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IAB L 3FINANCIAL STATEMENTS FOR SOLE
TRADERS
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This book was prepared for Home iLearn Ltd.
It is part of a series of chapters developed for the course on ACCA F6 and is published by Home iLearn
Ltd.
Home iLearn Ltd
6! "ath #oad
Cranford$ HounslowT%& '()
www.homeilearn.com
* Home iLearn +!,-
All rihts reserved. /o part of this work may be reproduced in any form$ or by any means$ without
permission in writin from the author.
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Table of Contents
9 FINANCIAL STATEMENTS FOR SOLE TRADERS 4
SOLE TRADERS..........................................................................4
FINANCIAL STATEMENTS FOR SOLE TRADER................................4
OTHER ITEMS IN FINANCIAL STATEMENTS....................................7
SUMMARY OF YEAR END ADJUSTMENTS FOR FINANCIAL
STATEMENTS...........................................................................
!RE!ARIN" FINANCIAL STATEMENT FROM THE E#TENDED TRIAL
$ALANCE.................................................................................%
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9 FINANCIAL STATEMENTS FOR SOLETRADERS
O&ER&IE'
This chapter is about preparing fnancial statements or a single
owner o a business, called a sole trader.
SOLE TRADERS
A sole trader is a business in which there is onl one owner who has
complete control o!er the business and its management.
The legal ownership structure does not di"erentiate between the
owner and the business entit #although rom an accounting
perspecti!e it does$. All the profts, losses, assets and liabilities are
thus the direct responsibilit and entitlement o the owner. This
means that an liabilit o the business is also the responsibilit o
the owner #unli%e a compan$.
AD&ANTA"ES DISAD&ANTA"ES
• &ase o ormation and
dissolution
• 'imple to run
• Low start(up costs
• Low operational o!erheads
• )ewer regulations
• *ontrol o!er the business
operations
• +wnership o all profts
• nlimited liabilit- +wners are
personall responsible or the
obligations and liabilities o
the business
• +wner is liable or the actions
o emploees representing
the business
• Limited lie- I the owner dies,
the business dies too
• suall it is dicult or the
owner to raise unds or
e/pansion
FINANCIAL STATEMENTS FOR SOLE TRADER
The fnancial accounts or sole traders comprise o the ollowing
statements-
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• Income 'tatement
• 'tatement o )inancial osition
e introduced these statements in the pre!ious unit, Accounts
reparation. e will now ta%e a closer loo% at each o them.
THE INCOME STATEMENT
The Income 'tatement shows the proft and loss o a business o!er
an accounting period. It is tpicall prepared on an annual, uarterl
or monthl basis.
An e/ample o an Income 'tatement is shown below-
In(o)e State)ent fo* Yea* En+e+ , De( %-#%Sales /0--+pening in!entor 1,044urchases 02,544*losing in!entor #2,444$Less- *ost o sales #01,644$"*oss 1*o2t 30-ages #07,444$Insurance #6,444$8epreciation e/pense #3,544$Irreco!erable debts #3,044$
Net loss fo* ea* 54307-6
Note: the Income Statement relates to a period e.g. sales
and profts or a whole month or a whole year
Co)1onents of an In(o)e State)ent
• Sales- the cash generated b a business through sales o goods.
Also called re!enues.
• Cost of oo+s sol+8 cost o sales comprise opening in!entor
plus purchases less closing in!entor. urchases comprise goods
directl related to what is being sold #e.g. boo%s that are bought
b a boo% retailer rom a supplier$.
• "*oss 1*o2t8 the di"erence between sales and cost o goods
sold.
• E1enses8 whereas cost o sales relates directl to what is being
sold, e/penses relate to all other e/penditure and o!erheads
#rent, rates, oce costs, emploee costs, insurance etc$.
• Net 1*o2t8 9et proft shows the o!erall proftabilit o the
business. It is eual to :sales less cost o sales less e/penses;.
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STATEMENT OF FINANCIAL !OSITION
The 'tatement o )inancial osition summarises the assets and
liabilities o a business. This includes both non(current #o!er a ear$
and current #under a ear$ assets and liabilities.
