Sole Proprietorships
This is the type of business which legally the business entity is not separated from the owner. However, do not get yourself confused with the Separate Entity Concept in accounting. Usually the business is registered with government under a trade name (either with some association with the name of the owner or a different name altogether) and this trade name will represent the business entity in the conduct of its business activities.
Partnerships
This is the type of business with more than one owner. All the owners are called partners. In general all the partners contribute capital to the business and share common objectives of making the business successful and share the profits generated. Generally in law, the partners may have joint liability or joint and several liabilities. However, some countries may allow partnerships in which the liabilities of partners are limited. A partnership agreement could be used to set the terms and conditions among the partners.
Private Limited Companies
Some countries allow single member limited companies to be incorporated and some require minimum two members. The clear distinction of private limited companies from sole proprietorship and partnership is the liability of members is limited to the capital invested. Another distinct feature of limited private companies is that the governing body of the companies are the board of directors. The company incorporated carries its own identity under law and can sue and be sued by others. Of course when a company is found to have guilty legally, financial penalties are imposed because it is meaningless to impose jail terms on companies. In these circumstances, the relevant individuals behind the company (usually the directors) may be penalised financially, with jail terms or both. The relationship between the companies, the members/shareholders and the directors is unique and also can be a complex one whenever there are disputes between the company with third parties or disputes between members/shareholders or among the members of the board of directors. There are relevant sections in the Companies Act or Corporations Act of each country touching on this and of course there are common laws which have set down the legal principles since centuries ago.
You could find a lot of reading materials on the legal aspects of the above three types of business entities. Therefore, I only described them briefly in this post.
Example of Income Statement and Balance Sheet of a Sole Proprietor
Income Statement for the year ended 31 December 2006 | |
$ |
|
Sales |
159,270 |
Cost of Sales |
– 90,875 |
Gross profit |
68,395 |
Other income: – | |
Interest income |
2,356 |
Operating expenses: – | |
Accountancy fee |
– 800 |
Depreciation of property, plant and equipment |
– 2,500 |
Donation |
– 500 |
Electricity & water |
– 3,340 |
Insurance premium |
– 2,000 |
Printing & stationery |
– 1,697 |
Rental of premises | – 12,000 |
Salaries |
– 35,579 |
Upkeep of office |
– 3,547 |
Telephone charges |
– 1,285 |
Travelling, petrol & toll charges |
– 2,648 |
– 65,896 |
|
Net profit for the year |
4,855 |
Retained profits B/F |
27,654 |
Retained profits C/F |
32,509 |
Balance Sheet as at 31 December 2006 | |
$ |
|
Non-current assets | |
Property, plant and equipment |
15,000 |
Current assets | |
Inventories |
5,200 |
Trade receivables |
6,000 |
Other receivables, deposits & prepayments |
3,458 |
Cash and bank balances |
10,639 |
25,297 |
|
Current liabilities | |
Trade payables |
– 3,588 |
Other payables and accruals |
– 2,575 |
– 6,163 |
|
Net current assets |
19,134 |
34,134 |
|
Financed by: – | |
Capital |
15,000 |
Retained profits |
32,509 |
Net drawings |
– 13,375 |
34,134 |
Example of Income Statement and Balance Sheet of a Partnership
Income Statement for the year ended 31 December 2006 | ||
$ |
||
Sales |
159,270 |
|
Cost of Sales |
– 90,875 |
|
Gross profit |
68,395 |
|
Other income: – | ||
Interest income |
2,356 |
|
Operating expenses: – | ||
Accountancy fee |
– 800 |
|
Depreciation of property, plant and equipment |
– 2,500 |
|
Donation |
– 500 |
|
