study Unit on the core skill
of Drafting and a further study Unit on writing on the LPC. This note will not give
further guidance on drafting as it will be fully covered throughout the BLP course
and we will be teaching you from first principles.
4.3
Writing
We will introduce you to the core skill of Writing early on in the course in the
combined Study Unit on Writing & Drafting; this will be followed by a separate
Study Unit on Writing. Writing is assessed in the context of Property law &
Practice (a year two subject if you are a PT student).
Preparation of file notes, letters of advice and memoranda
File Notes
The purpose of the file note is to provide an accurate summary of the current
position on a client‟s file. This will assist the author when writing a follow-up
letter of advice to the client following a meeting. It will also provide a clear
account for somebody else looking at the file at a later date. This might occur
when the person originally dealing with the matter is on leave or where a file is
inherited by a person who has just joined the relevant department.
Even where a file is not to be handed on, it is very important to keep accurate
and comprehensive file notes, especially for a busy solicitor who is involved in
many on-going matters. It is good practice to make a file note in the following
circumstances:
to summarise a telephone call or a meeting with one‟s own client or “the
other side”;
to note some key date (such as the date for serving a notice);
to record some relevant research.
A file note may simply comprise a few words dashed down (such as `X rang to
say no offer at this stage') or might extend to several pages, dictated and typed
up. Whatever the type and subject matter, file notes should be constructed with
a view to helping with the management and orderly conduct of the file; once
prepared they should be placed on the file in date order. There is no point
having a whole pile of file notes that are not dated and do not identify the file to
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which they relate. All the good work done in preparing the file notes will be
reversed in the laborious and time-consuming task of having to sort them out.
There is no set format for a file note (although different firms such as the firm
that we will use on the BLP course, Harringtons LLP, will undoubtedly have their
own ways of doing things) but the following items might appear, depending on
the nature of the particular file note:
the file name and number and the name of the client;
the date on which the note was prepared, and the dates of any relevant
events that it refers to;
an accurate summary of the relevant events;
an accurate summary of any relevant legal issues.
The file note should be written in plain English and should be comprehensible to
any other person who picks up the file. As file notes are designed to be read by
lawyers it is acceptable and advisable to have technical content.
Letters of Advice to Clients
When you are in practice, you may be surprised to find how infrequently you
are required to write a letter of advice to a client. Typically, business lawyers
will find themselves in lengthy meetings negotiating documents and may also
spend a lot of time on conference calls and in giving advice over the
telephone or corresponding via e-mail. However, it is essential that you are
able to write a competent professional letter of advice and much time on the
BLP course will be spent in acquiring this skill.
Bear in mind the following points when writing to your clients:
(i)
Before you start, think about the recipient and adjust your style
accordingly. Rarely, if ever, will it be appropriate to use technical
language such as legal terms, case names and references to statute
in a letter to a lay client. This will not apply as regards letters to fellow
professionals.
(ii)
Use plain English and correct spelling and grammar. A poorly written
and presented letter will not look professional even if the advice that
you give is correct.
(iii)
Try to be as succinct as possible – lawyers no longer charge by the
word and your clients will not want to plough through several pages of
unnecessary information before getting to the crucial point.
(iv)
Explain yourself clearly avoiding waffle.
(v)
State the law accurately and give practical advice. Your client is
unlikely to be interested in the law in general; he or she will only want
to know how the law applies to his or her particular case
The final point cannot be over-emphasised. Students coming onto the LPC
straight from their degree courses have a tendency to write essays rather
than letters of practical legal advice. This is a tendency that must be curbed
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in the early days of your LPC career, not only as regards exercises
undertaken in the workshops, but also in assessments where you must take
extra care to give specific advice based on the factual scenario that you have
been given.
Everyone has his or her own style of writing and this will be borne in mind. As
long as your letters follow the guidelines set about above and the criteria for
the skill of legal writing, you should not go far wrong. Once or twice during
the BLP course you will be handed a specimen letter indicative of a piece of
work that the team thinks would achieve a respectable mark in an
assessment. You will also be required to hand in a piece of work for your
tutor to look at in order to give you some guidance as to how your letter
writing skills are coming along.
When you are in practice you are likely to find that your firm has a house-style
that you will be required to follow. To some extent, we have a certain housestyle that we will expect you to follow on the LPC. When you are asked to
write a letter of advice, we will expect you to use the following format:
(i)
Include a resemblance of a letterhead and a letter opening such as:
Name of your firm
Address
Telephone and fax
numbers
Client‟s name and address
Our ref:
Your ref:
Date:
Dear _____,
[Heading]
(ii)
Business letters should always contain a brief heading followed by a
short introduction. Resist the urge to use flowery prose and get to the
point quickly.