A 'tatement o )inancial osition is shown below-
State)ent of F:nan(:al !os:t:on at , De( %-#%
Non;(<**ent assets
8eli!er !ans 4%0--
C<**ent assets
In!entor Trade recei!ables
Less allowance or doubtul debts
repaments
*ash
2,44414,044
#3,344$
1,444
15,544%03--
Total assets 3/0--
C<**ent l:ab:l:t:es
Trade paables
Accruals
#6,354$
#12,444$5%0,-6
Non;(<**ent l:ab:l:t:es
Ban% loan 5%0--6Total l:ab:l:t:es 5430/-6
Net assets %0%-
*apital < at beginning o ear =6,444roft>loss or ear
8rawings
#0=,754$
#1,444$Ca1:tal %0%-
Note: the Statement o Financial Position relates to a
particular point/day in time (NO a period!
Liabilities are subtracted rom assets to gi!e a business?s :net
assets; #top hal o statement$. This euals :capital" #shown b
the bottom hal o this statement$ which is the amount o mone
in!ested b the owner #includes profts that the owner has earned
reduced b drawings ta%en out b the owner$.
This is summarised in the Accounting &uation-
Assets = L:ab:l:t:es > Ca1:tal 5t?:s also e@<als Net Assets6
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Assets = L:ab:l:t:es > Ca1:tal !*o2t = D*aB:ns
ASSETS
• Non;(<**ent assets8 Assets that are used primaril or carring
out business acti!ities and are not e/pected to be con!erted into
cash, irrespecti!e o their !alue, in the due course o time.
suall held or greater than 1 ear e.g. plant, machiner,
computers, urniture, building, land, !ehicles.
• C<**ent assets8 These are short term assets, which can be
readil con!erted to cash within 1 ear e.g. cash, in!entor,
accounts recei!ables.
LIA$ILITIES
The obligation o paing a debt that a compan owes to an e/ternal
part is %nown as liabilities. The e/ternal parties are usuall the
sta%eholders li%e ban%s and creditors #also called paables$.
Liabilities are usuall show up in the orm o unpaid bills>in!oices or
loans that a compan is bound to pa. *lassifcation o liabilities is
as ollows-
•
C<**ent l:ab:l:t:es8 'hort term liabilities that are paable within1 ear eg. +!er drat, accounts paable, accruals.
• Non;(<**ent l:ab:l:t:es8 Long term liabilities that are due in
greater than 1 ear e.g. ban% loans.
O'NERS EUITY OR CA!ITAL
This shows the amount o in!estment that the owner has made in
the business. As shown abo!e in the Accounting &uation, it is a
combination o the amount that the owner has in!ested in the
business #opening capital$ plus profts less drawings #amounts
withdrawn b the owner$.
OTHER ITEMS IN FINANCIAL STATEMENTS
There are a number o other double entr balances that ma ha!e
to be transerred into the income statement. These include-
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• Ca**:ae :nBa*+s- the transport costs incurred b the buer,
e.g. cost o deli!er. *ost o carriage is added to the cost o
purchases.• Ca**:ae o<tBa*+s8 when goods are sold to the buer and
seller pas the carriage charge. This cost is e/pensed in the
income statement.
• Sales *et<*ns8 when a credit customer returns the goods to
the business. 'ales returns are subtracted rom the sales
re!enue fgure.
• !<*(?ases *et<*ns8 when a business returns goods to the
supplier. urchases returns are subtracted rom the purchases
in the income statement.
• D:s(o<nt *e(e:e+- a percentage discount allowed on goods
purchased or uic% settlement. It is added to the total income
o the business as income recei!ed.
• D:s(o<nt alloBe+8 a percentage discount allowed on sale o
goods to the buers or uic% settlement. The discount
allowed amount is added to the e/penses in the income
statement.
'er!ice sector businesses do not incorporate a calculation o gross
proft because business is not trading in goods. In act the incomestatement begins with the income #ees rom clients, charges, etc.$@
other income is added such as rent recei!ed and the e/penses are
deducted to compute the net proft #loss$ or the ear.
