Economics Essays

Finance Essays: Profit and Loss, Balance Sheets

The Trade Profit and Loss Statement on 30th of June 2003 for the Compumatics Ltd

Profit/Loss statement for 2003	Expenses	Revenue
Sales		105000
Sales Returns	8000
Purchases	70000
Purchase Returns		1800
Discounts allowed	300
Carriage inwards	250
Computer	1,500
Wages	32,500
Electricity	825
Telephone	325
Insurance	225
Rent	1,250
Business rates	1,000
Total	116,175	106800
Profit/Loss		-9,375

The Balance Sheet for the year 2003 as on 30th June for Compumatics Ltd

Balance Sheet for2003	Asset	Liability
Business premises	18,000
Motor van	7,500
Stock of GPS	6,500
Debtors	12,000
Creditors		13,000
Cash at bank	1,800

Long term loan		6,600
Total	45,800	19600

Asset -Liability		26,200
Share Capital	30000
Profit Reserves	5575
Profit/Loss for the year	-9375
Shareholders Equity	26200

The adjusted Balance Sheet as on 30th June for Compumatics Ltd

Balance Sheet for2003	Asset	Liability
Business premises	18,000
Motor van	7,500
Closing Stock of GPS	7,000
Debtors	12,275
Creditors		14,375
Cash at bank	1,800
Long term loan		6,600
	46,575	19600
Asset -Liability		26,975

1) Discuss the way in which the profit figure links the profit and loss account and balance sheet.

The Profit & Loss account shows the profit and loss figure for the accounting year and added to the share- holders equity and hence reconcile the Balance Sheet. The difference between the asset and liability figures in the Balance Sheet equals the sum of the figures of shareholders capital & the reserves .The profit and loss changes the reserves and gives the new reserves figure according to the profit and loss for the year.
(Reserves for the Previous year + the Profit / Loss for the present year = The Reserves for the year.)

2) Why do we need to carry out the adjustments to 1 to 3 (post-trial balance adjustments) in task 1?

The post-trial balance adjustments gives us better directions than the trial balance for the year. The recent developments are introduced through the post trial balance adjustments. Here we have seen the changes in the closing balance of the GPS and the other changes in debts (through the dues for telephone and electricity: Adjustment 2) and credit (the Adjustment 3).

3) Briefly contrast the advantages and disadvantages of the following forms of business entity:
Sole traders
Partnerships and
Limited liability companies.

Sole Tradership:

Advantages:
# The proprietor has full control of the business and the entire profit of the business
# The proprietor has the right to sell or discontinue the business.
# The decision of discontinuation has the minimum legal and other costs.

Disadvantages:
# The owner has the unlimited personal liability for debts and negligence arising from the business.
# Cost of Expansion and cost of raising capital for the business is much higher compared to the other forms of ownership.
# The sole proprietor is the only source of capital and management control and that ensures additional risk for the proper functioning of the business.

Partnership.

Advantages:
# The capital rising, legal and administrative procedures and costs of formation are relatively inexpensive. Compared to the other forms of ownership (namely the sole proprietorship)
# A partnership form of ownership provides for the business the combined labour, expertise, management skills and financial resources of the partners.
# There is greater ability to overcome the consequences of the disability,
Sickness or accident of a partner than for a single proprietor. And hence preferred to the sole proprietorship. The continuity of the company is not directly linked to one individual as in case of sole proprietorship.

Disadvantages
# The unlimited liability of each partner for debts and the conduct of the business, including for the activities of each partner Thus riskier compared to sole tradership..The potential for disputes and breakdown in the mutual trust of the Partners.
# More potential for raising further capital than sole proprietor, but less than corporate proprietor.
# Potential problems relating to the retirement or admission of partners.
# There is the potential for termination in the event of disputes and there may be considerable legal and other costs in the event of a disputed dissolution of the partnership.
# A partnership is not a separate legal entity for most purposes and requires the participation of all partners for many legal transactions.

The Limited Liabilities Company:

Advantages:
# The limited liability company provides the biggest benefit in terms of legal protection to the owners of the company, as the owner’s personal assets cannot be attached to the company .The commercial liability cannot be made a personal liability.
# The control and ownership stays with the owner with the advantages of partnership and that of corporations.
# Only the assets in the business at risk in case of Bankruptcy
# The cost of capital rising and the have higher freedom to compensate the owners of the limited liability company compared to the corporation. Thus a higher benefit is transferred to the owners.
# The Limited Liability Company can have any number of owners and not fixed numbers as in case of corporations. The limited liability companies thus can attract more capital and better talents through the introduction of more owners.
# The Limited Liability Companies can have two types of partners. The General Partner and the Limited Partner. Thus giving more flexibility in the organizational structure.
# The limited Liability Company has the same tax benefits of partnership and sole proprietorship, where the owners pay taxes for the organization.

Disadvantages:

# The joint agreement on every decision made on behalf of the company.
# Financing is costlier compared to the partnership as the limited liability restricts the ability to recover the debts in case of bankruptcy.
# Higher legal and other cost for set up.
# Lack of perpetual succession .The ownership of the organization does not follow a smooth path like the corporations.
# Not all types of business can operate as Limited Liability Company. Companies in Banking, Insurance and Trusts are not allowed to form Limited Liability company.

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  Bibliography:
  
• Financial accounting: an introduction
  Weetman, Pauline: London: Financial Times/Prentice Hall, 2003
• Accounting: An Introduction Peter Atrill et al
  French’s Forest, NSW: Pearson Education 1999.
• Introduction to Financial Accounting
  3rd Edition: Routledge 1992

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