(iii)
Keep sentences and paragraphs short. If you are unsure of your
grammar, keep it simple. You cannot go far wrong if you stick to brief
sentences and include the odd comma.
(iv)
Use subheadings and/ or number your main paragraphs if the letter is,
say, more than a page long.
(v)
End the letter by making it clear to the reader as to what is to happen
next (for example, do you need further instructions from the client?).
(vi)
Always have your client‟s best interests at the forefront of your mind.
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Memoranda of Advice
As a junior lawyer within your department, you are likely to be required to carry
out research for your colleagues. Typically, you will need to present your
research in the form of a memorandum. Your approach to writing a
memorandum as opposed to a letter of advice should be different, not least
because your memorandum will be an “in-house” document prepared for a
fellow lawyer rather than a lay client.
Again, your firm is likely to have a house style for memoranda. On the BLP
course, we shall expect your memoranda to adopt the following format:
(i)
Your memoranda should start with the following details:
To:
From:
Date:
File name and number
[Heading]
(ii)
Your style should be business-like and to the point and you should avoid
using social chit-chat such as “Dear so-and-so, thank you very much for asking
me to help you with this matter”.
(iii)
It will be acceptable (and usually necessary) to go into detail on the legal
issues that you have researched. Remember that your memo will be addressed
to a fellow lawyer who is likely to be more senior than you. You should be
comprehensive, and not simplistic. You should use technical language (such as
case names, legal terms and references to statute) where appropriate.
(iv)
Use subheadings and/or numbering in all but the very shortest of
memoranda.
(v)
Memoranda are not usually signed off in the way that letters are. It is
acceptable to stop once you have conveyed all of the necessary
information.
Although your “formal” assessment in legal writing will take place in the
context of Property Law & Practice, please note that your writing skills will
also be taken into account in the BLP assessment and many other
assessments on the LPC. In particular, if you are asked to answer a question
using a particular format (such as a file note, memorandum or letter) then you
must use that format. If you do not, you are likely to have marks deducted.
5.
Pervasive elements – Tax and Professional Conduct /Financial Services
Each of the subjects on the LPC incorporate references to particular elements
that are regarded as integral to the particular subject matter covered. In BLP tax
is one such element. Although you will not have a discrete assessment on tax,
this topic may occur in the BLP assessment. You may also be assessed in
Professional Conduct/Financial Services in the BLP assessment.
6.
Business Assessment
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Content
You may be assessed on any part of the BLP syllabus whether covered in:
Large Group sessions
Study Units (including the preparatory work, what is covered in
workshops and any post workshop work and the review / consolidation
work)
Online exercises
The BLP Manual (as well as relevant parts of the skills and foundations
manuals)
Any other directed reading
Relevant skills and Foundations Work
Financial Services and tax
Format of the Assessment
The BLP assessment will be “open book”. This means that you will be allowed to
take certain materials with you into the assessment. You will be notified of these
materials (which will be comprehensive) early on in the autumn term. The
assessment will contain both short form and multiple choice type questions to
test your knowledge across a broad spectrum of the BLP syllabus. It will also
contain longer “transactional” type questions to test your application of the law to
particular circumstances. These will be broadly similar to the Study Unit style
questions.
As well as legal content, there will be an emphasis on the relevant skills,
especially writing. You will have three hours in which to complete the
assessment. You must answer all questions and will not have a choice. This
means that you will be allowed to take certain materials with you into the
assessment.
You will be notified of these materials (which will be
comprehensive) early on in the autumn term.
Practice Assessments in BLP and Drafting
We think it important for you to have some practice at LPC assessments
before you have to undertake the real thing. We shall therefore provide a
BLP and Drafting practice assessments in November. The purpose of
these practice assessments is to give you some experience at undertaking an
assessment of the kind to be taken in February and also to give you an
indication of how you are performing on the LPC. These practice
assessments will be marked by your tutors. In addition, you will also be given
a detailed answer guide so that you can assess your own performance. In
addition, plenary feedback will be given to all students. This feedback will
highlight likely strengths and weaknesses in the answering of the BLP /
Drafting practice assessment questions. Finally, all students will be able to
make an appointment with the relevant subject tutor to discuss any specific
queries arising out of the practice assessments.
You will be given further details of the BLP and Drafting practice assessments
later in the autumn term. For the time being, full time students should note the
following:
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It will take place in the last week of the autumn term
It will be held under „controlled conditions‟ (effectively exam conditions)
You will be entitled to have with you the same permitted materials as you will
have in the BLP subject assessment. Details of these materials will be given to
you during the autumn term. Part time students will be required to attempt
the practice assessments in Session 5 in December. Plenary feedback and
an opportunity to discuss performance with tutors will also be provided.
