Vocational scenario 

Having successfully completed your six-month probation as a Graduate Trainee at the accountancy firm, you have now been attached to a unit in the firm that deals with the provision of accountancy and consultancy services to small businesses that are typically set up as sole traders, not-for-profit or partnerships. The firm is careful about which small and emerging businesses it works with as it seeks to spot growth potential and identify and work with clients that have scalable business models.

Assignment activity and guidance

You are initially working with a selection of three of these small businesses that have been trading for three years and which now need annual trading statements to be compiled and submitted in line with government requirements. You have been given:  

• an extended trial balance for each business, including accruals, prepayments and figures for bad debts and depreciation 

• a range of comparative key performance ratios from the previous year.

The businesses are: 

1. Allaband Typing Services- a small not for profit organisation 

2. Rich Allaband- sole trader selling perfumes 

3. Allaband and Bhara- a small partnership business trading in second-hand books. These local businesses do not make use of contemporary software to support its bookkeeping and accounting function. This is something which concerns you as you feel that it represents an opportunity for the business to save time and resource.  

Your supervisor has provided the following Trial Balances and additional information for each of the three businesses/clients:

There was no cash in hand or in the bank on 31 December 2020. Rent of £1000 remained unpaid for the year 2021 on 31 December 2021.

Please note that 10% of trade receivables at 31.12 2021 should be written off as bad debts, £1000 should be accrued for insurances, furniture should be depreciated at the rate of 10% using the straight-line method and Closing Stock at 31 December 2021 totalled  £20,000.

Please note that office equipment bought in 2021 should be depreciated at the rate of 20% per year using the reducing balance method. Prepaid rent at 31 December 2021 amounted to £3000 and Closing inventory at 31 December 2021 totalled £21000. 

The files for each client include some ratios calculated for previous years as follows: 

Allaband Typing Services 2020 Surplus for the year: Revenue NIL, Staff costs:Total income= 30% 

Rich Allaband: 2020 Gross Profit Ratio=55%.  

                           2020 Current Ratio=1:1 

                           2020 Efficiency Ratio (Days’ credit taken) =60 days 

Allaband and Bhara: 2020 Current Ratio=50% 

                            2020 Efficiency Ratio (Days’ debtors in sales) = 80 days 

Your supervisor, one of the firm’s Key Account Managers, has asked you to compile the year-end financial statements ready for submission and provide, for each client, some detailed analysis of the figures produced, which will be presented in the form of an accompanying letter.  

Specifically, you will undertake the following: 

1. From the data provided, you are required to prepare the year-end financial statements, taking into consideration accounting principles, conventions and standards. You will need to make and show appropriate adjustments to both the income statement and thebalance sheet. 

2. Write an accompanying letter to the client that will be sent with the completed financial statements. 

The letter needs to include: 

• calculation of relevant profitably, liquidity, asset usage and investment ratios  

• critical evaluation of the performance to the business year on year (making reference to data you have calculated, and data provided from the previous year), with reference to relevant benchmarks as well as any limitations of using financial ratios as performance measures  

• an outline of the benefits of contemporary accounting software packages, with examples of products on the market  

• justified conclusions and recommendations for your client.