Sole Traders (Copy)
Cheat Sheet: 5.1 Sole Traders
O Level and IGCSE Accounting – Quick Revision
Definition of a Sole Trader
- A sole trader is a business owned and operated by one person, who bears all risks, enjoys all profits, and has unlimited liability.
Advantages and Disadvantages
| Advantages | Disadvantages |
|---|---|
| Easy and inexpensive to set up | Unlimited liability |
| Full control over decision-making | Limited capital |
| Keeps all the profits | Difficult to raise large-scale finance |
| Simple accounting and reporting requirements | No continuity after death or withdrawal |
Trading vs Service Businesses
| Trading Business | Service Business |
|---|---|
| Buys goods to sell at profit | Provides services to customers |
| Includes sales, cost of sales, and gross profit | No sales or gross profit (no inventory involved) |
| Example: Grocery store | Example: Barber shop, plumber |
Income Statement Format
For Trading Business:
Income Statement for the Year Ended [Date]
| Particulars | Amount ($) |
|---|---|
| Sales | xxxx |
| Less: Sales Returns | (xxx) |
| Net Sales | xxxx |
| Less: Cost of Sales | |
| Opening Inventory | xxxx |
| Add: Purchases | xxxx |
| Less: Purchase Returns | (xxx) |
| Add: Carriage Inwards | xxx |
| Cost of Goods Available for Sale | xxxx |
| Less: Closing Inventory | (xxx) |
| Cost of Sales | xxxx |
| Gross Profit | xxxx |
| Add: Other Income (e.g., Rent Received) | xxxx |
| Less: Expenses (e.g., Wages, Rent, Depreciation) | (xxxx) |
| Profit for the Year | xxxx |
For Service Business:
No inventory or cost of sales.
Profit = Income – Expenses
Statement of Financial Position (SOFP)
As at [Date]
| Assets | Amount ($) |
|---|---|
| Non-Current Assets | |
| Equipment, Vehicles (after depreciation) | xxxx |
| Current Assets | |
| Inventory | xxxx |
| Trade Receivables | xxxx |
| Prepaid Expenses | xxxx |
| Bank/Cash | xxxx |
| Total Assets | xxxx |
| Equity and Liabilities | Amount ($) |
|---|---|
| Owner’s Equity (Capital) | xxxx |
| Add: Profit for the year | xxxx |
| Less: Drawings (incl. goods for own use) | (xxx) |
| Closing Capital | xxxx |
| Non-Current Liabilities | |
| Long-term Loan | xxxx |
| Current Liabilities | |
| Trade Payables | xxxx |
| Accrued Expenses | xxxx |
| Bank Overdraft | xxxx |
| Total Equity + Liabilities | xxxx |
Inter-Relationship in SOFP
- Assets = Liabilities + Capital
(Accounting Equation) - Profit increases capital
- Drawings reduce capital
- Accruals and prepayments adjust current liabilities/assets
Adjustments in Financial Statements
| Adjustment | Effect |
|---|---|
| Depreciation | Increases expenses, reduces non-current assets |
| Accrued Expense | Added to expenses, shown as current liability |
| Prepaid Expense | Deducted from expenses, shown as current asset |
| Accrued Income | Added to income, shown as current asset |
| Prepaid Income | Deducted from income, shown as current liability |
| Irrecoverable Debts | Increase expenses, reduce trade receivables |
| Provision for Doubtful Debts | Increase expenses, reduce trade receivables |
| Drawings of Goods | Deduct from purchases and drawings; does not affect income statement directly |
Example Adjustment for Drawings of Goods
- Goods taken by owner for personal use = $500
- Original purchases = $10,000
Revised Purchases = 10,000 − 500 = $9,500
Drawings = Increased by $500