As with the other practice assessments, the BLP and Drafting practice
assessment is not intended to give you guidance on the subject matter to be
covered in the BLP subject assessment. You should not use the practice
assessment to try to „question spot‟ what will, or will not, be in the subject
assessment in February.
Business Accounts
You will look at Business Accounts in Study Unit 12 of the BLP course. However,
there will be occasional references to the accounts of businesses at various times
throughout the BLP course in other Study Units. This introduction is intended to help
you understand those references to accounts.
1.
Reasons for Businesses keeping Accounts
Management: to enable a sole trader, partners in a partnership and directors and
members of a company to monitor the performance of the business to ensure
liquidity (the ability to pay debts as they fall due) and profitability.
Legal obligations: many partnership agreements require the production of accounts.
Directors of companies have a statutory duty to keep accounting records; to have
annual accounts produced; to send copies to all members and to file accounts at
Companies House.
Taxation: the Inland Revenue will need to agree the accounts of a business to
determine the tax liability of the sole trader, partners or company.
Valuation : For example, if a sole trader is selling his or her business, or a partner is
retiring or a shareholder is selling shares, accounts can help determine the value of
the business, share of the business or shares in the company, as the case may be.
Borrowing: if a business wants to borrow money, accounts can help convince the
bank that the business is a good credit risk; that it has the assets to give adequate
security, and that it is likely to have the income to pay the interest and repay the
capital.
2.
The Need for Solicitors to Understand Business Accounts
Your work as a solicitor may require an understanding of business accounts. Many
areas of practice will require you to be able to find your way around the accounts of a
business (to a greater or lesser extent).
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In addition, solicitors run businesses (sometimes as sole traders, sometimes as
partnerships or limited partnerships). Any solicitor offered a partnership must
consider the accounts to assess whether what is being offered (such as a share of
assets and profits) is worth the price that is being asked. Once in a partnership, a
solicitor needs to be able to interpret the accounts to monitor his or her business.
3.
Terminology
Assets: items owned by the business. Consider the basis of valuation: alternative
valuations include the cost price; the book value (cost price less accumulated
depreciation), and market value.
Capital: long-term investments in a business to fund its operation. Capital is both an
asset (funds available to finance its operations), and a liability (the business has to
repay the capital at some stage - often not until the business is wound up).
Creditors: a debt due from the business (a liability), for example, the purchase of
goods or receipt of services on credit, where the business pays later.
Current Assets: these are constantly changing and are sometimes referred to as
„circulating assets‟: they are part of the „cycle of production‟. Current assets:
- start with cash (used to buy stock or raw materials) … raw materials turn into …
- work-in-progress (when raw materials are partly made into products) .. turns into …
- stock (when made into saleable products) … turns into …
- debtors (when stock sold on credit) … turns into …
- cash (once debtor pays or if stock sold for cash).
Debtors: a debt due to the business (an asset), for example, the sale of goods or the
provision of services on credit, where the business is paid later.
Fixed Assets: assets retained in the business and used in the generation of profits.
Fixed assets are generally „static‟ - not frequently changing (such as premises and
plant and machinery)
Liabilities: these are owed by the business.
categories:
Liabilities are divided into two
Long-Term Liabilities: amounts due to be paid in more than 12 months‟
time: and
Current Liabilities: amounts due to be paid with in the next 12 months.
Net Assets: a business will have net assets where total assets exceed total liabilities
(meaning that the business is solvent)
Net Current Assets: where current assets exceed current liabilities. If current
liabilities exceed current assets then the business will have Net Current Liabilities.
Net Liabilities: a business will have net liabilities where total assets are less than
total liabilities (meaning that the business will be insolvent).
Purchases of stock: an expense paid (or payable) by the business for goods
purchased by the business (such as stock for re-sale).
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Sales of stock: income paid (or payable) to the business on the sale of goods.
THE ACCOUNTING PROCESS
1.
The Preliminary Stage : book-keeping entries
Accounts / Ledgers
Each type of asset, liability, income and expense will have a ledger account in which
to record the amount of the asset, liability, income and expense.
Double-entry Book-keeping System
In order to understand business accounts it is necessary to be able to understand
how the accounts have been produced and what they represent. This involves an
understanding of the basic concepts of double-entry book-keeping. As the name
suggests, for every transaction entered into by a business there must be (at least)
two entries made in the accounts of the business. Every transaction has two
(opposite) consequences for the business - which must be recorded by entries in the
accounts / ledgers of the business. These will be a debit and a credit with the debit
equalling the credit.
