Chapter 7
Preparation of a
Sole Trader’s
Financial Statements
Two of the Most Important
Financial Statements
There are two main reports prepared for sole
traders. These are the:
• The Income Statement (also called a Trading
and Profit and Loss Account)
• The Balance Sheet
Two of the Most Important
Financial Statements
An income statement is used to determine
whether a firm made a profit or loss for a
particular period. The money used up in
generating revenue is deducted from
money earned.
In a balance sheet, the firm presents its
assets, liabilities, and capital. It shows the
worth of the organisation at a particular
point
A typical Income Statement
A Typical Income Statement:
Gross Profit Calculation
Gross profit =
Net Sales - Cost of sales
Net Sales =
Sales - returns inwards (goods returned by customers)
Cost of Sales =
Opening stock + Net purchases -Closing stock
Net purchases =
Purchases + Carriage inwards (the cost of bringing
goods to our premises) - Returns outwards
A typical Income Statement:
Net Profit Calculation
Net profit =
Gross profit + Other revenue earned Expenses
A typical Balance Sheet
A Typical Balance Sheet:
Presentation of Working Capital
Working Capital=
Total Current Assets – Total Current Liabilities
Working capital tells the owner the extent to
which he can pay amounts due within a few
weeks or months.
A Typical Balance Sheet:
Presentation of Working Capital
Current assets
$
Inventory
1500
Short term investments
12000
Bank
40000
Cash
500
Current liabilities
Bank overdraft
750
53,250
$
54000
Capital and
Revenue Expenditure
It is very important to know the difference between
capital expenditure and revenue expenditure.
Capital expenditure is any spending on fixed assets,
whether that is to purchase new fixed assets or to
extend fixed asset lives.
Revenue expenditure is any spending on goods and
services that facilitate daily business operations.
Capital and revenue expenditure
Capital Expenditure
Revenue Expenditure
Purchase of motor vehicles
Maintenance costs of motor vehicles (e.g.
gasoline, oil, minor repairs)
Installation of a new engine in a motor vehicle
Costs of changing spark plugs
Purchase of new computers
Costs of cleaning computers
Testing and installation of new computers
Costs of regular testing and maintenance of
computers
Purchase of a warehouse to be used for the storage
of computers in a firm that sells computers
N.B. This will apply to manufacturers and retailers
of computers.
Purchase of computers for sale to customers.
N.B. This will apply to retailers of computers.
Acquisition cost of land
Regular cutting and clearing of grass on acquired
land
Purchase of new building
Electricity, water, and telephone rates; regular
cleaning, repairs and painting of a building