Electricity & water |
– 3,340 |
|
Insurance premium |
– 2,000 |
|
Printing & stationery |
– 1,697 |
|
Rental of premises |
– 12,000 |
|
Salaries |
– 35,579 |
|
Upkeep of office |
– 3,547 |
|
Telephone charges |
– 1,285 |
|
Travelling, petrol & toll charges |
– 2,648 |
|
– 65,896 |
||
Profit for the year |
4,855 |
|
Add: – | ||
Interest on partner’s drawings | ||
Partner A | 1,500 | |
Partner B | 2,000 | 3,500 |
Less: – | ||
Partner’s salary | ||
Partner A | – 15,000 | |
Partner B | – 20,000 | – 35,000 |
Partner’s commision | ||
Partner A | – 3,000 | |
Partner B | – 2,000 | – 5,000 |
Interest charged on partner’s capital | ||
Partner A | – 2,500 | |
Partner B | – 3,500 | – 6,000 |
Net loss for the year | – 37,645 | |
Shared as follows: – | ||
Partner A – 60% | – 22,587 | |
Partner B – 40% | – 15,058 | |
– 37,645 |
Analysed as follows: – | |||
Partner A |
Partner B |
Total |
|
$ |
$ |
$ |
|
Shared net loss for the year |
– 22,587 |
– 15,058 |
– 37,645 |
Less: – | |||
Interest on partner’s drawings |
– 1,500 |
– 2,000 |
– 3,500 |
Add: – | |||
Partner’s salary |
15,000 |
20,000 |
35,000 |
Partner’s commission |
3,000 |
2,000 |
5,000 |
Interest charged on partner’s capital |
2,500 |
3,500 |
6,000 |
Net profit for the year |
– 3,587 |
8,442 |
4,855 |
Note 1 |
Note 1 |
Balance Sheet as at 31 December 2006 | |||
$ |
|||
Non-current assets | |||
Property, plant and equipment |
15,000 |
||
Current assets | |||
Inventories |
5,200 |
||
Trade receivables |
6,000 |
||
Other receivables, deposits & prepayments |
3,458 |
||
Cash and bank balances |
10,639 |
||
25,297 |
|||
Current liabilities | |||
Trade payables |
– 3,588 |
||
Other payables and accruals |
– 2,575 |
||
– 6,163 |
|||
Net current assets |
19,134 |
||
34,134 |
|||
Financed by: – | |||
Partner A | Partner B |
Total |
|
$ |
$ |
$ |
|
Capital account |
9,000 |
6,000 |
15,000 |
Current account | |||
Balance B/F |
45,874 |
24,280 |
70,154 |
Shared net loss for the year |
– 22,587 |
– 15,058 |
– 37,645 |
Net drawings during the year |
– 12,000 |
– 5,000 |
– 13,375 |
Balance C/F |
11,287 |
4,222 |
19,134 |
20,287 |
10,222 |
34,134 |
Note 1: the net loss for the year for Partner A of $3,587 and net profit of Partner B of $8,422 were derived by calculating from the share of net loss for the year of $37,645, taken into account of the interest on capital, interest on drawings, salary and commission of each partner. You would not be able to know how much is each partner’s share of profit or loss directly from the net profit of $4,855.
Example of Income Statement and Balance Sheet of a Private Limited Company
Income Statement for the year ended 31 December 2006 | ||
$ |
||
Sales |
159,270 |
|
Cost of Sales |
– 90,875 |
|
Gross profit |
68,395 |
|
Other income: – | ||
Interest income |
2,356 |
|
Operating expenses: – | ||
Accountancy fee |
– 800 |
|
Depreciation of property, plant and equipment |
– 2,500 |
|
Donation |
– 500 |
|
Electricity & water |
– 3,340 |
|
Insurance premium |
– 2,000 |
|
Printing & stationery |
– 1,697 |
|
Rental of premises |
– 12,000 |
|
Salaries |
– 35,579 |
|
Upkeep of office |
– 3,547 |
|
Telephone charges |
– 1,285 |
|
Travelling, petrol & toll charges |
– 2,648 |
|
– 65,896 |
||
Net profit for the year |
4,855 |
|
Retained profits B/F |
27,654 |
|
Retained profits C/F |
32,509 |
|
Balance Sheet as at 31 December 2006 | ||
$ |
||
Non-current assets | ||
Property, plant and equipment |
15,000 |
|
Current assets | ||
Inventories |
5,200 |
|
Trade receivables |
6,000 |
|
Other receivables, deposits & prepayments |
3,458 |
|
Amount due by shareholders |
13,375 |
Note 2 |
Cash and bank balances |
10,639 |
|
38,672 |
||
Current liabilities | ||
Trade payables |
– 3,588 |
|
Other payables and accruals |
– 2,575 |
|
– 6,163 |
||
Net current assets |
32,509 |
|
47,509 |
||
Financed by: – | ||
Share capital |
15,000 |
|
Retained profits |
32,509 |
|
47,509 |
Note 2: in this example, the net drawings of the owner in the example of a Sole Proprietor has been shown as amount due by shareholders for comparison purposes
Once things start going right, you could be asked to bring some proof.