(100)-ADVANTAGES AND DISADVANTAGES OF PARTNERSHIPS

Advantages and Disadvantages of Partnerships

Operating as a partnership entails certain advantages and disadvantages when compared with both sole trader and limited companies.

Partnership and sole trader

The advantages of operating as a partnership rather than as a sole trader are practical rather than legal. They include the following.

• Risks are spread across a larger number of people.
• The trader will have access to a wider network of contacts through the other partners.
• Partners should bring to the business not only capital but skills and experience.
• It may well be easier to raise finance from external source such as banks.

Possible disadvantages include the following

• While the risk is spread over a larger number of people, so are the profits
• By bringing in more people the former sole trader dilutes control over his business
• There may be disputes between the partners

Limited companies offer limited liability to their owners. This means that the maximum amount that an owner stands to lose in the event that the company becomes insolvent and must pay off its debts is the capital in the business. In the case of partnerships, liability for the debts of the business is unlimited, which means that if the business runs up debts and is unable to pay, the proprietors will become personally liable for the unpaid debts and would be required, if necessary, to sell their private possessions in order to pay for them.

Limited liability is clearly a significant incentive for a partnership to incorporate. Other advantages of incorporation are that it is easier to raise capital and that the retirement or death of one of its members does not necessitate dissolution and re-formation of the firm.

In practice, however, particular, particularly for small firms, these advantages are more apparent than real. Banks will normally seek personal guarantees from shareholders before making loans or granting an overdraft facility and so the advantage of limited liability is lost to a small owner managed business.

(99)-INTRODUCTION TO PARTNERSHIP ACCOUNTS

Introduction to Partnership Accounts

Partnership is defined as the relationship which exists between persons carrying on a business in common with a view of profit.

In other words, a partnership is an arrangement between two or more individuals in which they undertake to share the risks and rewards of a joint business operations.

It is usual for a partnership to be established formally by means of a partnership agreement. However, if individuals act as though they are in partnership even if no written agreement exists, they it will be presumed in law that a partnership does exist and that its terms of agreement are the same as those laid down in the partnership act 1890.

The partnership agreement

The partnership agreement is a written agreement in which the terms of the partnership are set out, and in particular the financial arrangements as between partners the items it should cover include the following.

• Capital
• Profit sharing ration
• Interest on capital
• Partners salaries
• Drawings
• Guaranteed minimum profit shares

In the absence of a formal agreement between the partners, certain rules laid down by the partnership act are presumed to apply instead.

• Residual profits are shared equally between the partners
• There are no partners’ salaries
• Partners receive no interest on the capital they invest in the business
• Partners are entitled to interest of 5% per annul on any loans they advance to the business in excess of their agreed capital

(98)-SUMMARY ABOUT INCOMPLETE RECORDS

Summary about Incomplete records

Incomplete records accounts is preparing accounts in the following situations,

• A trader does not maintain a ledger and therefore has no continuous double entry record of transactions.
• Accounting records are destroyed by accident, such as fire.
• Some essential figure is unknown and must be calculated as a balancing figure. This may occur as a result of stock being damaged or destroyed, or because of misappropriation of assets.

The approach to incomplete records questions is to build up the information given so as to complete the necessary double entry. This may involve reconstructing control accounts for:

• Cash and bank
• Debtors and creditors

Where stock, sales or purchases is the unknown figure it will be necessary to use information or gross profit percentage so as to construct a trading account in which the unknown figure can be inserted as a balance.

(97)-STEPS TO DEALING WITH INCOMPLETE RECORDS

Steps to Dealing with Incomplete Records

The nature of the “incompleteness” in the records will vary from problem to problem, but the approach, suitably applied, should be successful in arriving at the final accounts whatever the particular characteristics of the problem might be.

The approach is as follows.

