5.2 Partnerships (3)
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1.
Question 3
Green Grocers had the following information for the year ended 31 March 2024:
- Revenue £65,000
- Cost of Goods Sold £40,000
- Gross Profit £25,000
- Administrative Expenses £12,000
- Finance Costs £3,000
- Profit Before Tax £9,000
- Tax Expense £2,250
- Dividends £1,500
- Retained Earnings £500
Required: Prepare the Income Statement and the Statement of Financial Position for Green Grocers as at 31 March 2024.
Answer 3
Green Grocers
Income Statement
For the year ended 31 March 2024
| Item | Amount (£) |
| Revenue | 65,000 |
| Cost of Goods Sold | 40,000 |
| Gross Profit | 25,000 |
| Administrative Expenses | 12,000 |
| Finance Costs | 3,000 |
| Profit Before Tax | 9,000 |
| Tax Expense | 2,250 |
| Profit After Tax | 6,750 |
| Dividends | 1,500 |
| Retained Earnings | 500 |
Green Grocers
Statement of Financial Position
As at 31 March 2024
| Assets | Amount (£) |
| Non-Current Assets | |
| Current Assets | |
| Equity and Liabilities | |
| Capital | 10,000 |
| Retained Earnings | 6,750 |
| Current Liabilities | |
| Total | 16,750 |
2.
A partnership between two individuals, Sarah and John, is considering setting up a business. Describe the key legal and financial considerations they should discuss and agree upon in a partnership agreement. Explain why these considerations are important.
Sarah and John should carefully consider several key legal and financial aspects when drafting their partnership agreement. These considerations are crucial for establishing a clear framework for their business and protecting their individual interests.
Legal Considerations
- Liability: The agreement should explicitly state that both partners have unlimited liability for the business debts. While unavoidable in a general partnership, this needs to be clearly understood and acknowledged.
- Profit and Loss Sharing: The agreement must detail how profits and losses will be divided. This could be a fixed percentage or based on contributions of capital, time, or expertise.
- Decision-Making Process: The agreement should outline how decisions will be made – e.g., majority vote, unanimous consent, or specific responsibilities assigned to each partner.
- Withdrawal/Dissolution: The agreement should specify the process for a partner to withdraw from the partnership or for the partnership to be dissolved. This should include provisions for valuing the business and distributing assets.
- Dispute Resolution: The agreement should include a mechanism for resolving disputes, such as mediation or arbitration, to avoid costly and time-consuming legal battles.
Financial Considerations
- Capital Contributions: The agreement should clearly state the amount of capital each partner will contribute to the business.
- Profit Distribution: As mentioned above, the agreement should detail how profits will be distributed.
- Loan Repayment: The agreement should specify how loan repayments will be handled.
- Accounting and Reporting: The agreement should outline the frequency and format of financial reporting to each partner.
- Expenses: The agreement should clarify how business expenses will be paid and reimbursed.
These considerations are important because they provide clarity, prevent misunderstandings, and protect the rights and interests of both partners. A well-drafted partnership agreement can significantly reduce the risk of disputes and ensure the smooth operation of the business.
3.
A company has made a profit of £50,000 during the year. The board of directors decide to pay out £20,000 as dividends and retain the rest for reinvestment. Prepare an appropriation account showing the information. (Assume no other appropriations exist.)
Appropriation Account
| Dividends | £20,000 |
| Retained Earnings | £30,000 |
Explanation: The appropriation account shows the distribution of the company's profit. The £50,000 profit is divided into dividends (£20,000) and retained earnings (£30,000). This demonstrates the company's decision to balance shareholder returns with future investment needs.