Recalculating Profits: Private Side - Capital Statements: Business Assets and Liabilities
When a balance sheet is supplied, the business assets and liabilities will have been reconciled by the accountant and can therefore be left out of the capital computation, apart from any which have been omitted from the accounts. Drawings from the business will be included as income, and any private cash introduced into the business as an outgoing.
Any argument that the amount of personal and private expenditure should be constrained by the drawings figure should be resisted. It might be stated that the drawings were based on the regular sum taken by the taxpayer to cover living expenses, and only money put into deposit accounts came out of omitted profits. You should not accept this without testing the adequacy of the drawings figure.
Where full accounts have been provided, living expenses will have to take into account any expenses met by the business, and adjusted in the computation. Where accounts have not been provided, or at least a balance sheet has not, you will have to include business assets and liabilities in the computation of total wealth, in particular
- trade debtors, stock and the cost price of fixtures and fittings, machinery and plant and other business assets
- trade creditors and business loans and overdrafts.
Where business capital is included in the computation, the difference between the capital at the beginning and end of the year, adjusted for living expenses and other personal spending, represents business profits. Where, however, the business capital is excluded the difference is additional profits over and above those shown by the accounts.