Prepare a letter to Kwame advising him of: (a) The advantages and dis-advantages of operating as a partnership. (b) How the partnership will be tax and the responsibilities of each partner.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Case 4
Part A
Kwame Lee has been made redundant from a managerial position in an oil company in
Trinidad where he had worked for the past fifteen years. His plan is to go into private
practice as an environmental engineer consultant working in Trinidad and the Eastern
Caribbean countries.
Initially he was unsure whether he should operate as a sole proprietor, incorporate a
company in which he will be the sole director; or operate in
school friend. However, he was advised that a partnership would be the best structure.
Kwame intends to employ staff and invest excess cash from the business in purchasing
stocks/shares. The stocks/shares will be purchased by the partnership but will be held in
trust for Kwame and his children.
Required
Prepare a letter to Kwame advising him of:
(a) The advantages and dis-advantages of operating as a partnership.
(b) How the partnership will be tax and the responsibilities of each partner.
(c) How the income from the stock/shares will be treated.
(d) The direct taxes and indirect taxes that he will need to consider, the tax filing
obligations which he is required to fulfil for compliance, the powers of the Revenue
Authority and his responsibility as a taxpayer.
Kwame Lee has heard the term ‘Appropriation Account’, but he does not understand what it
means. He asks that you explain the need for an appropriation account and what is included
in this account. He would like you to give practical examples.
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