E#AM!LE
i!en below are balances ta%en rom a sole trader?s ledger accountson 31 arch 2412-
'ales ledger control account #recei!ables$ 50,344 Telephone 1,714urchases ledger control account #paables$ 21,C04Deat and light 3,214otor !ehicles at cost 03,744*omputer euipment at cost 5,1C4*arriage inwards 1,604*arriage outwards 0,=04ages 77,514Loan interest 544*apital 50,=448rawings 30,444
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Allowance or doubtul debts 5C4Ban% o!erdrat 0,704urchases 23=,744
ett cash =4'ales 022,454Insurance 0,5=4Accumulated depreciation < motor !ehicles 13,244Accumulated depreciation < computer euipment 3,404'toc% at 1 April 2447 20,544Loan C,144Eent 35,=04
INCOME STATEMENT
In(o)e state)ent fo* M:lton Te(?nolo:es fo* t?e ea*
en+e+ ,st Ma*(? %-%
'ales
Less- *ost o sales
+pening 'toc%
*arriage inwards
urchases
Less- *losing stoc%
ross roft
Less- &/penses
Telephone
Deat and light
*arriage outwards
ages
Loan interest
Insurance
Eent
8epreciation(otor !ehicles
8epreciation(*omputer euipment
Irreco!erable debts
Allowance or doubtul debt
adFustment
Total e/penses
Net !*o2t
20,544
1,604
23=,7442=3,104
#15,C44$
1,C64
3,214
0=04
77,514544
3,624
35,=04
12,074
644
544
124
022,454
207,304
170,714
101344
,,04-
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STATEMENT OF FINANCIAL !OSITION
$alan(e S?eet of M:lton Te(?nolo:es as at , Ma*(? %-%Cost A((<)<late+
De1*e(:at:on
Net booG
&al<e
F:e+ Assets
otor !ehicles 03,744 20,C74 1C,C34*omputer euipment 5,1C4 3,604 1,204
0C,CC4 2C,C14 24,474
C<**ent Assets'toc% 15,C448ebtors 53,=44Less allowance or
doubtul debts
#734$ =C,=74
repaments 564ett cash =4 =6,324C<**ent L:ab:l:t:es 5;6Ban% o!erdrat 0,704*reditors 21,C04Accruals 7,44 27,2C4
*urrent assets 02,404Net C<**ent Assets
#Total assets less
current liabilities$
=2,114
Long term liabilit-Loan #C,144$Net assets 40--Ca1:tal+pening capital 50=449et proft or the
ear
33,014
CC,414Less drawings #30,444$!*o1*:eto*s f<n+s 40--
SUMMARY OF YEAR END ADJUSTMENTS FOR
FINANCIAL STATEMENTS
ADJUSTMENTS FINANCIAL STATEMENTClos:n :nento* *losing in!entor is deducted rom purchases
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in the income statement and classifed as
current asset in the statement o fnancial
position
A((*<e+ e1enses Accrued e/penses are e/pensed in the income
statement and classifed as current liabilit in
the statement o fnancial position!*e1a:+ e1enses repaid e/penses are deducted rom the total
e/penses in the income statement and
classifed as current asset in the statement o
fnancial positionA((*<e+ :n(o)e Accrued income is added to the income o the
business and shown as current asset in the
statement o fnancial position
!*e1a:+ :n(o)e repaid income is deducted rom income o thebusiness and shown as current liabilit in the
statement o fnancial positionDe1*e(:at:on an+
a((<)<late+
+e1*e(:at:on
8epreciation charge is e/pensed in the income
statement and accumulated depreciation
reduces the cost o non current asset to gi!e
carring amountD:s1osal of non
(<**ent assets
ain #loss$ on disposal is treated as income
#e/pense$ in the income statement and
disposal reduces the amount o non current
assetsI**e(oe*able +ebts These are treated as an e/pense and the trade
recei!ables fgure is reduced b the amount o
irreco!erable debtC*eat:on:n(*ease :n
alloBan(e fo* +o<btf<l
+ebts
Increase in allowance or doubtul debts is
treated as an e/pense and trade recei!able
fgure is reduced b the total amount o
allowanceDe(*ease :n alloBan(e
fo* +o<btf<l +ebts
8ecrease in allowance or doubtul debts is
treated as an income and trade recei!able
fgure is reduced b the total amount o
allowanceD*aB:ns 8rawings are deducted rom purchases in the
income statement and added to Gdrawings? in
the statement o fnancial position
!RE!ARIN" FINANCIAL STATEMENT FROM THE
E#TENDED TRIAL $ALANCE
The fnal accounts o a sole trader in!ol!e the preparation o an
e/tended trial balance #as we co!ered in the unit, Accounts
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reparation$. )rom this, we can create the Income 'tatement along
with a 'tatement o )inancial osition.
e illustrate this with an e/ample. e use an initial trial balance
and a summarised e/tended trial balance but or the e/am ou will
need to be comortable preparing and using an e/tended trial
balance. lease reer to the pre!ious unit, Accounts reparation, or
detailed inormation on preparing an e/tended trial balance.
