Small Businesses

The same method of preparing, final accounts is also suitable for businesses run by a sole proprietor, although if he is trading in commodities, or is a manufacturer, amounts must be shown for stocks of raw materials and partly finished and finished goods, and also for his purchases of goodwill where a going concern has been acquired by a purchaser at a price that includes an amount in respect of the 'goodwill' built up by the previous owner - in other words with the customer connection. A shop or guest house, for example, often changes hands at a figure above the value of net assets, reflecting the hard work the seller has put into building up the profitability of the business.

As a rough and ready guide, the value set on goodwill should be of such a figure as will, with the other net assets, come to a total purchase price for the business that will cause the annual net profits to represent a reasonable yield on the total cost, including goodwill. Should profits be only at a rate reflecting a fair return on the capital invested in real assets, then there is no goodwill.

In a business it is also prudent to make provisions for losses

GAVIN SPORTS CLUB ACCOUNTS (see Example on page 146) Income and Expenditure Account

Expenditure £1 Income

Wages l,200 Subscriptions

Ground rent 250 Concert proceeds

Printing, stationery, postage 120 Bank interest

Depreciation

(100 + 102 + 280 + 94) 576

2,146

Excess of income over expenditure to Capital Account 252

1,728

440

230

2,398 2,398

Balance Sheet as at (date)

Liabilities £ £1 Assets £1 £1 £1

Capital Account 6,000 Fixed assets

Excess of income over Pavilion at valuation 1,000

expenditure for year 252 6,252 less Depreciation at 10% 100 900

Sundry creditors Tennis court at cost 1,020

Garden Equipment Ltd 127 less Depreciation at 10% 102 918

Furniture and fittings at cost 1,400

less Depreciation at 20% 280 1,120

Equipment at cost 470

less Depreciation at 20% 94 376

Total fixed assets 3,314

(Balance Sheet cone d)

Liabilities Assets

£1 Current assets

Cash in current account 1,097

Investment (on deposit) 1,500

Stationery stock 15

Ground rent in advance 125

Overdue subscriptions 328

Total current assets 3,065

6,379 6,379

Note The figure for cash on current bank account is arrived at as follows.

Money received £1 Money paid out

Gavin Engineering 5,000 Tennis court construction 1,020

Concert 440 Ground rent 375

Interest 230 Furniture and fittings 1,400

Printing and stationery, etc. 135

Placed in deposit account 1,500

Mowing equipment £1470

less not yet paid £1127 343

(5,973)

Thus, balance in bank 1,097

7,070 7,070


Interpretation

A member of this club, on being presented with a copy of these accounts, can obtain a very comprehensive picture of how its financial affairs have been looked after.

On a current basis he will see that the club's expenditure has been £1252 less than its revenue, including the writing down of wasting assets; so its capital has risen from the original grant of £15,000 and gift of pavilion of £11,000 (£16,000) to £16,252, which is very satisfactory.

The balance sheet shows how the capital has been disposed in acquiring useful assets suitable to the purpose of the club. Those that wear... see: Interpretation


Refunds, Personal And Business Finance 2017

  • You can send us an email if you want to know more about waht we do and we will get back to you as soon as we are able.

  • Want to be a published author
    We publish articles on this site if they fulfil our requirments. more>>