• Step one. If possible, and if it is not already known, establish the opening balance sheet and the proprietor’s interest.
• Step two. Open up four accounts these are Trading account, a cash book, a debtors account, a creditors account.
• Step three. Enter the opening balances in these accounts.
• Step four. Work through the information you are given line by line; and each item should be entered into the appropriate account if it is relevant to one or more of these four accounts. You should also try to recognize each item as a profit and loss account income or expense item or a closing balance sheet. It may necessary to calculate an amount for drawings and an amount for fixed asset depreciation.
• Step five. Look for the balancing figures in your four accounts. In particular you might be looking for a value for credit sales, cash sales, purchases, the cost of goods sold, the cost of goods stolen or destroyed, or the closing bank balance. Calculate these missing figures, and make any necessary double entry.
• Step six. Now complete the profit and loss account and balance sheet.

(96)-TWO COLUMN CASH BOOK FOR SINGLE ENTRY

Preparing Two Column Cash Book for Single Entry

Where there appears to be a sizable volume of receipts and payments in cash, then it is also helpful to construct a two column cash book.

A two column cash book is a cash book with one column for cash, and one column for the business bank account.

A two column cash book is completed as follows in single entry accounting.

1. Step one. Enter the opening cash balances.
2. Step two. Enter the information given about cash payments and any cash receipts.
3. Step three. The cash receipts banked are a “contra” entry, being both debit bank column and credit cash in hand column in the same account.
4. Step four. Enter the closing cash in hand (cash in the bank at the end of the period is not known)
5. Step five. The closing balance of money in the bank is a balancing figure. Notice that this is a credit balance i.e. an overdraft.
6. Step six. Since all sales are for cash, a balancing figure that can be entered in the cash book is sales, in the cash in hand debit column.

Theft of cash form the till

When cash is stolen from the till, the amount stolen will be a credit entry in the cash book, and a debit in either the profit and loss account or insurance claim account, depending on whether the business is insured. The missing figure for cash sales, if this has to be calculated, must not ignore cash received but later stolen.

(95)-USING CASH BOOK FOR INCOMPLETE RECORDS

Using Cash Book for Incomplete Records

The construction of a cash book, largely from bank statements showing receipts and payments of a business during a given period, is often an important feature of incomplete records problems.

Information about cash receipts or payments might be needed to establish:

• The amount of purchases during a period
• The amount of credit sales during a period

Other items of receipts or payments might be relevant to establishing:

• The amount of cash sales
• The amount of certain expenses in the profit and loss account
• The amount of drawings by the business proprietors

It might therefore be helpful, if a business does not keep a cash book day to day, to construct a cash book at the end of an accounting period. A business which typically might not keep a day to day cash book is a shop, where:

• Many sales, if not all sales, are cash sales
• Some payments are made in notes and coins out of the till rather than by payment out of the business bank account by cheque.

(94)-ACCOUNTING FOR STOCK DESTROYED, STOLEN OR LOST

Accounting for Stock Destroyed, Stolen or Lost

When unknown quantity goods is lost, whether they are stolen, destroyed in a fire, or lost in any other way such that the quantity lost cannot be counted, then the cost of the goods lost is the difference between:

• The cost of goods sold
• Opening stock of the goods plus purchases less closing stock of the goods

When stock is stolen, destroyed or otherwise lost, the loss must be accounted for somehow. Since the loss is not a trading loss, the cost of the goods lost is not included in the trading account.

The account that is to be debited is one of two possibilities, depending on whether or not the lost goods were insured against the loss.

• If the lost goods were not insured, the business must bear the loss, and the loss is shown in the profit and loss account.
  Profit and loss account – Debit
  Trading account – Credit
• If the lost goods were insured, the business will not suffer a loss, because the insurance will pay back the cost of the lost goods. This means that there is no charge at all in the profit and loss account, and the appropriate double entry is:
  Insurance claim account – Debit
  Trading account – Credit
  The insurance claim will then be a current asset, and shown in the balance sheet of the business as such. When the claim is paid, the account is closed by,
  Cash – Debit
  Insurance claim account – Credit