SOFP

• Types of business entity

  • Sole traders
  • Partnerships
  • Companies
• Sole traders


  • No legal distinction between owner and business meaning unlimited liability
  • Simple to set up and administer
  • Pay income tax and NIC on profits
• Partnerships


  • Two or more individuals working together
  • Every partner is jointly and severally liable for the business
  • Each partner pays income tax and NIC on their share of the profits
  • Relatively simple to set up and administer, but a partnership agreement is advisable
• Companies


  • A separate legal identity
  • Managed by Directors
  • Owned by Shareholders
  • Offers limited liability to the shareholders
  • Private companies (Ltd) relatively straightforward to set up and administer, but can only trade shares on a private basis. Only need £1 share capital to set up
  • Public Limited Companies (PLC) complex to set up and administer but can potentially sell shares via a stock exchange (if 'listed'). Need £50,000+ share capital to set up
  • Companies pay corporation tax on their profits. Shareholders pay income tax on their dividends
• Limited Liability Partnerships (LLP)


  • Relatively new concept favoured by professional firms (solicitors, accountants etc.)
  • A hybrid between a company and a conventional partnership
  • Legally LLPs are corporate bodies and so offer limited liability, but the LLP does not pay corporation tax. Instead the members (i.e. the partners) pay income tax and NIC on their share of profits
• Users of Financial Information and why they find it important

  • Shareholders --> Invest or Divest?
  • Lenders --> Safe to Lend?
  • Suppliers --> Safe to offer Credit?
  • Customers --> Warranty and ongoing Support
  • Government --> Tax due and Industrial Strategy
  • Competitors --> Benchmarking Performance
  • Special Interest Groups --> Enviromental impact
  • Employees/Trade Unions --> Wage Negotations
  • Directors/Managers --> Planning, Control and Decision Making
• Useful financial information is

  • Accurate
  • Relevant
  • Timely
  • Understandable
  • Comparable
• Types of accountants

  • Management
  • Financial
• Financial Accounting


  • Reporting a 'true & fair' view of the company to external users
  • Historic reporting giving broad overview of company's performance & position
  • Highly accurate (possibly audited) and regulated by financial reporting standards
  • Typically produced annually in the form of published annual accounts
• Management Accounting


  • Internal use only to assist in planning, control & decision making
  • Detailed historic reporting & future forecasting on numerous aspects of the business
  • Less accurate but produced very quickly to ensure up to date information
  • Produced as required (daily, weekly, monthly, annually)
• Statement of Financial Position (SOFP)

  • Reports on a business's 'position' at a point in time by detailing its:
  • Assets - What it owns (categorised into current and non-current assets)
  • Liabilities - What it owes (categorised into current and non-current liabilities)
  • Equity - The 'book-value' of the business at that point in time
  • The SOFP is a visualisation of the Accounting Equation
• Accounting Equation

  Equity = Assets - Liabilities
• Equity = Share Capital + Retained Profit