Sole Traders | O Level Accounting 7707 & IGCSE Accounting 0452 | Detailed Free Notes To Score An A Star (A*)
Advantages of Operating as Sole Trader
- Complete control over the business
- Not answerable to anyone.
- You are your own boss
- Can determine your own work hours, work conditions and timing
- All profits are for you.
- The sole trader does not have to share his profits with anyone.
- Business Secrecy
- Not required to make the accounts of the business public.
- Can put own ideas to work
- Decision making is fast as no collaboration required with anyone.
Disadvantages of Operating as a Sole Trader
- All losses are of the owner.
- Can become too occupied with work.
- Has to manage everything by himself.
- Expansion problems
- Can’t discuss business details with anyone as no partner
- Raising capital can be difficult
- No separate legal identity
- No limited liability i.e. unlimited liability
Income Statement
- Income statement tells the income, expenses, profits and losses for a particular period.
- Remember, income statement starts with “For the year/ period ended” not “As per” because it covers a specific period
- Accruals/ matching principle: the revenues and expenses must be matched to their appropriate periods, irrespective of when they are incurred.
- Ends with the calculation of Net Income/ Net profit/ profit after interest and tax.
- Also called profit and loss statement
Statement of Financial Position
- Also called Balance Sheet
- It provides a spot check of the business’s financial position, liquidity and assets/ liabilities/ owner’s equity at any given point.
- It has “As Per” Instead of “For the period ended” because it can be constructed at anytime.
- It is a way to prove the accounting equation: i.e. Net Assets (Non-Current Assets+ Current Assets – Current Liabilities) = Capital Employed (Long-term liabilities + Owner’s Equity)
Trading Business
- A trading business either produces goods or purchases them to sell them to the customers.
- Therefore, a trading business produces tangible products i.e. products that we can touch.
- In such businesses, if the products are being produced, a manufacturing account has to be created before Income Statement.
- In such businesses, if the products are being purchased and resold, there is a Cost of Goods Sold section.
- Usually, sales returns can occur in such businesses.
Service Business
- A service business sells intangible products i.e. services
- Usually, there can be no sales returns.
- There is no Cost of Goods Sold section in such businesses.
Income Statement for a Sole Trader as a trading business that does not manufacture itself
- Remember, bracket means that something is being subtracted or has a negative value
Usually, the following format is used for Income Statement
Income Statement
XYZ Company
For the Year Ended XX-XXX-XXXX
| $ | $ | |
| Sales Revenue | – | |
| Less: Sales Returns | (-) | |
| Â Â Â Â Â Â Â Â Â Â Â Net Sales | – | |
| Less; Cost of Goods Sold | ||
| Opening Inventory (From Trial Balance) | – | |
| Add: Purchases
Purchases Add: Carraige Inward/ Other Direct Expenses Less: Purchase Return Net Purchases |
– – (-) – |
|
| Less: Closing Inventory (From Adjustments Under the Trial Balance) | (-) | |
| Â Â Â Â Â Â Â Â Â Â Cost of Goods Sold | (-) | |
| Â Â Â Â Â Â Â Â Â Â Gross Profit | – | |
| Add: Other Income | – | |
| Less: Operative Expenses | ||
| Electricity Expense | – | |
| Utility Expense | – | |
| Phone Bill | – | |
| Insurance Expense | – | |
| Employee Salaries | – | |
| Carriage Outwards | – | |
| Depreciation Expense | – | |
| Bad Debts
Add: New Provision on Doubtful Debts Less; Old Provision on Doubtful Debts (If the value is a positive number) (If the value is a negative number) |
– |
– |
| Loss of Disposal | – | |
| Interest Expense | – | |
| Any Other Operative Expense | – | |
| Â Â Â Â Â Â Â Â Â Â Total Operative Expenses | (-) | |
| Â Â Â Â Â Â Â Â Â Â Net Income (Can be profit or loss) | – |
Income Statement if the business is a service business
Income Statement
XYZ Company
For the Year Ended XX-XXX-XXXX
| $ | $ | |
| Sales Revenue | – | |
| Â Â Â Â Â Â Â Â Â Â Gross Profit | – | |
| Add: Other Income | – | |
| Less: Operative Expenses | ||
| Electricity Expense | – | |
