Sole Traders (Copy)

Statement of Profit or Loss (Income Statement):
- Shows the revenues and expenses of a sole trader, ultimately calculating the net profit or loss.
- Formula:
```
Net Profit (or Loss) = Revenue - Expenses
```
- Key Items:
  - Sales Revenue: Income from selling goods or services.
  - Cost of Sales: Direct cost of producing goods/services sold.
  - Gross Profit: Sales Revenue – Cost of Sales.
  - Operating Expenses: Indirect costs such as rent, wages, utilities.
  - Net Profit: Gross Profit – Operating Expenses.
Statement of Financial Position (Balance Sheet):
- Shows the financial position of the sole trader at a specific point in time.
- Formula:
```
Assets = Liabilities + Owner’s Equity
```
- Key Items:
  - Assets: What the business owns (e.g., cash, inventory, equipment).
  - Liabilities: What the business owes (e.g., loans, accounts payable).
  - Owner’s Equity: The owner’s claim after liabilities (e.g., capital, retained earnings).

Item	Amount
Assets
Current Assets
– Cash	$10,000
– Accounts Receivable	$5,000
– Inventory	$8,000
Total Current Assets	$23,000
Non-Current Assets
– Equipment	$15,000
Total Non-Current Assets	$15,000
Total Assets	$38,000
Liabilities
Current Liabilities
– Accounts Payable	$4,000
– Short-term Loan	$3,000
Total Current Liabilities	$7,000
Non-Current Liabilities
– Long-term Loan	$10,000
Total Liabilities	$17,000
Equity
– Owner’s Capital	$20,000
Total Equity	$20,000
Total Liabilities and Equity	$38,000

Adjustment Type	Description	Example
Accruals	Income or expenses that have been incurred but not yet received or paid.	Accrued income: Rent income earned but not yet received.
Prepayments	Income or expenses that have been received or paid in advance but not yet earned or incurred.	Prepaid expense: Insurance paid for the upcoming year.
Irrecoverable Debts	Debts that are unlikely to be collected and are written off.	A customer owes $500 but is declared bankrupt.
Depreciation	Allocating the cost of a non-current asset over its useful life.	Depreciating a machine worth $5,000 over 5 years.
Inventory Valuation	Ensuring that inventory is valued at the lower of cost or net realizable value.	Valuing inventory at the cost of $10 per unit or market value of $12 per unit, whichever is lower.
Correction of Errors	Adjusting any mistakes in the accounting records.	Correcting a sales transaction recorded in the wrong account.

Accrued Income:

Debit: Accrued Income (Asset)   500
Credit: Income (Revenue)        500

Accrued Expense:

Debit: Expense (e.g., Wages)    1,000
Credit: Accrued Expenses (Liability) 1,000

Prepaid Income:

Debit: Prepaid Income (Liability)  300
Credit: Income (Revenue)           300

Prepaid Expense:

Debit: Expense (e.g., Insurance)  200
Credit: Prepaid Expense (Asset)   200

Irrecoverable Debt:

Debit: Irrecoverable Debt Expense (Income Statement) 200
Credit: Accounts Receivable (Balance Sheet)           200

Depreciation:

Debit: Depreciation Expense (Income Statement)   1,000
Credit: Accumulated Depreciation (Balance Sheet) 1,000

Inventory Adjustment:

Debit: Inventory (Balance Sheet)     100
Credit: Cost of Goods Sold (Income Statement)   100

Statement of Profit or Loss: Shows revenues, expenses, and net profit or loss.
- Net Profit = Revenue – Expenses
Statement of Financial Position: Shows assets, liabilities, and owner’s equity.
- Assets = Liabilities + Equity
Adjustments: Include accruals, prepayments, depreciation, and correction of errors, which ensure that financial statements reflect the true financial position.

These statements provide a clear view of the sole trader’s financial performance and position, which is important for decision-making.

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