{"id":142,"date":"2018-10-11T06:36:00","date_gmt":"2018-10-11T06:36:00","guid":{"rendered":"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/?post_type=chapter&p=142"},"modified":"2019-01-03T10:49:44","modified_gmt":"2019-01-03T10:49:44","slug":"preparation-of-balance-sheet-under-sole-proprietorship","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/chapter\/preparation-of-balance-sheet-under-sole-proprietorship\/","title":{"rendered":"Preparation of balance sheet under sole proprietorship"},"content":{"raw":"
\"epgp<\/a>\r\n<\/span><\/div>\r\n
\r\n\r\n \r\n\r\n \r\n\r\n \r\n\r\nLEARNING OBJECTIVES:<\/strong>\r\n\r\n \r\n

After studying the module, students may be able to understand the meaning of sole proprietorship, its registration, and advantages. Also, knowledge can be gained regarding the final accounts of the sole proprietorship, balance sheet preparation, its limitations and the suitability of sole proprietorship form of business.<\/p>\r\n \r\n\r\nINTRODUCTION:<\/strong>\r\n\r\n \r\n

In the drastically changing environment, new prospects for already incorporated businesses is increasing and opening up new ways for expansion and diversification. The ever changing demands of the customers, act as a catalyst for the business houses to modify and enhance the quality as well as\u00a0the quantity of their products, so as to attract more number of customers. Various forms of businesses are working in the present globalized environment. The Company form, be it private or public undertaking, the Partnership form, where two or more members jointly start up a business by equally contributing as well as equally sharing, a Joint Hindu Family business, where family members own and continue the business, or a Non Profit Organisation, working solely for not earning the profits, but for the society.<\/span><\/p>\r\n\r\n<\/div>\r\n

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Apart from the above mentioned forms, if an individual wish to start up a business individually, on its own, he can start up a Sole Proprietorship form of business. This is the simplest form of business, and this form of business requires no number of minimum members\/partners for setting up the business, neither it require any minimum amount of capital for starting its business. In this form an individual deals into small scale business, and can wish to expand as well in future.<\/p>\r\n \r\n\r\nMEANING OF SOLE PROPRIETORSHIP:<\/strong>\r\n\r\n \r\n

As the name suggest, sole means single, on the other hand proprietor is a person who starts up a business. Therefore, sole proprietorship (single owner) is that form of business where a single person starts up a business, totally under his single ownership. Here the proprietor, puts in the capital solely on his own and carries out the business without any partners, and bears the risks and losses, as well as takes the benefit of profits on its own.<\/p>\r\n \r\n

In simple terms, a form of business where there is a lack of partnership, and is controlled and managed by a single owner, is termed as Sole Proprietorship Business.<\/p>\r\n \r\n\r\nREGISTERATION OF SOLE PROPRIETORSHIP:<\/strong>\r\n\r\n \r\n

It is not compulsory for a sole proprietor to get its business registered. Only a bank account needs to be opened up in the name of the business. However if the proprietor is liable to pay the service tax or VAT, then he can get the business registered under the Service Tax.<\/p>\r\n \r\n\r\nCHARACTERISTICS OF SOLE PROPRIEORSHIP:<\/strong>\r\n\r\n \r\n\r\nFollowing are the characteristics of sole proprietorship form of business:\r\n\r\n \r\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0 No compulsory registration required: in order to start up with the sole proprietorship firm, there is no need to get itself registered under any of the acts. It is not a compulsion to be followed.<\/p>\r\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 Single owner: this type of business is owned, controlled and managed by a single owner itself, without any interference from any other person.<\/p>\r\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0 Unlimited liability: the liability of the owner to pay back its debt, lies totally on the shoulders of one person, therefore it is said that the liability is unlimited.<\/p>\r\n

4)\u00a0\u00a0\u00a0\u00a0\u00a0 No separation between the ownership and management: unlike a partnership firm, there is no separation between the ownership and management, i.e. they both are considered as one.<\/p>\r\n

5)\u00a0\u00a0\u00a0\u00a0\u00a0 No perpetual succession: a sole proprietorship form of business cannot last forever, and dissolves as soon as the owner falls very ill to continue with the business or dies.<\/p>\r\n

