Reserves And Provisions

(a) Depreciation of 10% has been written off fixtures and fittings and is charged in the income and expenditure account.

(b) Bad debts of £1280 have also been charged against profits, the jeweller evidently being satisfied that this amount cannot be recovered. Two other items of a provision nature appear in the balance sheet but do not figure in the income and expenditure account - namely Provision for doubtful debts £210 and write-off of part (20%) of goodwill (£950). Instead of being treated as expenses of the business these are treated as allocations of profits and thus are shown as deductions from proprietor's capital after the net profit has been added to it. This is perfectly in order, although not the usual accepted procedure. Presumably the proprietor originally bought the ingoing of the shop at some thousands of pounds more than the value of net assets, and is writing this off at 20% each year worked on the reducing balance. In the course of a few years he will be able to eliminate this item from the balance sheet. Indeed, it seems questionable whether this business has any goodwill value at all.

9. Drawings. The proprietor has drawn out of the business a sum of £4,500 as his remuneration for the year. His own capital account is thus shown as £1,668 higher than it was at the beginning of the year (£1304,849 minus £1303,181).

Profit and loss account

For a small non-trading business, such as that of a self-employed architect, solicitor, designer or consultant, it is perfectly satisfactory for all items of current income and revenue expenditure to be presented in the form of a Revenue and Expenditure Account. In the case of a merchant or any large scale trader in commodities it is preferable for purposes of presentation to marshall the buying and selling items in a separate preliminary account called the Trading Account. Other items, representing indirect costs or 'overheads', are accommodated in a Profit and Loss Account.

Accounts And Balance Sheets

earned doing nothing. In fact the net profit expressed as a percentage of proprietor's capital is only around 22%. As a percentage of total sales it is just over 20%.

3. Rate of stock turnover. Total goods sold in the year, valued at cost, stand at a figure below the average stock held. This indicates that goods are being turned over less than once a year. In other words, each item is, on average, held for more than a year before it is sold. There is something wrong here. It would be normal for stock to turn over about three to four times a year. Is some of the stock unsaleable?

4.... see: Accounts And Balance Sheets

Refunds, Personal And Business Finance 2017

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