| Utility Expense | – | |
| Phone Bill | – | |
| Insurance Expense | – | |
| Employee Salaries | – | |
| Depreciation Expense | – | |
| Bad Debts
Add: New Provision on Doubtful Debts Less; Old Provision on Doubtful Debts (If the value is a positive number) (If the value is a negative number) |
– |
– |
| Loss of Disposal | – | |
| Interest Expense | – | |
| Any Other Operative Expense | – | |
| Â Â Â Â Â Â Â Â Â Â Total Operative Expenses | (-) | |
| Â Â Â Â Â Â Â Â Â Â Net Income (Can be profit or loss) | – |
XYZ Company
Statement of Financial Position
As Per XX-XXX-XXXX
| $ | $ | $ | |
| Assets | |||
| Non-Current Assets | |||
| Non-Current Asset (At Cost) | – | ||
| Less: Total Accumulated Depreciation for the Asset (New Provision + Old Provision) | (-) | ||
| Â Â Â Â Â Net Value of Non-Current Asset 2 | – | ||
| Non-Current Asset (At Cost) | – | ||
| Less: Total Accumulated Depreciation for the Asset (New Provision + Old Provision) | (-) | ||
| Â Â Â Â Â Net Value of Non-Current Asset 2 | – | ||
| Â Â Â Â Â Total Non-Current Assets | – | ||
| Add: Current Assets | |||
| Inventory (Closing Inventory from adjustments NOT trial balance) | – | ||
| Prepaid Expenses | – | ||
| Debtors (Accounts Receivable – New Provision for Doubtful Debts) | – | ||
| Bank | – | ||
| Cash at Hand | – | ||
| Â Â Â Â Â Total Current Assets | – | ||
| Less: Current Liabilities | |||
| Creditors | – | ||
| Overdraft | – | ||
| Accrued Expenses (Including any interest payable) | – | ||
| Notes Payable | – | ||
| Â Â Â Â Total Current Liabilities | (-) | ||
| Â Â Â Â Net Current Assets (Working Capital) | – | ||
| Â Â Â Â Net Total Assets | |||
| Capital Employed | |||
| Non-Current Liabilities | |||
| Â Â Â Â Mortgage | – | ||
| Â Â Â Â Bank Load | – | ||
| Â Â Â Â Debentures | – | ||
| Â Â Â Â Any Other Long-Term Loan | – | ||
| Add: Owner’s Equity | |||
| Capital | – | ||
| Less: Drawings | (-) | ||
| Add: Retained Earnings (Net Income from Income Statement) | – | ||
|      Total Owner’s Equity | – | ||
| Â Â Â Â Â Â Capital Employed | – |
- Remember, Net total assets and the capital employed must equal at the end, otherwise there is a problem in the solution because basic accounting equation must be satisfied
- Goods of money or item taken by owner for personal use is called drawings
- It only shows up in statement of financial position, not in income statement/ profit and loss account
- It will be reduced from that account as well, and show up in owner’s equity section as a deduction
- Intangible assets do show up after non-current assets in only one condition
- If the business has purchased goodwill.
- Intangible assets can’t be touched but they exist.
- Goodwill is the difference between the value of the business assets and the actual value paid to purchase it.
- It is the good name, beneficial market position and brand that the business has established over the years.
- Inherent goodwill is not mentioned in books of accounts
- Under the money measurement principle
- We can’t measure such goodwill in monetary value
- Under the money measurement principle
- Only when the business is sold or purchased can such a value be ascertained and is shown in the books of accounts in statement of financial position as an intangible asset.
- Why?
- Say new owner’s paid 1,000,000 for a business that has assets of only 900,000 and no liability, where will the extra 100,000 be adjusted to equate assets with capital employed?
- That is part of purchased goodwill.
- Why?
- Important to note
- An adjustment is basically something written below the trial balance that will end up showing in both the income statement and the balance sheet.
- An apportionment is a division between a value that is stated inside the trial balance completely under one account when it should be in two places
- It will show in only one statement.
- Do check for an account named something like X% loan, here a hidden entry is of the interest expense for that percentage for the complete year. Don’t forget to pass that entry
- For depreciation, do consider if the entire year has passed since the asset was purchased, and does it mention if a full year depreciation is charged irrespective in the year of purchase/ sale, or none is charged in either.