Debits (DR): There are three types of debits. These reflect the:
acquisition of an asset (including the receipt of money) [assets up]
payment of a liability [liabilities down]
recording of the incurring of an expense (not the payment of an expense). It is
not easy to see what is „good news‟ about incurring an expense, but it is the
recording of the receipt of the benefit of the subject matter of the expense.
Credits (CR): There are three types of credits. These reflect the:
sale of an asset [assets down]
increase in the amount of a liability [liabilities up]
recording of an item of income. It is not easy to see what is „bad news‟ about
income, but it is recording what the business has given in order to be entitled
to the income (not the recording of the income).
2.
The Intermediate Stage : checking accounting entries - theTrial Balance
In order to make sure that the double-entry accounts balance, at any given date a
Trial Balance can be produced to check that total DRs = total CRs. This should be
the case since each transaction will have a DR entry and a CR entry of equal
amounts. A Trial Balance is simply a statement listing all the accounts with a DR
balance and listing all the accounts with a CR balance (in separate columns). The
total for each column should be the same.
3.
The Final Stage : the ‘final accounts’
Profit and Loss Account
This is (normally) produced at end of an accounting period. It is a statement showing
total income (for a trading business that will be „sales‟) less total expenses during the
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accounting period. If the income exceeds the expenses, there will be a „net profit‟. If
the expenses exceed the income, there will be a „net loss‟.
Balance Sheet
This is (normally) produced at the end of an accounting period and is a “snap-shot” of
the assets and liabilities on a stated date. It shows the assets and liabilities of the
business as at that date. The aggregate of all assets and the aggregate of all
liabilities must balance.
Trading Account
This is optional. It is used by sole traders, partnerships and companies which trade in
goods. A Trading Account is a management tool. It provides additional information on
the performance of the business - showing the gross profit after deducting the „costs
of sales‟ from the sales. The „cost of sales‟ is the direct cost of buying the stock which
has been sold to generate the „sales‟.
Accounts of Partnerships
Capital Accounts
When a business is set up in whatever form, capital will be introduced into the
business. Capital can be introduced in the form of cash or non-cash (such as the
transfer of the ownership of an asset to the business). With a sole trader there will be
one capital account for the sole trader. In a partnership there will be a separate
capital account for each of the (equity) partners
Current Accounts
In theory, there is no reason why sole traders could not have a current account
(separate from their capital account), but we will not have them in our examples of
sole trader‟s accounts. With a partnership, each partner will have a current account
showing the amounts due from the partnership to the partner (other than by way of
capital) and the amounts due from the partner to the partnership on a day-to-day
basis.
By analogy, a partner‟s investment in the partnership is like a customer having
money in two bank accounts:
- a long term investment account (equating to a capital account); and
- a current account dealing with day-to-day matters.
Drawings by Partners
Drawings are cash taken out of the partnership by a partner during the financial year
on account of his or her share of profits for the year. Otherwise, if the partner had to
wait until the end of the accounting period (to see what profit, if any, had been made),
he or she would have nothing to live on in the meantime. He or she is „drawing‟ out in
advance part of his or her anticipated profits.
Profit and Loss Account
Up to the determination of the net profit, the Profit & Loss Account is the same for
both a sole trader and a partnership (and, indeed, a company). Once the net profit of
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a partnership has been determined, the Profit & Loss Account is „extended‟ by the
addition of an Appropriation Account showing the allocation of the profit (or loss)
between all of the partners in accordance with their contractual / legal entitlements
(or obligations).
Balance Sheet
The form of the Balance Sheet will be largely the same for both a sole trader and a
partnership. However, there will be only one capital account shown for a sole trader
whereas the accounts of a partnership will show the balances on capital account for
each partner. The accounts of a partnership will also show the balances on current
accounts for each partner as well as movements in the balances of the current
accounts from the start of the financial year to the end of the year
Accounts of Companies
Accounting Treatment of Share Capital
The accounting treatment of the introduction of share capital (equity) into a company
is similar to the treatment of the introduction of capital into a sole trader‟s business or
into a partnership. However, the capital account is replaced by the „share capital
account‟ (shares being the method of investing in a company by shareholders).
Final Accounts of Companies
Trading Accounts and Profit & Loss accounts are the same for sole traders,
partnerships and companies. However, there are differences in the Appropriation
Account and part of the Balance Sheet:
The Appropriation Account for a company will show:
the amount of corporation tax payable and the net profit after tax
the amount of any profits paid or to be paid by way of dividends
the balance of any profits to be retained or transferred to reserves.
The Balance Sheet for a company will show funds invested in the business by way of
share capital and profits retained in the company (not paid out by way of dividends).
We wish you all the best with your studies in BLP and we look forward to meeting you
all.
Cathy Biggs
Practice Area Head: Business Law & Practice
September 2012
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