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This unit covers the impact of a partnership relationship on the Financial Statements of a business. It also highlights the similarities in Financial Statements between different types of business as well as the differences. 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
This unit covers the impact of a partnership relationship on the Financial Statements of a business. It also highlights the similarities in Financial Statements between different types of business as well as the differences. 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
This unit covers the impact of a partnership relationship on the Financial Statements of a business. It also highlights the similarities in Financial Statements between different types of business as well as the differences. 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
Unit 6: Financial Statements Partnerships: Limited Liability Companies
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:
explain the advantages and disadvantages of forming a partnership Compare the advantages and disadvantages of sole trader and partnership businesses in terms of ownership, control and sources of finance. 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.
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. http://www.tutor2u.net/revision_notes_accou nting.asp
Past question papers available from CIE, e.g.
Specimen Paper 1 Q19
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.
1 AO Suggested Teaching activities Learning resources Learning outcomes agreement
explain the purpose of an Appropriation Account
prepare partnership Income Statements, Appropriation Accounts and Balance Sheets
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
Past question papers available from CIE, e.g. J un 2003 Paper 1 Q31 J un 2005 Paper 1 Q32 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.
Nov 2002 Paper 2 Q3
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.
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 Suggested Teaching activities Learning resources Learning outcomes Goodwill Explain and work through examples of goodwill and how it is included in accounts. J ournal entries and ledgers should be fully covered to prevent students reversing the entries. This is a common error in examination answers.
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.
Nov 2003 Paper 1 Q21, 26 J un 2004 Paper 2 Q5 J un 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 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.
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.
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.
It is important to clarify for students the extent of this syllabus so that they spend their course and homework time on matters of Past question papers available from CIE, e.g.
3 4 AO Learning outcomes Suggested Teaching activities Learning resources issue of capital, or to know the accounting requirements of the Companies Acts.
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. direct relevance.