6)\u00a0\u00a0\u00a0\u00a0\u00a0 Quick decision making: the owner of the business is free to take up the decisions on its own, without prior consultation with anybody; therefore it is quite possible that the decisions are taken quickly, without any delay.<\/p>\r\n \r\n\r\nADVANTAGES OF SOLE PROPRIETORSHIP:<\/strong>\r\n\r\n<\/div>\r\n

\r\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0 Easy formation and dissolution: incorporating sole proprietorship business is the simplest and easiest procedure, as no legal formalities are required for its incorporation, and neither it is governed by any of the acts. However, some general laws like sales of goods act, law of contracts follow.<\/p>\r\n \r\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 Tax Advantage: a sole proprietor running a sole proprietorship business, need not pay the taxes on the business, but only the individual tax. According to the Income Tax Act 1961, an individual is liable to pay the tax only limited to his income, therefore the tax liability is much less as compared to other form of businesses.<\/p>\r\n \r\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0 No minimum members required: to start up a business there is no need for the individual to maintain the requirement of minimum number of members, unlike the partnership form of business. A single person can itself start up the business.<\/p>\r\n \r\n

4)\u00a0\u00a0\u00a0\u00a0\u00a0 Sole authority: the owner has the only authority to make up the plans for his own business, without consulting any other member. There is no distribution of authority between partners, and is enjoyed by a single person only.<\/p>\r\n \r\n

5)\u00a0\u00a0\u00a0\u00a0\u00a0 Quick decision making: in order to make any kind of decisions relating to the business, the sole proprietor need not consult anyone, as a result lot of time is saved, and decisions are taken quickly.<\/p>\r\n \r\n

6)\u00a0\u00a0\u00a0\u00a0\u00a0 No profit sharing required: unlike in the partnership form, under a sole proprietorship there is no need to share the profits in equal ratio with the members. The sole owner shares the profits on its own.<\/p>\r\n \r\n

7)\u00a0\u00a0\u00a0\u00a0\u00a0 No need to hold policy meeting: a sole trader need not conduct any kind of policy meetings or board meetings because the decisions are to be taken alone by the owner, so the need to conduct such meetings is not felt.<\/p>\r\n \r\n

8)\u00a0\u00a0\u00a0\u00a0\u00a0 No partnership deed required: as there are no partners, therefore need to frame a partnership deep does not exist. A deed is a set of rules and regulations containing the conditions regarding partnership.<\/p>\r\n \r\n

9)\u00a0\u00a0\u00a0\u00a0\u00a0 Ease in Employment: a sole proprietor is free to hire nay number of employees, without entering their names as owners. Also, wife\/husband of the owner can be employed, and can help in running the business, without even being declared as an employee\/ partner to the business.<\/p>\r\n \r\n\r\n \r\n\r\nQUICK REVISION:<\/strong>\r\n\r\n \r\n

\u25aa\u00a0\u00a0\u00a0 Sole proprietorship (single owner) is that form of business where a single person starts up a business, totally under his single ownership.<\/p>\r\n

\u25aa\u00a0 It is not compulsory for a sole proprietor to get its business registered<\/p>\r\n

\u25aa\u00a0\u00a0 To start up a sole proprietorship business, minimum number of members is not required. A single individual can start up such business.<\/p>\r\n

\u25aa\u00a0\u00a0\u00a0 A husband and wife can also start up the business, as it will be assumed as one\/ single owner business.<\/p>\r\n

\u25aa\u00a0 A sole proprietor enjoys the profits earned as well as bears all the losses incurred individually, on its own.<\/p>\r\n

\u25aa\u00a0 The sole proprietor is the sole authority to take all the decisions individually.<\/p>\r\n \r\n\r\n \r\n\r\nFINAL ACCOUNTS OF SOLE PROPRIETORSHIP:<\/strong>\r\n\r\n<\/div>\r\n

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Business concerns work throughout the year to earn profits and deal with the changing environment effectively. And at the end of accounting year, owners and managers are interested in knowing the overall financial position of the concern, which helps in formulating policies and effective decision making. Final accounts, also known as financial statements are a set of systematically presented and chronologically recorded accounts, which reveals the financial position of the concern at the end of accounting year.<\/p>\r\n \r\n