E#AM!LE
Hames *aan?s initial trial balance at 31 arch 24C is shown below-
T*:al $alan(e of M:lton Te(?nolo:es as at , Ma*(? %-#/
'ales ledger control account ( recei!ables 50,344 Telephone 1,714urchases ledger control account ( paables 21,C04Deat and light 3,214otor !ehicles at cost 03,744*omputer euipment at cost 5,1C4*arriage inwards 1,604*arriage outwards 0,=04ages 77,514Loan interest 544*apital 50,=44
8rawings 30,444Allowance or doubtul debts 5C4Ban% o!erdrat 0,704urchases 23=,744ett cash =4'ales 022,454Insurance 0,5=4Accumulated depreciation < motor !ehicles 13,244Accumulated depreciation< computer euipment 3,404'toc% at 1 April 247 20,544Loan C,144Eent 35,=04
%/0- %/0-
)rom the initial trial balance we can prepare an e/tended trial
balance using the ollowing additional inormation-
• Irreco!erable debts are J744 and allowance or doubtul debts are
J244
• Insurance prepament is J=04 and accrual or telephone e/penses
is J1C4
• 8epreciation e/pense or motor !ehicles is J11,=74 and computer
euipment is J644• *losing in!entor is J15,C44
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This is shown below #see wor%ings ne/t to the account categoriesor how the abo!e inormation is used$
Eten+e+ T*:al $alan(e of M:lton Te(?nolo:es at , Ma*(? %-#/
'ales ledger control account < Eecei!ables
#50,344 < 744$
53,=44
Telephone #1,714 K 1C4$ 1,C64urchases ledger control account ( aables 21,C04Deat and light 3,214otor !ehicles at cost 03,744*omputer euipment at cost 5,1C4*arriage inwards 1,604*arriage outwards 0,=04ages 77,514Loan interest 544
*apital 50,=448rawings 30,444Allowance or doubtul debts #5C4 K 244$ 7C
4Ban% o!erdrat 0,70
4urchases 23=,744ett cash =4'ales 022,45
4Insurance #0,5=4 < =04$ 3,624Accum depreciation < motor !ehicles #13,244 K
11,=74$
20,C7
4Accum depreciation< computer euipment #3,404
K 644$
3,60
4'toc% at 1 April 247 20,544Loan C,14
4Eent 35,=04In!entor at 31 arch 24C #K15,C44 < 15,C44$ 15,C44 15,C448epreciation e/pense(motor !ehicles #K11,=74$ 11,=748epreciation e/pense(computer euipment
#K644$
644
Accruals #(1C4$ 1C4repaments #K=04$ =04
Allowance or doubtul debt adFustment #K244$ 244Irreco!erable debt e/pense #K744$ 744
70,7- 70,
7-
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)inancial statements can then be prepared rom the e/tended trialbalance as ollows-
INCOME STATEMENT
In(o)e State)ent fo* M:lton Te(?nolo:es fo* t?e ea* en+e+ ,st
Ma*(? %-#/
Sales
Less- *ost o sales
+pening in!entor
*arriage inwards
urchases
Less- *losing in!entor
"*oss 1*o2t
Less- &/penses
Telephone
Deat and light
*arriage outwards
ages
Loan interest
InsuranceEent
8epreciation(otor !ehicles
8epreciation(*omputer euipment
Irreco!erable debts
Allowance or doubtul debt
adFustment
Net !*o2t
20,544
1,604
23=,744
2=3,104
#15,C44$
1,C64
3,214
0,=04
77,514
544
3,62435,=04
11,=74
644
744
244
4%%0--
#207,304$
7407-
#104,7C4$
,,09,-
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STATEMENT OF FINANCIAL !OSITION
State)ent of F:nan(:al !os:t:on of M:lton Te(?nolo:es as at ,
Ma*(? %-#/
Non;(<**ent Assets
otor !ehicles 03,744 #20,C74$ 1C,C34*omputer euipment 5,1C4 #3,604$ 1,204
0C,CC4 #2C,C14$ 24,474
C<**ent Assets
In!entor 15,C44Eecei!ables 52,C24repaments =04ett cash =4
=6,324C<**ent L:ab:l:t:esBan% o!erdrat #0,704$aables #21,C04$Accruals #1C4$
#2=,7=4$Net C<**ent Assets 02,5=4
Lon te*) l:ab:l:tLoan #C,144$Net assets 40,-
Ca1:tal+pening capital 50,=449et proft or ear 33,634Less drawings #30,444$!*o1*:eto*s f<n+s 40,-
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