Format of the Balance Sheet?

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Dear Colleagues,

Having worked for HMRC and now that I'm helping a few sole traders with very small turnovers file their Self Assessment returns I have just started assisting them as well with the production of their accounts, but I'm still learning the ropes here.  I'm familiar with the Profit and Loss Account but I'm still trying to get my head round the Balance Sheet! Templates show Assets (Fixed and Current) then Liabilities.  Adding the assets together and then subtracting the liabilities gives Net Current Assets at the year end.  I am presuming this is what is meant by both the "owner's equity" and the "book value of the business."  Please correct me if I'm wrong here.

Then at the bottom of the sheet you generally get something like Represented by:  Profit Retained and Profit for the Year and then any Capital Introduced.  These add to the Net Current |Assets and then Less Drawings reduces the figure back to the Net Current Assets to balance with that.  I have 3 main questions regarding this final section of the Balance Sheet. 

(1) Profit for the Year is obviously the figure that needs to be stated for tax purposes, but please clarify what exactly counts as "Profit Retained"

(2)What is best practice if, for example, the profit and drawings stated don't equate finally to the figure already arrived at at Net Current Assets?  Presumably the discrepancy needs to be found somewhere (which could be quite difficult and very time consuming) I would very much appreciate advice on this one.

(3) If for example Assets are £15,000 and Liabilities £5,000 making £10,000 Net Current Assets and then there has been not a profit but a loss and possibly drawings have also been taken from the capital how are these types of entries shown on the Balance Sheet (again to balance with the Net Current Assets figure)?

A happy 2019 to all members of Accountacy Web!

Steven

 

 

Replies (17)

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By kevinread
04th Jan 2019 20:37

Lol

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By WhichTyler
04th Jan 2019 20:55

Practical Accounts & Bookkeeping in easy steps, 2nd Edition https://www.amazon.co.uk/dp/1840787384/ref=cm_sw_r_cp_apa_i_wF8lCbS98QB91

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paddle steamer
By DJKL
04th Jan 2019 21:14

For sole traders and partnerships ignoring the nuances of capital and current accounts:

Opening Capital
Capital introduced
Profit for year
Sub total
Drawings
Closing Capital

You follow the debits and credits as needed re each.

So opening capital, if not overdrawn, is a credit, capital introduced is a credit, profit for year is in effect a credit (it is the sum of the P & L credits less the sum of the P & L debits for the year), drawings are a debit, closing capital is the resultant (credit if retained capital debit if overdrawn capital)

Remember, because it it really all you need:

Assets- DR is increase CR is decrease
Liabilities- DR is decrease CR is increase
Capital and Reserves- DR is decrease CR is increase
Income Accounts- DR is decrease CR is increase
Expense Accounts- DR is increase CR is decrease

All nominal accounts fit one or other class

The suggestion above re a textbook is a good one, follow the debits and credits and it will all fit together once you try to do some of the questions.

There cannot be differences re accounts if every debit posted has a credit, I would either learn using T accounts but in real life you can work with an extended trial balance, something like (depending on business) columns for:

Opening Balances
Bank Received
Bank Paid
Cash received
Cash Paid
Columns re wages and sales
Vat adjustment column
Reverse LY accruals/prepaid/debtors/creditors column
Post this year accruals/prepaid/debtors/creditors column
General journal columns re stock, reallocations, depreciation, HP, asset disposals, others
Final accounts figures achieved by cross add the columns

Remember ever column squares to zero as every debit has a credit

Your mistake is to try to produce a set of accounts before you have a square and checked trial balance, produce the TB that squares then extract the numbers from same into the accounts (Or post/import into accounts software)

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Replying to DJKL:
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By andy.partridge
04th Jan 2019 21:33

Have you also tried teaching your sheepdog to recite some Day Lewis? Me too. It’s hard work, isn’t it.

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Replying to andy.partridge:
paddle steamer
By DJKL
04th Jan 2019 21:41

I have never been a good teacher, I have the amazing ability to either pitch what I say far below the individual's competence or fly it straight over his or her head.

Whilst the firm I trained with was a very good training firm, with some excellent teachers, my efforts as the teacher ,when I did work in practice, had mixed success- not sure if any of the trainees we ever had qualified.

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Replying to DJKL:
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By andy.partridge
04th Jan 2019 22:27

I think you are a good teacher. Most people (on here) don’t want to be taught they want a solution that’s easily digestible. Fed from a spoon and in a form that doesn’t require them to chew.

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Replying to andy.partridge:
paddle steamer
By DJKL
04th Jan 2019 22:37

That is of course a complete waste of time, accountancy is like arithmetic- do exercises over and over and over and it then sticks, it is, in its basics,very similar to learning to drive; eventually you stop even thinking about the basics, change gear, brake, check mirrors, they all just happen.

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Replying to DJKL:
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By andy.partridge
04th Jan 2019 22:42

That requires effort. People are reluctant to invest for fear they will be none the wiser.

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Replying to andy.partridge:
paddle steamer
By DJKL
04th Jan 2019 23:02

You are a cynic, some people do put in an effort - my problem is that a fair number want to be able to run before they can walk, earn money from the public when they are still on accountancy 101 and in the real world of poor/incomplete records lack experience- the catch with textbooks is they are an ideal, reality is often filling the gaps and that ability, to even spot the gaps or know they exist, comes from experience, no textbook will help.

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Replying to DJKL:
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By andy.partridge
04th Jan 2019 23:17

It has taken a lifetime of practical experience to turn me into a cynic. Guilty as charged.

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Replying to DJKL:
RLI
By lionofludesch
05th Jan 2019 08:34

It's the old story that you need to know what you don't know.

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RLI
By lionofludesch
04th Jan 2019 22:13

Bless me. ©

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By Tosie
05th Jan 2019 20:07

Are you charging a fee for the preparation of accounts .

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Replying to Tosie:
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By DGTS
09th Jan 2019 10:01

Yes, I intend to charge a small fee, but which will reflect the fact that I do not hold a professional accountancy qualification.

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Replying to DGTS:
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By 356B
09th Jan 2019 11:18

I hope your PII is up to date.

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By 356B
07th Jan 2019 12:01

He only confirms what I've always believed about HMRC staff. (and he's had a F/B page for two years)

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blue
By mg200
07th Jan 2019 18:25

We put our Apprentices through some intensive Extended Trial Balance work with some basic clients for a week and this tends to answer your question.

Learn double entry, the ETB and then you'll be in a better place.

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