Preparation of final accounts is the last step in the entire accounting cycle. The cycle starts with the recording of monetary transactions in the books of accounts and end up with the preparation of final accounts. Sole proprietorship can be classified into two heads: Manufacturing Concern and Non Manufacturing Concern.<\/p>\r\n \r\n\r\nManufacturing Concern: <\/strong>are concerned with the purpose of manufacturing the goods and then selling them to the customers. They do not borrow the items from outside for reselling them in the market, instead produce them on their own.\r\n\r\n \r\n

Non-Manufacturing Concern: <\/strong>are involved in the process of selling only. They are not engaged in the process of manufacture, but simply purchase the goods from outside, and sell them to the customers, without changing the original form of the goods. They are not attached to the manufacturing business.<\/p>\r\n \r\n

Final accounts of manufacturing business entities include the preparation of manufacturing accounts, trading accounts, profit & loss account and balance sheet. Whereas, final accounts of non-manufacturing concern includes the preparation of trading accounts, profit & loss accounts and balance sheet.<\/p>\r\n \r\n

The steps for the final accounts preparation in case of sole proprietor are as follows:<\/p>\r\n \r\n\r\n1.\u00a0\u00a0\u00a0\u00a0\u00a0 Recording the monetary transactions in the journal.\r\n\r\n2.\u00a0\u00a0\u00a0\u00a0\u00a0 Posting them to the ledger accounts.\r\n\r\n3.\u00a0\u00a0\u00a0\u00a0\u00a0 Preparing a trading account.\r\n\r\n4.\u00a0\u00a0\u00a0\u00a0\u00a0 Preparing profit and loss account.\r\n\r\n5.\u00a0\u00a0\u00a0\u00a0\u00a0 Balance sheet preparation.\r\n\r\n \r\n

The only difference between the two concerns is the additional preparation of Manufacturing Account in case of Manufacturing Business Entities. Manufacturing account is prepared to know the costs involved in the process of manufacturing the finished goods. And the balance of the manufacturing account can be transferred to the trading account. The preparation of rest of the accounts (i.e. the Trading Account, Profit and Loss account, and Balance Sheet) remains the same, both for the manufacturing as well as the non manufacturing concerns.<\/p>\r\n \r\n\r\n \r\n\r\nBALANCE SHEET PREPARATION OF A SOLE PROPRIETORSHIP:<\/strong>\r\n\r\n \r\n

The Balance Sheet, also known as the position statement, is a statement which highlights the financial position of the enterprise. It depicts the position of the assets and liabilities of the firm, by recording them. According to A. Palmer, \u201cThe Balance Sheet is a statement at a particular date showing on one side the trader\u2019s property and possessions and on the other hand the liabilities.\u201d<\/p>\r\n \r\n\r\nPreparing a balance sheet serves the following purposes:\r\n\r\n<\/div>\r\n

    \r\n \t
  1. The financial position is revealed at the end of an Accounting Year.<\/li>\r\n \t
  2. The assets and liabilities are presented in an elaborate manner.<\/li>\r\n \t
  3. The solvency position of the concern can be judged easily.<\/li>\r\n \t
  4. The opening entries of the next financial year depend on the figures from the previous year balance sheet.<\/li>\r\n<\/ol>\r\n

    \u00a0 \u00a0Sole proprietor prepare the balance sheet horizontally, depicting the \u201ccapital and liabilities\u201d on the left hand side, whereas \u201cassets\u201d on the right hand side of the balance sheet. The format is presented below:<\/p>\r\n\"\"\r\n\r\n \r\n

    \r\n\r\nThe following points are evident from the above presented format:\r\n\r\n \r\n

    1.\u00a0\u00a0\u00a0\u00a0\u00a0 The order of arranging the liabilities may be in two ways. First, is to show the capital, followed by long term liabilities, and lastly short term liabilities (which is to be paid within a period of one year). Second method is to depict the short term liabilities in the beginning, followed by the long term liabilities and at the last, capital.<\/p>\r\n

    2.\u00a0\u00a0\u00a0\u00a0\u00a0 The assets may be grouped either in the order of permanence or in the order of liquidity.<\/p>\r\n

    3.\u00a0\u00a0\u00a0\u00a0\u00a0 Order of liquidity means that the most liquid assets will be shown first followed by the less liquid assets. Liquid means those assets which can be easily and quickly converted into cash.<\/p>\r\n

    4.\u00a0\u00a0\u00a0\u00a0\u00a0 Order of permanence means the assets which are to be used for long term in the business and are not supposed to be sold are presented first, followed by the liquid assets.<\/p>\r\n\r\n<\/div>\r\n

      \r\n \t
    1. Order of Liquidity: Cash in Hand Cash at Bank Investments Trade receivables Machinery Land Patents Goodwill<\/li>\r\n \t
    2. Order of Permanence: Goodwill Patents Land Machinery<\/li>\r\n<\/ol>\r\nTrade Receivables\r\n\r\n \r\n\r\nInvestments\r\n\r\n \r\n\r\nCash at Bank\r\n\r\n \r\n\r\nCash in Hand\r\n\r\n \r\n\r\n \r\n\r\nQUICK REVISION:<\/strong>\r\n\r\n \r\n\r\n\u25aa Final accounts, also known as financial statements are a set of systematically presented and chronologically recorded accounts.\r\n\r\n\u25aa Final accounts reveal the financial position of the concern at the end of accounting year.\r\n\r\n\u25aa Sole proprietorship can be classified into two heads: Manufacturing Concern and Non Manufacturing Concern.\r\n\r\n\u25aa Final accounts of manufacturing business entities include the preparation of manufacturing accounts, trading accounts, profit & loss account and balance sheet.\r\n\r\n\u25aa Final accounts of non- manufacturing concern includes the preparation of trading accounts, profit & loss accounts and balance sheet.\r\n\r\n\u25aa Sole proprietor prepare the balance sheet horizontally, depicting the \u201ccapital and liabilities\u201d on the left hand side, whereas \u201cassets\u201d on the right hand side of the balance sheet.\r\n\r\n\u25aa Assets can be grouped either in the order of liquidity or in the order of permanence.\r\n\r\nIn order to deepen the understanding, let us study a hypothetical example on the balance sheet preparation for sole proprietorship:\r\n\r\n\"\"\r\n\r\n \r\n\r\n\"\"\r\n
      \r\n\r\nBoth the sides of the balance sheet of a sole proprietorship business, is tallying, that means fulfilling the matching concept.\r\n\r\n \r\n\r\n \r\n\r\n \r\n\r\nLIMITATIONS OF SOLE PROPRIETOSHIP:<\/strong>\r\n\r\n \r\n

      Though, Sole Proprietorship seems to be the simplest form of business, and though it seems that starting up a sole proprietorship business involves less legal formalities, and a non compulsory registration, it is also affected by some of the limitations:<\/p>\r\n

      1.\u00a0\u00a0\u00a0\u00a0\u00a0 Unlimited Liability: the owner himself is responsible for paying off all the debts, be it long term or short term. No one except the owner is liable to clear all the debts.<\/p>\r\n

      2.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Limited Amount of Capital: as the owner is solely responsible for bringing in the capital, the amount of capital so brought in is limited and is of limited amount, unlike the partnership firm, where each partner brings in some amount of capital, while entering into the partnership.<\/p>\r\n

      3.\u00a0\u00a0\u00a0\u00a0\u00a0 Limited Ideas: the owner is the sole authority to frame the policies and ideas. He is a single mind working on the entire business, therefore only he is the one responsible for framing the ideas, therefore only limited ideas, i.e. limited to his thinking capacity are generated.<\/p>\r\n

      4.\u00a0\u00a0\u00a0\u00a0\u00a0 Limited size of Business: since the owner himself is not acquainted with all the skill, expertise, adequate finance for expansion, he sometimes fail to expand, diversify the business to the fullest, either due to lack of expertise or due to lack of finances.<\/span><\/p>\r\n5.\u00a0\u00a0\u00a0\u00a0\u00a0 No Continuity in Business: unlike the partnership firm, sole proprietorship lacks continuity in business, as it does not have the partners to carry on the business forever, but the business dissolves as soon as the owner becomes seriously ill or dies.<\/span>\r\n\r\n<\/div>\r\n

      \r\n\r\n \r\n\r\nSUITABILITY OF SOLE PROPRIETORSHIP:<\/strong>\r\n\r\n \r\n

      The limitations of sole proprietorship bring us to the situations where the sole proprietorship form of business is suitable to start up:<\/p>\r\n \r\n\r\n1)\u00a0\u00a0\u00a0\u00a0\u00a0 When the amount of capital required is small.\r\n\r\n2)\u00a0\u00a0\u00a0\u00a0\u00a0 Where it is important to keep a direct contact with the customers.\r\n\r\n3)\u00a0\u00a0\u00a0\u00a0\u00a0 When continuity of the business is not an issue of concern.\r\n\r\n4)\u00a0\u00a0\u00a0\u00a0\u00a0 When a limited scale of business is needed to be carried out.\r\n\r\n5)\u00a0\u00a0\u00a0\u00a0\u00a0 Where a vast storehouse of knowledge, ideas, skills and expertise is not required.\r\n\r\n \r\n\r\nQUICK REVISION:<\/strong>\r\n\r\n \r\n\r\n\u25aa\u00a0 A sole proprietorship faces a limitation of unlimited liability on the owner.\r\n\r\n\u25aa\u00a0 there is less scope of expansion in such business.\r\n\r\n\u25aa\u00a0 There is always a risk of discontinuing the business early, as it depends upon the single owner.\r\n\r\n\u25aa\u00a0 There is always a chance of generation of limited ideas.\r\n\r\n \r\n\r\n \r\n\r\nSUMMARY:<\/strong>\r\n\r\n \r\n

      Any individual person, a group of persons can start up any form of business, and carry out its operations, and serve its products to the customers at large. Any form of business line, be it a partnership, or a company, or non profit organisation, it all starts up with the idea of a single man, known as a proprietor. And sometimes, if the proprietor wishes not to indulge anyone in the business, and start off alone, then this form of business is termed as a sole proprietorship.<\/p>\r\n \r\n

      Sole proprietorship means single ownership business, which is owned, managed and controlled by a single person. The owner brings in the entire amount of capital on its own, operates the business activities alone, bears all the risks and losses alone and at the end enjoys all the profits earned alone. There is an unlimited liability and no separation between the ownership and management, and no perpetual succession. As far as the registration is concerned, there is not a legal liability on the owner to get its business registered, apart from this some tax benefits are also enjoyed by the owner, as only individual taxes are paid and not the business tax.<\/p>\r\n \r\n

      The final account preparation under sole proprietorship form, includes the preparation of a trading account, profit & loss account, balance sheet (in case of a non manufacturing concern). And the preparation of manufacturing account, trading account, profit & loss account, and a balance sheet (in case of a manufacturing concern).<\/p>\r\n\r\n<\/div>\r\n \r\n

      The balance sheet preparation is the final step in the final accounts preparation. Balance sheet is a summarised form of statement, which reveals the position of the assets owned and the liabilities due upon the business, it is a way to know the exact financial position of the concern. A sole proprietor follows a horizontal method to prepare its balance sheet as at the end of the accounting year. The left hand side of the balance sheet presents the capital and liabilities and the right hand side showing the assets (either in the order of permanence or order of liquidity). A sole proprietorship faces a problem of unlimited liability, small amount of capital, less scope for expansion, limited ideas and lack of continuity, so therefore before setting up such form of business it is always advisable to look up at the suitability. This form of business should be stated only when the amount of capital required is small, where it is important to keep a direct contact with the customers, when continuity of the business is not an issue of concern, when a limited scale of business is needed to be carried out and where a vast storehouse of knowledge, ideas, skills and expertise is not required.<\/p>\r\n\r\n\r\n\r\n
      you can view video on Preparation of balance sheet under sole proprietorship<\/strong><\/td>\r\n\"\"<\/a><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\nFEW SUGGESTED READINGS:<\/strong>\r\n\r\n \r\n